CHAPTER 6:- BUILDING INTERNALLY CONSISTENT COMPENSATION SYSTEMS

Internal Consistency

 Internally consistent compensation systems clearly define the relative value of each job among all
jobs within a company.
 Companies rely on a simple yet fundamental principle for building internally consistent
compensation systems: Jobs that require higher qualifications, more responsibilities, and more
complex job duties should be paid more than jobs that require lower qualifications, fewer
responsibilities, and less-complex job duties.
 Internally consistent job structures formally recognize differences in job characteristics that enable
compensation managers to set pay accordingly
 Compensation experts and HR professionals create internally consistent job structures through
two processes—job analysis followed by job evaluation
 Job analysis is almost purely a descriptive procedure; job evaluation reflects value judgments.
 Effective job analysis identifies and defines job content.
 Job content describes job duties and tasks as well as such pertinent factors as the skill and effort
(i.e., compensable factors) needed to perform the job adequately.
 Job evaluation is key for casting internally consistent compensation systems as strategic tools.
 Compensation professionals use job evaluation to establish pay differentials among employees
within a company.
Job Analysis

 Job analysis is a systematic process for gathering, documenting, and analyzing information in
order to describe jobs.
 Job analyses describe content or job duties, worker requirements or job specifications, and,
sometimes, the job context or working conditions.
 Job-content descriptions may be broad, general statements of job activities or detailed descriptions
of duties and tasks performed on the job.
o Greeting clients is common to receptionist jobs. The job activity of greeting clients
represents a broad statement.
o Describing the particular activities associated with greeting clients (e.g., saying “hello,”
asking the clients’ names, using the telephone to notify the employees of their clients’
arrivals, and offering beverages) represents a detailed statement.
 Worker requirements represent the minimum qualifications and the knowledge, skills, and
abilities (KSAs) that people must have to perform a particular job.
o Such requirements usually include education; experience; licenses; permits; and specific
abilities and skills
o For example, HR managers must have knowledge of principles and procedures for
recruitment, selection, training, compensation and benefits, labor relations and
negotiations, and HR information systems.
o Active listening and critical thinking are two examples of many necessary skills for effective
HR managers.
 Working conditions are the social context or physical environment where work will be performed.
o For instance, social context is a key factor for jobs in the hospitality industry.
o Hospitality industry managers emphasize the importance of employees’ interactions with
guests.
 o Physical environments vary along several dimensions, based on the level of noise and
possible exposure to hazardous factors, including hazardous chemicals.
o Work equipment also defines the character of the physical environment. Nuclear power
plant employees work in rather hazardous physical environments because of possible
exposure to dangerous radiation levels.
Steps in Job analysis process
The job analysis process has five main activities:
(1) Determine a job analysis program: A company must decide between using an established system or
developing its own system tailored to specific requirements.
 Both established and custom job analysis programs vary in the method of gathering data.
 The most typical methods for collecting job analysis information are questionnaires,
interviews, observation, and participation.
 Administrative costs often represent a major consideration in selecting a job analysis method.
(2) Select and train analysts: Job analysts generally must be able to collect job-related information
through various methods, relate to a wide variety of employees, analyze the information, and write
clearly and succinctly.
 A task force of representatives from throughout the company ideally conducts the analysis,
and HR staff members coordinate it.
o Although some companies rely on HR professionals to coordinate and conduct job
analysis, many use teams to represent varying perspectives on work because virtually
all employees interact with coworkers and supervisors
 Before the task force embarks on a job analysis, members need to be taught about the basic
assumptions of the model and the procedures they must follow.
o The training should include discussions of the study’s objectives, how the information
will be used, methodology overviews, and discussions and demonstrations of the
information-gathering techniques.
 Analysts also should be trained to minimize the chance that they will conduct ineffective job
analyses.
o For example, analysts should involve as many job incumbents as possible within the
constraints of staff time to have representative samples of job incumbents’ perceptions.
 Finally, job analysts must be familiar with the structure of pertinent job data.
o Job analysis data are configured in levels, hierarchically from specific bits of information to
progressively broader categories that include the prior specific pieces.

(3) Direct job analyst orientation: Before analysts start specific job analysis techniques, they must analyze
the context in which employees perform their work to better understand influencing factors.
 analysts should obtain and review such internal information as organizational charts, listings of job
titles, classifications of each position to be analyzed, job incumbent names and pay rates, and any
instructional booklets or handbooks for operating equipment.
 Job analysts may also find pertinent job information in such external sources as The Standard
Occupational Classification System, trade associations, professional societies, and trade unions.

(4) Conduct the study: data collection methods and sources of data: Once analysts have gathered and
made sense of these preliminary data, they can begin gathering and recording information for each
job in the company.
  Analysts should carefully choose the method of data collection and the sources of data. The
most common methods are questionnaires and observation.
 Questionnaires direct job incumbents’ and supervisors’ descriptions of the incumbents’ work
through a series of questions and statements.
 for example: Describe the task you perform most frequently OR How often do you perform
this task? Etc.
 Observation requires job analysts to record perceptions they form while watching employees
perform their jobs.
 The most common sources of job analysis data are job incumbents, supervisors, and the job
analysts.
 Job incumbents should provide the most extensive and detailed information about how they
perform job duties.
o Experienced job incumbents will probably offer the most details and insights.
 Supervisors also should provide extensive and detailed information, but with a different focus.
o Supervisors specifically are most familiar with the interrelationships among jobs within
their departments.
o They are probably in the best position to describe how employees performing different
jobs interact.
 Job analysts also should involve as many job incumbents and supervisors as possible because
employees with the same job titles may have different experiences.
 Companies ultimately strive to conduct job analyses that lead to reliable and valid job
evaluation results.
o A reliable job analysis yields consistent results under similar conditions.
o For example, let’s assume that two job analysts independently observe John Smith
perform his job as a retail store manager.
o The method is reliable if the two analysts reach similar conclusions about the duties
that constitute the retail store manager job.
o Although important, reliable job analysis methods are not enough.
o Job analyses also must be valid.
o A valid job analysis method accurately assesses each job’s duties.
o At present, the “best” approach to producing valid job descriptions requires that results
among multiple sources of job data (e.g., job incumbents, analysts, supervisors, and
customers) and multiple methods (e.g., interview, questionnaire, and observation)
converge.

(5) Summarize the results: writing job descriptions

 Job descriptions summarize a job’s purpose and list its tasks, duties, and responsibilities, as
well as the skills, knowledge, and abilities necessary to perform the job at a minimum level.
 Effective job descriptions generally explain:
 What the employee must do to perform the job
 How the employee performs the job
 Why the employee performs the job in terms of its contribution to the functioning of the
company
 Supervisory responsibilities if any
 Contacts (and purpose of these contacts) with other employees inside or outside the
company
 The skills, knowledge, and abilities the employee should have or must have to perform the
job duties
  The physical and social conditions under which the employee must perform the job
 Job descriptions usually contain four sections:
• Job title • Job summary • Job duties • Worker specifications

 Job titles indicate the name of each job within a company’s job structure.
 The job summary statement concisely summarizes the job with two to four descriptive
statements.
o This section usually indicates whether the job incumbent receives supervision and by
whom.
 The job duties section describes the major work activities and, if pertinent, supervisory
responsibilities.
o For instance, the training and development specialist evaluates training needs of
employees and departments by conducting personal interviews, questionnaires, and
statistical studies.
 The worker specifications section lists the education, skills, abilities, knowledge, and other
qualifications individuals must possess to perform the job adequately.
Job Analysis Techniques

 Human resource professionals can either choose from a variety of established job analysis
techniques or custom-design them.
 Most companies generally choose to use established job analysis techniques because the costs of
custom-made job analysis techniques often outweigh the benefits.
 many of the established job analysis techniques apply to a wide variety of jobs and both
researchers and practitioners have already tested and refined them.
 Choosing one established plan over another depends on two considerations: applicability and
cost.
o Some job analysis techniques apply only to particular job families (e.g., managerial jobs),
but others can be applied more broadly.
o some methods are proprietary, yet others are available to the public at no charge.
o the U.S. Department of Labor does not charge fees to use its job analysis method.

The U.S. Department of Labor’s Occupational Information Network (O*NET)

 spearheaded the development of O*NET during the 1990s to replace its previous methods of
analyzing and describing jobs
 O*NET is a database, and it was created for two reasons.
o First, it is designed to describe jobs in the relatively new service sector of the economy
o Second, O*NET more accurately describes jobs that evolved as the result of technological
advances (e.g., software and hardware engineering)
 O*NET is comprehensive because it incorporates information about both jobs and workers.
 The O*NET Content Model lists six categories of job and worker information.
 Job information contains the components that relate to the actual work activities of a job.
 Worker information represents characteristics of employees that contribute to successful job
performance.
 The Content Model allows occupational information to be applied across jobs, sectors, or
industries (cross-occupational descriptors) and within occupations (occupational-specific
descriptors).
 A description of each content area follows.
(1) Experience Requirements include:
• Experience and training • Licensing
o Experience and training information describes specific preparation required for entry into
a job plus past work experience contributing to qualifications for an occupation.
o Licensing information describes licenses, certificates, or registrations that are used to
identify levels of skill and that are required for entry and advancement in an occupation,
preferred education or training, and required apprenticeships will be documented by this
part of the model.
(2) Occupational Requirements include: • Generalized work activities • Organizational context • Work
context
 includes information about typical activities required across occupations.
 Identifying generalized work activities and detailed work activities summarizes the broad
and more specific types of job behaviors and tasks that may be performed within multiple
occupations.
o describes general types of job behaviors occurring on multiple jobs for e.g., data
processing and decision making
 Organizational context information indicates the characteristics of the organization that
influence how people do their work. For example, decision making: individual vs team,
centralized vs decentralized
 Work context information describes physical and social factors that influence the nature of
work e.g., social relations between colleagues, noisy etc.
(3) Occupation-specific information requirements detail a comprehensive set of elements that apply
to a single occupation or a narrowly defined job family.
o These particular requirements are occupational skills, knowledge, tasks, duties, machines,
tools, and equipment etc.
(4) Workforce characteristics refer to variables that define and describe the general characteristics of
occupations that may influence occupational requirements.
o Organizations do not exist in isolation.
o To be useful, an occupational classification system must incorporate global contextual
characteristics.
o O*NET provides this information by linking descriptive occupational information to
statistical labor market information.
o This includes compensation and wage data, employment outlook, and industry size
information.
o Much of this information is collected outside of the O*NET program’s immediate scope.
o Collaborative efforts with such organizations as the Bureau of Labor Statistics, Departments
of commerce defense etc. facilitate these information linkages
o These characteristics include:
• Labor market information • Occupational outlook
o Labor market information describes current labor force characteristics of occupations.
o Occupational outlook describes future labor force characteristics of occupations
(5) Worker characteristics information includes: • Abilities • Interests • Work styles
o Abilities are enduring attributes of the individual that influence performance e.g.,
cognitive, verbal ability
o Interests describe preferences for work environments and outcomes.
o Work styles are personal characteristics that describe important interpersonal and work
style requirements in jobs and occupations e.g., supportive or idea oriented
(6) Worker requirements include: • Basic skills • Cross-functional skills • Knowledge • Education
 o Worker requirements represent developed or acquired attributes of an individual that may
be related to work performance such as work-related knowledge and skill.
o Basic skills (e.g., reading, writing) facilitate the acquisition of new knowledge.
o Basic skills information describes developed capacities that facilitate learning or the more
rapid acquisition of knowledge.
o Cross-functional skills (e.g., problem solving or social skills) extend across several domains
of activities.
o Cross-functional skills information indicates developed capacities that facilitate
performance of activities that occur across jobs.
o Knowledge information describes organized sets of principles and facts applying in general
domains.
o Education information details prior educational experience required to perform in a job.

Job Evaluation

 Compensation professionals use job evaluation to systematically recognize differences in the

relative worth among a set of jobs and establish pay differentials accordingly.
 job evaluation partly reflects the values and priorities that management places on various
positions.
 Based on job content and the firm’s priorities, managers establish pay differentials for virtually all
positions within the company.
Compensable Factors

 Compensation professionals generally base job evaluations on compensable factors, which are
the salient job characteristics by which companies establish relative pay rates.
 Most companies consider skill, effort, responsibility, and working conditions.
 Skill, effort, responsibility, and working conditions are universal compensable factors because
virtually every job contains these four factors.
 Many companies break these general factors into more specific factors.
 For example, responsibility required could be further classified as responsibility for financial
matters and responsibility for personnel matter.
 A working conditions compensable factor is most helpful when a company expects a substantial
difference in working conditions for similar jobs.
 For example, a company may employ geologists, but while some of them are required to work in
the field where possible dangers are greater, other geologists are required to work within the
safe confines of a laboratory.
 In any event, compensation professionals should choose compensable factors based on two
considerations.
o First, factors must be job related.
o The factors that describe a particular job should indeed reflect the actual work that is
performed
 Second, compensation professionals should select compensable factors that further a company’s
strategies.
o For example, companies that value product differentiation probably consider innovation
to be an important compensable factor for research scientist and marketing manager jobs.
o Lowest-cost strategies may emphasize different kinds of compensable factors (e.g.,
efficiency and timeliness).
The job evaluation Process
The job evaluation process entails six steps:

 (1) Determining single versus multiple job evaluation techniques:

o Compensation professionals must determine whether a single job evaluation technique is
sufficiently broad to assess a diverse set of jobs.
o Ask yourself, ‘Can we use the same compensable factors to evaluate two different jobs?’
o If the answer is yes, then a single job evaluation technique is appropriate.
o If not, then more than one job evaluation approach should be employed.
o It is not reasonable to expect that a single job evaluation technique, based on one set of
compensable factors, can adequately assess diverse sets of jobs
o A carpenter’s job is clearly distinct from a certified public accountant’s position because
manual dexterity is an important compensable factor that describes carpentry work and is
not nearly as central to an accounting position
 (2) Choosing the Job Evaluation Committee
o Human resource professionals help put together a committee to design, oversee, and
evaluate job evaluation results.
o The functions, duties, responsibilities, and authority of job evaluation committees vary
considerably from company to company.
o In general, committees simply review job descriptions and analyses and then evaluate
jobs.
o Job evaluation is an important determinant of a job’s worth within many companies.
o All employees, regardless of their functions, wish to be compensated and valued for their
efforts. All employees strive for a reasonable pay-effort bargain
o Union representatives strive to ensure that members enjoy a good standard of living.
o Therefore, unions try to prevent the undervaluation of jobs.
o Job evaluation procedures are not scientifically accurate because these evaluation
decisions are based on ordinary human judgment.
o Therefore, a consensus of several employees helps to minimize the biases of individual job
evaluators
 (3) Training Employees to Conduct Job Evaluations
o Individuals should understand the process objectives.
o In addition to knowing company objectives, evaluators also should practice using the
chosen job evaluation criteria before applying them to actual jobs.
o Similar to job analysis procedures, evaluators should base their decisions on sound job-
and business-related rationales to ensure legal compliance
 (4) Documenting the Job Evaluation Plan
o Documenting the job evaluation plan is useful for legal and training purposes.
o From an employer’s perspective, a well-documented evaluation plan:
 specifies job- and business-related criteria against which jobs are evaluated.
 can allow employees to understand clearly how their jobs were evaluated and
the outcome of the process.
 provide guidelines for clarifying ambiguities in the event of employee appeals or
legal challenges
 (5) Communicating with Employees
o Job evaluation results matter personally to all employees.
o Companies must formally communicate with employees throughout the job analysis
and evaluation processes to ensure employees’ understanding and acceptance of the
job evaluation process and results
 o Employers should share basic information, and employees should be given the
opportunity to respond to what they believe are either unsatisfactory procedures or
inaccurate outcomes of the job evaluation process.
 (6) Setting Up the Appeals Process
o Companies should set up appeals procedures that permit reviews on a case-by-case
basis to provide a check on the process through reexamination.
o Such appeals reduce charges of illegal discrimination that would be more likely to
occur if employees were not given a voice
o Companies increasingly process appeals through committees made up of
compensation professionals and a representative sample of employees and supervisors.
o Grievants are more likely to judge appeals decisions as fair if committees are
involved: Committee decisions should reflect the varied perspectives of participants
rather than the judgment of one individual.
Job Evaluation Techniques

 Compensation professionals categorize job evaluation methods as either market-based

evaluation or job-content evaluation techniques
 Market-based evaluation plans use market data to determine differences in job worth.
o Many companies choose market-based evaluation methods because they wish to
assign job pay rates that are neither too low nor too high relative to the market.
o Setting pay rates too low will make it difficult to recruit talented candidates, whereas
setting pay rates too high will result in an excessive cost burden for the employer.
o Compensation professionals rely on compensation surveys to determine prevailing pay
rates of jobs in the relevant labor market.
 Job-content evaluation plans emphasize the company’s internal value system by establishing
a hierarchy of internal job worth based on each job’s role in company strategy.
 compensation professionals judge the adequacy of pay differentials by comparing both
market rates and pay differences among jobs within their companies.
 consult with the top HR official and chief financial officer when discrepancies arise,
particularly if company pay rates are generally lower than the market rates.
 Upon careful consideration of the company’s financial resources and the strategic value of the
jobs in question, these executives decide whether to adjust internal pay rates for jobs with
below-market pay rates.
 Neither market-based nor job-content evaluation approaches alone enable compensation
professionals to balance internal and external considerations.
 Most companies therefore rely on both approaches.
Alternative Job content evaluation approach
The prevalent kinds of qualitative job evaluation techniques include:

 Simple ranking plans: order all jobs from lowest to highest according to a single criterion (e.g., job
complexity or the centrality of the job to the company’s competitive strategy).
o This approach considers each job in its entirety, usually used in small companies that have
relatively few employees.
o In large companies that classify many jobs, members of job evaluation committees
independently rank jobs on a departmental basis.
o Different rankings will likely result.
 o When this occurs, job evaluation committees discuss the differences in rankings and choose
one set of rankings by consensus.
 Paired comparison technique
o technique is useful if there are many jobs to rate, usually more than 20.
o Job evaluation committees generate every possible pair of jobs.
o For each pair, committee members assign a point to the job with the highest value,
whereas the lowest-value job does not receive a point.
o After evaluating each pair, the evaluator sums the points for each job.
o Jobs with higher points are more valuable than are jobs with fewer points.
o The job with the most points is ranked the highest; the job with the fewest points is ranked
the lowest.
 Alternation Ranking
o orders jobs by extremes.
o Yet again, committee members judge the relative value of jobs according to a single
criterion (e.g., job complexity or the centrality of the job to the company’s competitive
strategy).
o This ranking process begins by determining which job is the most valuable, followed by
determining which job is the least valuable.
o Committee members then judge the next most valuable job and the next least valuable job.
o This process continues until all jobs have been evaluated.
o Despite the simplicity of ranking plans, they exhibit three limitations.
o First, ranking results rely on purely subjective data; the process lacks objective standards,
guidelines, and principles that would aid in resolving differences of opinion among
committee members.
o Companies usually do not fully define their ranking criteria.
o For example, the criterion job complexity can be defined as level of education or as
number of distinct tasks that the workers must perform daily.
o Second, ranking methods use neither job analyses nor job descriptions, which makes this
method difficult to defend legally.
o Committee members rely on their own impressions of the jobs
o Third, ranking approaches do not incorporate objective scales that indicate how different in
value one job is from another.
 Classification plans
o Companies use classification plans to place jobs into categories based on compensable
factors.
o Public sector organizations (e.g., civil service systems) use classification systems most
prevalently. The federal government’s classification system is a well-known example.
o the General Schedule classifies federal government jobs into 15 classifications (GS-1
through GS-15) based on such factors as skill, education, and experience levels.
o jobs that require high levels of specialized education (e.g., a physicist), significantly
influence public policy (e.g., law judges), or require executive decision making are classified
in separate categories
o The GS classification system enables the federal government to set pay rates for thousands
of unique jobs based on 18 classes.
o Pay administration is relatively simple because pay rates depend on GS level and the
employees’ relevant work seniority,
 o The most noteworthy disadvantage is the absence of regular procedures for rewarding
exceptional performance, which, ultimately, discourages employees from working as
productively as possible

Internally Consistent Compensation Systems and Competitive Strategy

 Although we made the case for building internally consistent pay systems, these systems do
have some limitations
 Internally consistent pay systems may reduce a company’s flexibility to respond to changes in
competitors’ pay practices because job analysis leads to structured job descriptions and job
structures.
 job evaluation establishes the relative worth of jobs within the company.
 Responding to the competition may require employees to engage in duties that extend
beyond what’s written in their job descriptions whenever competitive pressures demand.
 definitions of jobs become more fluid, which makes equity assessments more difficult
 Another potential limitation of internally consistent compensation structures is the resultant
bureaucracy.
 Companies that establish job hierarchies tend to create narrowly defined jobs that lead to
greater numbers of jobs and staffing levels.
 Such structures promote heavy compensation burdens.
 Employees’ core compensation depends on the jobs they perform, how well they perform their
jobs, or the skills they possess.
 Employee benefits however, represent fixed costs that typically do not vary with employees’
job performance or their skills.