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As we said, many firms simply price their jobs based on what other employers are paying—they use a market-based approach. However, most employers also base their pay plans on job evaluations. In a market-competitive pay plan, a job’s compensation reflects the job’s value in the company, as well as what other employers are paying for similar jobs in the marketplace. Because the point method (or “point-factor method”) is so popular, we’ll use it as the centerpiece of our step-by-step example for creating a market-competitive pay plan. 119 The 16 steps in creating a market-competitive pay plan begin with choosing benchmark jobs. Get Fundamentals of Human Resource Management, 5/e now with the O’Reilly learning platform. O’Reilly members experience live online training, plus books, videos, and digital content from nearly 200 publishers.
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As we said, many firms simply price their jobs based on what other employers are paying—they just use a market-based approach. However, most employers also base their pay plans on job evaluation methods like those just described. These evaluations assign values (such as point values) to each job. This helps to produce a pay plan in which each job’s pay is internally equitable, based, as it is, on the job’s value to the employer (as measured, for instance, by how many points it warrants). However, even with the job evaluation approach, managers must adjust pay rates to fit the market. After all, you want employees’ pay to be equitable internally—relative to what their colleagues in the firm are earning—but also competitive externally—relative to what other employers are paying. In a market-competitive pay plan a job’s compensation reflects the job’s value in the company, as well as what other employers are paying for similar jobs in the marketplace. Because the point method (or “point-factor method”) is so popular, we’ll use it as the centerpiece of our step-by-step example for creating a market-competitive pay plan. The 16 steps in creating a market-competitive pay plan begin with choosing benchmark jobs. 1. Choose Benchmark Jobs 2. Select Compensable Factors 3. Assign Weights to Compensable Factors 4. Convert Percentages to Points for Each Factor 5. Define Each Factor’s Degrees 6. Determine for Each Factor Its Factor Degrees’ Points 7. Review Job Descriptions and Job Specifications 8. Evaluate the Jobs 9. Draw the Current (Internal) Wage Curve 10. Conduct a Market Analysis: Salary Surveys 11. Draw the Market (External) Wage Curve 12. Compare and Adjust Current and Market Wage Rates for Jobs 13. Develop Pay Grades 14. Establish Rate Ranges 15. Address Remaining Jobs 16. Correct Out-of-Line Rates 1. Choose Benchmark JobsParticularly when an employer has dozens or hundreds of different jobs, it’s impractical and unnecessary to evaluate each of them separately. Therefore, the first step in the point method is to select benchmark jobs. Benchmark jobs are representative of the jobs the employer needs to evaluate. Like “accounting clerk” they should be common 2. Select Compensable FactorsThe choice of compensable factors depends on tradition (as noted, the Equal Pay Act of 1963 uses four compensable factors: skill, effort, responsibility, and working conditions), and on strategic and practical considerations. For example, if your firm’s competitive advantage is quality, you might substitute “responsibility for quality” for working conditions, or simply add it as a fifth factor.65 Similarly, using “working conditions” makes little practical sense for evaluating executive jobs. The employer should carefully define each factor. This is to ensure that the evaluation committee members will each apply the factors with consistency. Here we can see one such definition, in this case for the factor job complexity. The human resource specialist often draws up the definitions. Factor Definition: What Is Job Complexity? Job complexity generally refers to the amount of judgment, initiative, ingenuity, and complex data analysis that doing the job requires. To what extent does the person doing this job confront unfamiliar problems, deal with complex decisions, and have to exercise discretion? 3. Assign Weights to Compensable FactorsHaving selected compensable factors, the next step is to determine the relative importance (or weighting) of each factor (for instance, how much more important is “skill” than “effort”?). This is important because for each cluster of jobs some factors are bound to be more important than others are. Thus, for executive jobs the “mental requirements” factor would carry far more weight than would “physical requirements.” To assign weights, we assume we have a total 100 percentage points to allocate for each job. Then (as an illustration), assign percentage weights of 60% for the factor job complexity, 30% for effort, and 10% for working conditions. 4. Convert Percentages to Points for Each FactorNext, we want to convert the percentage weights assigned to each compensable factor into point values for each factor (this is, after all, the point method). It is traditional to assume we are working with a total of l,000 points (although one could use some other figure). To convert percentages to points for each compensable factor : multiply the percentage weight for each compensable factor (from the previous step) by 1,000. This will tell you the maximum number of points for each compensable factor. Doing so in this case would translate into 1,000 × 0.60 = 600 possible points for job complexity, 1,000 × 0.30 = 300 points for effort, and 1,000 × 0.10 = 100 points for working conditions. 5. Define Each Factor’s DegreesNext, split each factor into degrees, and define (write degree definitions for) each degree so that raters may judge the amount or degree of a factor existing in a job. Thus, for a compensable factor such as “job complexity” you might choose to have five degrees, ranging from “here the job is routine” to “uses independent judgment.” (Our definitions for each degree are shown in the previous table under “Job Complexity Degree Definitions: What to Look For in the Job.”) The number of degrees usually does not exceed five or six, and the actual number depends mostly on judgment. We will continue in the next article |
What is the first step in developing a market competitive pay plan using the point factor method?
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