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. The ordered set of jobs represents the job structure or
hierarchy.

- To build internally consistent compensation systems, companies believe that: 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.

- Compensation experts and HR professionals create internally consistent job structures through
two processes: job analysis followed by job evaluation.

1- Job analysis: it is considered a descriptive procedure. An effective job analysis identifies and
defines job content. Job content describes job duties and tasks as well as such relevant factors as
the skill and effort needed to perform the job adequately.

2- Job evaluation: job evaluations reflect value judgments. Compensation professionals use job
evaluation to establish pay differentials among employees within a company. The job analysis
results directly aid compensation professionals in their pay-setting decisions by quantifying the
key similarities and differences between jobs based on job content identified in the job analysis
process.

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, workers requirements or job
specifications, and, sometimes, the job context or working conditions.

- Worker requirements represent minimum qualifications and the knowledge, skills, and
abilities (KSA) that people must have to perform a particular job. Such requirements usually
include education experience.
- Working conditions are the social context or physical environment where work will be
performed. Work environment and equipment usually define the working conditions.

Steps in the 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. The data-gathering
process differs in each. The most typical methods for collecting job analysis information are
questionnaires, interviews, observation, and participation. Costs represent a major consideration
in selecting a job analysis method.

2- Select and Train Analysts: Job analysts must generally be able to collect job-related
information through various methods, relate to a wide variety of employees, analyze the
information, and write clearly and briefly. Before the task force embarks on a job analysis,
members need to be taught about the basic assumptions of the model and procedures they must
follow. 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. Job analysts must also be trained to be efficient and be familiar with
reliable job data (Check Table 1, pp. 142).

3- Direct job analyst orientation: Before analysts start job analysis techniques, they must
analyze the context in which employees perform their work to better understand influencing
factors. They should also obtain and review internal information as organizational charts.

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. The most common methods of data-gathering are
questionnaires and observations. Questionnaires direct job incumbents' and supervisors'
descriptions of the incumbents' work through a series of questions and statements. Observations
require job analysts to record perceptions they form while watching employees perform their
jobs. The most common sources of job analysis data are job incumbents themselves, supervisors,
and the job analysts. Companies strive to conduct reliable job analyses. A reliable job analysis
yields consistent results under similar conditions. Job analyses must also be valid. A valid job
analysis method accurately assesses each job's duties. Failure to create reliable and valid job
analyses may result in either inadequate or excessive pay rates. Inadequate pay may lead to
dysfunctional turnover (turnover of high-quality employees) while excessive pay represents a
cost burden to the company that can undermine its position. Collecting data from multiple
sources minimizes inherent biases associated with any particular source. Observation techniques
do not exactly indicate why an employee performs a task in a specific way, but the interview
does through probing questions.

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, the
skills needed, and the working conditions.

- Job descriptions usually contain four sections:

1- Job Title: indicate the name of each job within a company's job structure.

2- Job Summary Statement: concisely summarizes the job with two to four descriptive
statements. This section usually indicates whether the job incumbent receives supervision and by
whom.

3- Job Duties: the major work activities and relevant supervisory responsibilities.

4- Worker Specifications: lists the education, skills, abilities, knowledge, and other
qualifications individuals must possess to perform the job adequately. Education refers to
formal training.

- The Equal Employment Opportunity Commission (EEOC) guidelines distinguish among

the terms, knowledge, skill, and ability. Skill refers to an observable competence to perform a
learned act. Ability refers to a present competence to perform an observable behavior or a
behavior that results in an observable product. Knowledge refers to a body of information
applied directly to the performance of a function. Companies measure knowledge with tests.
Legal Considerations for Job Analysis:

- The government does not require companies to conduct job analysis. Under the Equal Pay Act,
companies must justify pay differences in job functions. Companies must demonstrate
substantive differences in job functions and job analysis help HR professionals do just that.

- Companies may perform job analysis to see if they comply with the ADA and ADA. As long as
disabled applicants can perform the essential functions of a job with reasonable accommodation,
companies must not discriminate against these applicants by paying them less than other
employees performing the same job.

- Companies may also use job analysis to define essential job functions systematically.

Job Analysis Techniques:

- Human resource professionals can either choose from a variety of established job analysis
techniques or custom-design them. Most companies choose to use established job analysis
techniques because they're cheaper and apply to a wide variety of jobs.

Choosing one established plan over another depends on two considerations: applicability and
cost. Some job analysis techniques apply only to particular job families while others apply more
broadly. Some techniques are also free.

U.S. Department of Labor's Occupational Information Network (O*NET):

- The U.S Department of Labor's Employment and Training Administration spearheaded the
development of O*NET during the 1990s to replace its previous methods of analyzing and
describing jobs.

- The O*NET was designed to describe jobs in the service sector and describe jobs that evolved
as the result of technological advances. The O*NET incorporates information about both jobs
and workers.
- The O*NET Content Model lists six categories of job and worker information.

1- Experience Requirements: Experience requirements include experience and training and

licensing. Experience and training information describes specific preparation required for entry
into a job plus past work experience contributing to qualifications for an occupation. 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.

2- Occupation Requirements: Occupation requirements include generalized work activities,

organizational context, and work context. It includes information about typical activities required
across occupations. Generalized work activities information describes general types of job
behaviors occurring on multiple jobs. Organizational context information indicates the
characteristics of the organization that influence how people do their work. Work context
information describes physical and social factors that influence the nature of work.

3- Occupation-Specific Requirements: Occupation-specific requirements detail a

comprehensive set of elements that apply to a single occupation or a narrowly defined job
family. These particular requirements are occupational skills, knowledge, tasks, duties,
machines, tools, and equipment.

4- Workforce Characteristics: Workforce characteristics refer to variables that define and

describe the general characteristics of occupations that may influence occupational requirements.
To be useful, an occupational classification system must incorporate global contextual
characteristics. These characteristics include labor market information and occupational outlook.
Labor market information describes current labor force characteristics of occupations.
Occupational outlook describes future labor force characteristics of occupations.

5- Worker Characteristics: Worker characteristics information includes abilities, interests, and

work styles. Abilities are enduring attributes of the individual that influence performance.
Interests describe preferences for work environments and outcomes. Work styles are personal
characteristics that describe important interpersonal and work style requirements in jobs and
occupations.
6- Worker Requirements: Worker requirements include basic skills, cross-functional skills,
knowledge, and education. They represent developed or acquired attributes of an individual that
may be related to work performance such work as work-related knowledge and skill. Basic skills
information describes developed capacities that facilitate learning or the more rapid acquisition
of knowledge. Cross-functional skills information indicates developed capacities that facilitate
performance of activities that occur across jobs. Knowledge represents the acquisition of facts
and principles about a domain of information. Education information details prior educational
experience required to perform in a job.

Job Evaluation:

- Job evaluations are used to systematically recognize differences in the relative worth among a
set of jobs and establish pay differentials accordingly. Whereas job analysis is almost purely
descriptive, job evaluation partly reflects the values and priorities that management places on
various positions.

Compensable Factors:

- Compensation professionals generally base job evaluations on compensable factors, which are
the salient (main) job characteristics by which companies establish relative pay rates. Most
companies consider skill, effort, responsibility, and working conditions, which were derived
from the Equal Pay Act.

- These four factors are universal compensable factors because virtually every job contains these
four factors. However, most of today's jobs can be described broadly in terms of knowledge,
skills, and abilities given the evolution of jobs that require greater cognitive skills and mental
(versus physical) effort. Working conditions as a compensable factor is most helpful when a
company expects a substantial difference in working conditions for similar jobs (eg. dangerous
job.

- Compensation professionals should choose compensable factors based on two considerations.

1- Factors must be job related. The factors that describe a particular job should indeed reflect the
actual work that is performed.
2- Compensation professionals should select compensable factors that further a company's
strategies.

The Job Evaluation Process:

The job evaluation process entails six steps:

1- Determining Single Versus Multiple Job Evaluation Techniques: Compensation

professionals must determine whether a single job evaluation technique is sufficiently broad to
access a diverse set of jobs. If the same compensable factors used in a technique are applicable
for different jobs, then a single job evaluation technique is appropriate. If not, then more than
one job evaluation technique should be employed.

2- Choosing the Job Evaluation Committee: HR professionals help put together a committee
of rank-and-file employees, supervisors, managers, and, if relevant, union representatives to
design, oversee, and evaluate job evaluation results. In general, committees simply review job
descriptions and analyses, and then evaluate jobs. Job evaluation committees help ensure
commitment from employees through companies. Committees are needed to minimize the biases
of individual job evaluations.

3- Training Employees to Conduct Job Evaluations: Individuals should understand the

process and company objectives through practicing using the chosen job evaluation criteria
before apply them to actual jobs. They should be taught to base their decisions on sound job- and
business-related rationales to ensure legal compliance.

4- Documenting the Job Evaluation Plan: Documenting the job evaluation plan is useful for
legal and training purposes. From an employer's perspective, a well-documented evaluation plan
clearly specifies job- and business-related criteria against which jobs are evaluated. Well-
documented plans also allow employee to clearly understand how their jobs were evaluated and
the outcome of the process. They also provide guidelines for clarifying ambiguities in the event
of problems.

5- Communicating with Employees: 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. Memoranda and information sessions that
are two-way are useful media.

6- Setting up the Appeals Process: Companies should set up appeals procedures that permit
reviews on a case-by-case basis to provide a check on the process through reexamination. Such
appeals reduce charges of illegal discrimination that would be more likely to occur if employees
were not given a voice. Companies process appeals through committees. 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 evaluations plans use market data to determine differences in job worth. 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. 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.

- 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 a company's strategy. Compensation
professionals review preliminary structures for consistency with market pay rates on a
representative sample of jobs known as benchmark jobs. They ultimately balance these market
considerations with internal consistency objectives.

- 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. The point method is the most popular job-content method because it gives
compensation professionals better control over balancing internal and market considerations.
The Point Method:

- The point method is a job-content valuation technique that uses quantitative methodology.
Quantitative methods assign numerical values to compensable factors that describe factors that
describe jobs, and these values are summed as an indicator of the overall value for the job. The
relative worth of jobs is established by the magnitude of the overall numerical value for the jobs.

- The point method evaluates jobs by comparing compensable factors and giving them a range of
points on the factor's relative value to the company.

- Job evaluation committees follow seven steps to complete the point method:

1- Step 1: Select Benchmark Jobs: Point method job evaluations use benchmark jobs to
develop factors and their definitions to select jobs to represent the entire range of jobs in the
company. Benchmark jobs provide reference points against which jobs within the company are
judged.

2- Step 2: Choose Compensable Factors Based on Benchmark Jobs: Managers must define
compensable factors that adequately represent the scope of jobs slated for evaluation. Each
benchmark job should be described by those factors that help distinguish it from the value of all
other jobs.

3- Step 3: Define Factor Degrees: Although compensable factors describe the range of
benchmark jobs, individual jobs vary in scope and content. Evaluators must therefore divide each
factor into a sufficient number of degrees to identify the level of a factor present in each job. The
number of degrees will vary based on the comprehensiveness of the plan.

4- Step 4: Determine the Weight on Each Factor: Weighting compensable factors represents
the importance of the factor to the overall value of the job. The weights of compensable factors
are usually expressed as percentages. For example, ABC manufacturing rates these factors as:
skill (60%), responsibility (25%), effort (10%), and working conditions (5%).

5- Step 5: Determine Point Values for Each Compensable Factor: Compensation

professionals set point values for each compensable factor in three stages. 1- They must establish
the maximum possible point values for the complete set of compensable factors. This number is
random but it represents the maximum value jobs can possess. The total point value for a set of
compensable factors should be determined by a simple formula (no of compensable
factors*250). If there four compensable factors for ABC Manufacturing (Step 4), then (4*250) is
equal to 1,000 (the maximum number of points. 2- The maximum is then multiplied by the
weight percentages determined in step 4. Skill = (60%*1,000) = 600 points. 3- Compensation
professionals distribute these points across degree statements within each compensable factor. If
skill has five degree statements, the 600 points assigned to skill will be divided by 6 (120). After
that, each degree level will be multiplied by 120. (Eg. Degree 3 = (120x3)= 360).

6- Step 6: Verify Factor Degrees and Point Values: Committee members should
independently calculate the point values for a random sample of jobs. After calculating the point
values, committee members should review the point totals and give careful consideration to
whether the hierarchy of jobs make sense in the context of the company's strategic plan. When
committee members see something strange, they reconsider compensable factor definitions,
weights, and actual rating of the benchmark jobs.

7- Step 7: Evaluate All Jobs: Committee members evaluate all jobs in the company once the
evaluation system has been tested and refined. Each job then is evaluated by determining which
degree definition best fits the job and by assigning the corresponding point factors.
Balancing Internal and Market Considerations Using the Point Method:

- Compensation professionals balance internal and market considerations with point method
results using regression analysis, a statistical technique that enables compensation professionals
to set base pay rates in line with market rates for benchmark or representative jobs.

Alternative Job-Content Evaluation Approaches:

- Most other job-content approaches use qualitative methods. Qualitative methods evaluate entire
jobs and typically compare jobs with each other or some general criteria.

- The prevalent kinds of qualitative job evaluation techniques include: Simple ranking plans,
paired comparisons, alternation ranking, and classification plans.

1- Simple Ranking Plans: Simple ranking plans order all jobs from lowest to highest
according to a single criterion (Job complexity). This approach considers each job in its entirety
and is usually used in small companies with few employees. In large companies, committees
rank jobs on a department basis and decide on the rankings by consensus.

2- Paired Comparison and Alternation Ranking: The paired comparison technique is useful
if there are many jobs to rate, usually more than 20. Committees generate every possible pair of
jobs and assign a point to the job with the highest value, whereas the lowest value does not
receive a point. After evaluating each pair, the evaluator sums the points for each job and jobs
with the highest points are considered more valuable. The alternation ranking method orders
jobs by extremes. Committees judge the relative value of jobs according to a single criterion (eg.
job complexity). This ranking process begins by determining the most and least valuable jobs
and then judging the next most valuable and the next least valuable job. Despite their simplicity,
ranking plans have three limitations. 1- Ranking results rely on purely subjective data. 2-
Ranking methods use neither job analyses nor job descriptions, which makes this method
difficult to defend legally. 3- Ranking methods do not incorporate objective scales that indicate
how different in value one job is from another.

3- Classification Plans: Companies use classification plans to place jobs into categories based
on compensable factors. Public sector organizations (e.g. civil service systems) use classification
systems most prevalently.
Alternatives to Job Evaluation:

- Alternate methods include reliance on market pay rates, pay incentives, individual rates, and
collective bargaining. Many companies determine the value of jobs by paying the average rate in
the external labor market.

- In addition to the market pay rate, pay incentives may also be the basis for establishing the core
compensation for jobs.

Internally Consistent Compensation Systems and Competitive Strategy:

- Internally consistent pay systems may reduce a company's flexibility to respond to change in
competitors' pay practices because job analysis leads to structured job descriptions and job
structures. 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.

- Another potential limitation of internally consistent compensation structures is the resultant

bureaucracy.

By Mohamed Hassaballa