CHAPTER 6
Building Internally Consistent Compensation Systems
Learning Objectives
6-1. Explain the concept of internal consistency.
6-2. Summarize the practice of job analysis.
6-3. Describe the practice of job evaluation.
6-4. Summarize various job evaluation techniques.
6-5. Explain how internally consistent compensation systems and competitive strategy relate
to each other.
Outline
I. Internal Consistency
II. Job Analysis
III. Job Evaluation
IV. Job Evaluation Techniques
V. Internally Consistent Compensation Systems and Competitive Strategy
VI. Key Terms
VII. Discussion Questions and Suggested Answers
VIII. End of Chapter Case; Instructor Notes, and Questions and Suggested Student Responses
IX. Crunch the Numbers! Questions and Suggested Student Responses
X. Assisted-graded Questions
XI. Additional Case from the MyManagementLab Website; Instructor Notes, and Questions
and Suggested Student Responses
Lecture Outline
I. Internal Consistency
A. Internally consistent compensation systems
1. Clearly define the relative value of each job among all jobs within a company to
represent the job structure or hierarchy
2. Based on a fundamental principle that states jobs that require greater
qualifications, more responsibilities, and more complex job duties should offer
more pay than those jobs that require less
3. Developed using two processes
a. Job analysis
i. Mostly a descriptive procedure
ii. Identifies job content
b. Job evaluation
i. Is used to establish pay differentials among employees within a company
II. Job Analysis
A. Definition
1. A systematic process for gathering, documenting, and analyzing information in
order to describe jobs
2. Identifies and defines job content
a. Job duties that employees must perform
b. Worker requirements (compensable factors) are needed to perform the job
3. Job context or working conditions, like:
a. Social context
b. Physical environment
B. Steps in the Job Analysis Process
1. Five main activities
a. Determine a job analysis program
b. Select and train analysts
c. Job analyst orientation
d. Conduct the study: data collection methods and sources of data
e. Summarize the results: writing job descriptions
2. Determine a job analysis program
a. Decide between using an established system or developing its own
b. Typical methods include questionnaires, interviews, observation, and
participation
3. Select and train analysts
a. Job analysts 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
b. Ideally, a task force of representatives from throughout the company conducts
the analysis, while HR staff members coordinate it
c. Training should be provided on the basic assumptions of the model and the
procedures
4. Direct job analysts orientation
a. Before starting job analysis techniques the analyst must analyze the context in
which employees perform their work
b. Analysts should obtain and review internal information
5. Conduct the study: Data collection methods and sources of data
a. Anaylsts should carefully choose the method of data collection and the
sources of data
b. The most common methods of data collection are questionnaires and
observation
c. Most common sources of data are job incumbents, superviosrs, and the job
analysts
d. A reliable job analysis method yields consistent results under similar
conditions
e. A valid job analysis method accurately assesses each job’s duties
6. Summarize the results: writing job descriptions
a. Should summarize the job’s purpose and list its tasks, duties, responsibilities,
as well as the KSA’s necessary to perform the job at a minimum level
c. Should contain:
i. Job title to indicate the job designation
ii. Job summary with two to four concise, descriptive statements
iii. Job duties to describe the major work activities and supervisory
responsibilities
iv. Worker specification to list the education, skills, abilities, knowledge, and
other qualifications needed to perform the job
C. Legal Considerations for Job Analysis
1. Job analyses are not required by the government, but can increase the chance that
employment decisions are based on pertinent job requirements
2. The Equal Pay Act requires that companies justify pay differences between men
and women who perform equal work
3. Can be used to determine if a job is exempt or nonexempt under the Fair Labor
Standards Act
4. Can be used to insure compliance with the American with Disabilities Act
D. Job Analysis Techniques
1. Can use established or custom designed techniques
2. Choosing depends on applicability and cost
E. The U.S. Department of Labor’s Occupational Information Network (O*NET)
1. O*NET was developed by the U.S. Department of Labor’s Employment and
Training Administration during the 1990s
2. Is a database created to jobs in the relatively new service sector and to more
accurately describe jobs that evolved as the result of technological advances
3. Content Model lists six categories of job and worker information
a. Experience requirements
i. Experience and training describes specific preparation required for entry
into a job
ii. Licensing describes license, certificate, or registration required
b. Occupational requirements
i. Generalized work activities – describes general types of job behaviors on
multiple jobs
ii. Organizational context – indicates the characteristics of the organization
that influence how people do their work
iii. Work context – describes physical and social factors that influence the
nature of work
c. Occupation-specific information requirements
i. Detail a comprehensive set of elements that apply to a single occupation or
narrowly defined job family
d. Workforce characteristics
i. Variables that define and describe the general characteristics. of
occupations
ii. Include labor market information and occupational outlook
iii. Wages
e. Worker characteristics
i. Abilities – the enduring attributes of an individual that influence
performance
ii. Interests – describe preferences for work environments and outcomes
iii. Work styles – personal characteristics that describe important interpersonal
and work style requirements in jobs and occupations
f. Worker requirements
i. Basic skills – describe developed capacities that facilitate learning or the
more rapid acquisition of knowledge
ii. Cross-functional skills – indicates developed capacities that facilitate
performance of activities that occur across jobs
iii. Knowledge – describes organized sets of principles and facts applying in
general domains
iv. Education – details prior educational experience required to perform the
job
III. Job Evaluation
A. Definition
1. It is a technique used to systematically recognize differences in the relative worth
among a set of jobs, and establish differentials accordingly
B. Compensable Factors
1. Defined as salient job characteristics by which companies establish relative pay
rates
2. Universal compensable factors are skill, effort, responsibility, and working
conditions
3. Two considerations when selecting which factors to use when evaluating a job
a. Which factors are job-related?
b. Which factors further the company’s strategies?
C. The Job Evaluation Process
1. Six steps
a. Determining single versus multiple job evaluation techniques
b. Choosing the job evaluation committee
c. Training employees to conduct job evaluation
d. Documenting the job evaluation plan
e. Communicating with employees
f. Setting up the appeals process
2. Determining single versus multiple job evaluation techniques
a. Determine how many techniques are sufficiently broad to assess a diverse set
of jobs
b. It is not reasonable to expect that a single job evaluation technique based on a
single set of compensable factors can adequately assess diverse sets of jobs
3. Choosing the job evaluation committee
a. Usually chosen by the HR professional
b. Consists of rank and file employees, supervisors, managers, and union
representatives, each with their own motivations
d. Helps ensure commitment from employees and provides a check and balance
system
4. Training employees to conduct job evaluations, by ensuring that they:
a. Understand the process objectives, know company objectives, and practice
using criteria
5. Documenting the job evaluation plan
a. Important for legal and training purposes
b. Allows employees to understand how their jobs were evaluated
6. Communicating with employees
a. Should be done formally and personally throughout the process
b. Employees should have a chance to respond positively and negatively
7. Setting up the appeals process
a. Appeals procedures should allow reviews on a case-by-case basis to provide a
check on the process through reexamination and such appeals may reduce
charges of illegal discrimination
IV. Job Evaluation Techniques
A. Two general types
1. Market-based evaluations
a. Use market data to determine differences in job worth
b. Allow companies to assign pay rates that are neither too low nor too high
relative to the market
c. Compensation professionals use compensation surveys to determine the
prevailing pay rates in the relevant job markets
2. Job-content evaluations
a. Emphasize the company’s internal value system to establish a hierarchy of
internal job worth based on each job’s role in the company strategy
b. Compensation professionals must judge the adequacy of pay differentials by
comparing market rates with in-house rates
3. Must balance external market considerations with internal consistency objectives
B. The Point Method
1. The most popular job-content method because it gives compensation
professionals better control over balancing internal and market considerations
2. A quantitative method that assigns numerical values to compensable factors which
are summed to indicate the overall value of the job
3. The relative worth of the job is established by the magnitude of its overall
numeric value
4. Evaluates jobs by comparing compensable factors
a. Each factor is defined and assigned a range of points based on the factor’s
relative value to the company
b. Compensable factors are weighted to represent the relative importance of each
factor to the job
5. The seven-step process
a. Select benchmark jobs
b. Choose compensable factors based on benchmark jobs
c. Define factor degrees
d. Determine the weight of each factor
e. Determine point values for each compensable factor
f. Verify factor degrees and point values
g. Evaluate all jobs
6. Step 1: Select benchmark jobs
a. Used to develop factors and their definitions to select jobs to represent the
entire range of jobs in the company
b. Benchmark jobs found outside the company, provide reference points against
which jobs within the company are judged
7. Step 2: Choose compensable factors based on benchmark jobs
a. Managers must define compensable factors that adequately represent the
scope of jobs slated for evaluation
b. Each benchmark job should be described by these factors that help distinguish
it from the value of all other jobs
8. Step 3: Define factor degrees
a. Evaluators must divide each factor into a sufficient number of degrees to
identify the level of a factor present in each job
b. The number of degrees will vary depending on the comprehensiveness of the
plan
9. Step 4: Determine the weight of each factor
a. Represents the importance of the factor to the overall value of the job
b. Weighting often done by management or by a job evaluation committee
10. Step 5: Determine point values for each compensable factor in three stages
a. Establish the maximum possible point values
b. Determine point value by multiplying point total by percentage
c. Distribute these points across degree statements within each compensable
factor for use in a regression analysis
11. Step 6: Verify factor degrees and point values
a. Committee members should review the point totals for each job
b. Determine whether the hierarchy of jobs makes sense in the context of the
company’s strategy plan as well as the inherent content of the jobs
12. Step 7: Evaluate all jobs
a. Once the evaluation system has been tested and refined
b. By totaling the points for each job, which are then ranked according to their
point values
13. Balancing internal and market considerations using the point method
a. By converting point values into the market value of jobs through regression
analysis
i. Regression analyses enable compensation professionals to set base pay
rates in line with market rates for benchmark or representative jobs
ii. Companies get market pay rates through compensation surveys
iii. A company’s value structure for jobs based on the point method will
probably differ from the market rates
C. Alternative Job-Content Evaluation Approaches
1. Simple ranking plan
a. This plan orders all jobs from lowest to highest according to a single criterion,
such as job complexity
2. Paired comparison and alternation ranking ranking
a. Paired comparison
i. Useful when there are many (20 or more) jobs to rate
ii. Every job is paired with every other job
iii. After all pairs are rated, the jobs are ranked by total points
received
b. Alternation ranking
i. Orders jobs by extremes
i. The relative value of each job is judged by a single criterion
iii. Ranking begins by determining which job is the most then least
valuable
3. Classification plans
a. Place jobs into categories based on compensable factors
b. Public sector organizations, such as the civil service systems, use this plan
c. The federal government uses the General Schedule (GS) classification plan
D. Alternatives to Job Evaluation
1. Market pay rate
2. Pay incentives
3. Individual rates
4. Collective bargaining
V. Internally Consistent Compensation Systems and Competitive Strategy
A. Internally consistent compensation systems are important
1. Tightly specified job descriptions are appropriate for companies that pursue a
lowest cost strategy
2. Some limitations
a. Reduce a company’s agility to respond to to changes in competitor’s pay
practices
b. Establishing job hierarchies tends to create narrowly defined jobs, which leads
to increased bureacracy
End of the Chapter
VI. Key Terms
Internally consistent compensation systems: Clearly define the relative value of each job
among all jobs within a company
Job analysis: A descriptive procedure that 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
Worker requirements: Represent the minimum qualifications and the knowledge, skills,
and abilities (KSAs) that people must have to perform a particular job
Working conditions: The social context or physical environment where work will
be performed
Reliable job analysis method: Yields consistent results under similar conditions
Valid job analysis method: Accurately assesses each job’s duties or content
Job descriptions: Summarize a job’s purpose and lists its tasks, duties, and responsibilities,
as well as the KSAs necessary to perform the job at a minimum level
Job titles: Indicate the name of each job within a company’s job structure
Job summary: Precisely summarizes the job with two to four descriptive statements
Job duties: Describe the major work activities and, if pertinent, supervisory responsibilities
Worker specifications: Lists the education, KSAs, and other qualifications individuals must
possess to perform the job adequately
Education: Refers to formal training
Equal Employment Opportunity Commission (EEOC): Guidelines distinguish among
the terms skill, ability, and knowledge
Skill: An observable competence to perform a learned psychomotor ac
Ability: A present competence to perform an observable behavior or a behavior
that results in an observable product
Knowledge: A body of information applied directly to the performance of a function
Occupational Information Network (O*NET): Comprehensive database that incorporates
information about both jobs and workers
Content Model: Lists six categories of job and worker information
Experience and training: 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 that are required for entry and advancement in an occupation
Occupational requirements: Include generalized work activities, organizational context,
and work context
Generalized work activities: Describes general types of job behaviors occurring on
multiple jobs
Organizational context: Information that indicates the characteristics of the
organization that influence how people do their work
Work context: Information that describes physical and social factors that influence the nature
of work
Occupation-specific information requirements: A detailed comprehensive set of elements
that apply to a single occupation or a narrowly defined job family
Workforce characteristics: Variables that define and describe the general characteristics of
occupations that may influence occupational requirements
Worker characteristics: Information that includes abilities, interests, and work styles
Abilities: Enduring attributes of the individual that influence performance
Interests: Describe preferences for work environments and outcomes
Work styles: Personal characteristics that describe important interpersonal and work style
requirements in jobs and occupations
Basic skills: Describes developed capacities that facilitate learning or the more
rapid acquisition of knowledge
Cross-functional skills: Developed capacities that facilitate performance of activities that
occur across jobs
Knowledge: Organized sets of principles and facts applying in general domains
Education: Prior educational experience required to perform in a job
O*NET User’s Guide: How human resource professionals can access O*Net information
O*NET database: How human resource professionals can access O*Net information
Compensable factors: The salient job characteristics by which companies establish relative
pay rate
Universal compensable factors: Skill, effort, responsibility, and working conditions
Market-based evaluation: A plan that uses market data to determine differences in job
worth
Job-content evaluation: Plans that emphasize the company’s internal value system by
establishing a hierarchy of internal job worth based on each job’s function in company
strategy
Point method: A job-content valuation technique that uses quantitative methodology
Benchmark jobs: Used in the point method job to develop factors and their definitions to
select jobs to represent the entire range of jobs in the company
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)
Paired comparison: A variation of the ranking plan technique that is useful if there are
many jobs to rate, usually more than 20
Alternation ranking: Orders jobs by extremes
Classification plans: Place jobs into categories based on compensable factors