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Determining staff pay

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Determining staff pay

Determining staff pay

Have you ever wondered how a company decides how much to pay for a particular job? Imagine that you have seen a job posted on the Internet. It reads,

“Office Assistant Wanted. Will answer the phone and greet visitors. Some word processing duties. Other duties as assigned. Start at USD 8.00 an hour”.

How did the manager decide to pay USD 8.00 per hour? Why did she decide that was fair?

In this section, we will cover the two types of “fairness” important in designing a base pay system - Internal equity, and External equity.

Internal Equity

The first consideration is that the base pay system needs to be internally equitable. This means that the pay differentials between jobs need to be appropriate. The amount of base pay assigned to jobs needs to reflect the relative contribution of each job to the company’s business objectives.

In determining this, the manager should ask herself, “How does the work of the office assistant described compare with the work of the office manager?”

Another question to be asked is, “Does one contribute to solutions for customers more than another?”

Internal equity implies that pay rates should be the same for jobs where the work is similar and different for jobs where the work is dissimilar. Determining the appropriate differential in pay for people performing different work is a key challenge. Compensation specialists use two tools to help make these decisions: job analysis and job evaluation.

Internal Equity

Job analysis is a systematic method to discover and describe the differences and similarities among jobs. A good job analysis collects sufficient information to adequately identify, define, and describe the content of a job. Since job titles may in and of themselves be misleading, for example, “systems analyst” does not reveal much about the job, the content of the job is more important to the analysis than the title.

In general, a typical job analysis attempts to describe the skill, effort, responsibility, and working conditions of each job.
• Skill refers to the experience, training, education, and ability required by the job.
• Effort refers to the mental or physical degree of effort actually expended in the performance of the job.
• Responsibility refers to the degree of accountability required in the performance of a job.
Working conditions refer to the physical surroundings and hazards of a job, including dimensions such as inside versus outside work, heat, cold, and poor ventilation.

Internal Equity

Job evaluation is a process that takes the information gathered by the job analysis and places a value on the job. Job evaluation is the process of systematically determining the relative worth of jobs based on a judgment of each job’s value to the organisation.

The most commonly used method of job evaluation in the United States and Europe is the “point method”. The point method consists of three steps:
(1) defining a set of compensable factors,
(2) creating a numerical scale for each compensable factor, and
(3) weighting each compensable factor.

Each job’s relative value is determined by the total points assigned to it.

External Equity

External equity refers to the relationship between one company’s pay levels in comparison to what other employers pay.

Some employers set their pay levels higher than their competition, hoping to attract the best applicants. This is called “leading the market”. The risk in leading the market is that a company’s costs will generally be higher than its competitors’ costs.

Other employers set their pay levels lower than their competition, hoping to save labor costs. This is called “lagging the market”. The risk in lagging the market is that the company will be unable to attract the best applicants.

Most employers set their pay levels the same as their competition. This is called “matching the market”. Matching the market maximises the quality of talent while minimizing labor costs.

External Equity

Defining your market: An important question in external equity is how you define your market. Traditionally, markets can be defined in one of three ways.

One way to define your market is by identifying companies who hire employees with the same occupations or skills. For example, if a company hires electrical engineers, it may define its market as all companies that hire electrical engineers.

Another way to define a market is by identifying companies who operate in the same geographic area. For example, if the company is in Denver, Colorado, the market would be defined as all companies in Denver, Colorado.

A third way to define a company’s market is by identifying direct competitors, that is, those companies who produce the same products and services. For example, Shady Acres Veterinary Clinic may define its market as all other veterinary clinics.

Notice that these three characterisations can interact, that is, Shady Acres might define its market as all veterinary clinics in Denver

External Equity

Surveying compensation paid: Once you have defined your market, the next step is to survey the compensation paid by employers in your market. Surveys can be done in a variety of ways.

1. There are salary data publicly available through the Bureau of Labor Statistics in the United States.
2. There are salary data publicly available through the Internet.
3. Salary information can be obtained from a third party source, such as an industry group or employer organisation, which has collected general information for a geographic region or industry.
4. The company can hire a consulting organisation to custom design a survey.
5. A company can conduct their own survey.

Combining internal and external equity


A company that has performed appropriate research has two sets of data:
The first is pay structure, the output from the job evaluation.
The second is market data, the output from the market survey.

The next step will be to combine these two sets of data, to create a pay policy line.

The pay policy line can be drawn freehand, by graphing actual salaries and connecting the dots. Alternatively, statistical techniques such as regression analysis are used to create a pay policy line. Regression generates a straight line that best fits the data by minimising the variance around the line. In other words, the straight line generated by the regression analysis will be the line that best combines the internal value of a job (from job evaluation points) and the external value of a job (from the market survey).

You can also enact a policy of “leading” the market by raising the line, and the policy of “lagging” the market by lowering the line.