MODULE FOUR

COMPENSATION

If the abilities of employees have been developed to

the point where they met or exceed job requirements, it is
now appropriate that they be equitably compensated for their
contributions. The factors affecting the determination of
equitable compensation are many, varied, and complex, and
management must come to some decision concerning the
basic wage or salary (Unit 12 ). To motivate improved
performan on the job, many systems of variable
compensation have been devised ( Unit 13 ). And finally,
organizations have developed numerous ways of providing
supplementary compensation in the form of fringe benefits
( Unit 14).
 UNIT 12

BASE COMPENSATION – JOB

One of the most difficult functions of personnel management is that of determining

rates of monetary compensation. Not only is it one of the most complex duties, but it is
also one of the most significant to both the organization and the employee. It is important
to the organization, because wages and salaries often constitute the greatest single cost of
doing business; in 1929 employee compensation amounted to 58 percent of the nation’ s
income, as compared with the 75 percent in recent years. It is important to the employee
because the paycheck often is the sole means of economic survival; it is also one of the
most influential factors determining status in society.

As far as the organization is concerned, employee compensation programs are

designed to do three things: (1) to attract capable employees to the organization, (2) to
motivate them toward superior performance, and (3) to retain their services over an
extended period of time. As a consequence, our discussion is divided into three chapters,
exists, systems of job evaluation are widely used to make this first important decision.
When coupled with surveys of rates paid by competing firms, the organization can
establish a pay policy that will meet its desired goal of attracting sufficient personnel to
accomplish work tasks.

In many cases, organizations prefer that their employees perform at the rate higher
than average. In the following unit, we shall examine methods of varying individual pay
through merit evaluation and incentive pay plans, as well as systems of promoting group
productivity through profit sharing and production bonuses. Finally, the third unit in this
module will deal with the fastest- growing segment of the total compensation, the
provision of all types of supplementary pay of fringe benefits. Such programs are more
effective in maintaining a work force that they are in motivating higher levels of
performance.

SIGNIFICANT FACTORS AFFECTING COMPENSATION POLICY

Though a considerable amount of guesswork and negotiation are involved in salary

determination, certain factors are the following: (1) supply and demand for employee
skills, (2) labor organizations. (3) the firms ability to pay, (4) Productivity of the firm and
the economy, (5) cost of living, and (6) government. Each of these will be discussed
briefly in order to demonstrate the exceedingly complex nature of compensation.
Perhaps a realization of these complexities will lead to a greater appreciation and
acceptance of job evaluation despite its arbitrariness and scientific failings.

Supply and demand though the commodity approach to labor is not completely
correct, it is nevertheless true that wage is a price for the services of a human being. The
firm desires these services, and it must pay a price that will bring forth the supply, which
is controlled by the individual worker or by a group of workers acting in concert. The
primary practical result of the operation of this law of supply and demand is the creation
of the “going wage rate.” It will be demonstrated later how the wage and salary survey of
this going rate is incorporated into a job evaluation approach to wage determination. We
shall discuss the charges of certain groups that the market going rate reflects fundamental
biases toward female employees.
 This simple statement of the effect that the demand and supply of labor have on
wages bellies its complexity. It is not practicable to draw demand-and-supply curves for
each job in an organization, even though theoretically, a separate curve exists for each
job. But in general, if anything works to decrease the supply of labor, such as restriction
by a particular labor union, there will be a tendency to increase the compensation. If
anything works to increase the employer’s demand for labor, such as wartime prosperity,
there will be a tendency to increase the compensation. The reverse of each situation is
likely to result in decrease in employee compensation, provided other factors, such as
those discussed below, do not intervene.

Labor Unions In the structure of economic relationships, the labor union attempts
to work primarily on the supply side. In a strike for higher wages, the employer’s demand
for labor to meet a market need is pitted against a supply withheld by the union. Union
leaders are often very adroit in selecting the appropriate time to strike as judged by the
markets for the employer’s products.

To strengthen their control over the supply of labor, unions seek such goals as union
or closed shops, regulated or restricted substitution of capital for labor through
technology, and controlled entry into apprenticeship programs. All of these activities
serve to restrict the number of alternatives open to the employer, who must see that other
groups besides labor are properly compensated. All compensation must come from
products sold in market that is usually competitive in nature. Inequitable compensation to
any or all will create trouble in maintaining the health of the organization. The increase in
the strength of the labor unions is due, in part, to the fact the employees’ interests had not
been receiving attention equal to that given to other components of the enterprise. In the
six highest-paying industries, approximately half of the full-time workers are organized.
In the six lowest-paying industries, only 14 percent are organized. It should also be noted
that the percentage of female employees is lowest among the highest-paying industries.

Ability to Pay Labor unions has often demanded an increase in compensation on

the basis that the firm is prosperous and able to pay. However, the fundamental
determinants of the wage rate for the individual firm issue from supply and demand. If
the firm is marginal and cannot afford to pay competitive rates, its employees will
generally leave it for better-paying jobs. Admittedly, this adjustment is neither immediate
nor perfect because problems of labor immobility and lack of perfect knowledge of
alternatives. If the firm is highly successful, there is little need to pay far more than the
competitive rate to obtain personnel. Such a firm however may choose to adopt a policy
of paying above the competitive rate in order to attract a superior caliber of personnel. If
firms in general are prosperous and able to pay, the tendency is to bid up the price of
labor as a whole.

Productivity Beginning with the famed General Motors contract with the United
Automobile Workers (UAW) in 1948, mush attention has been paid to the effect of
general productivity increases in the economy upon the specific compensation of huge
aggregation of employees. In the battle against inflation, representatives of the federal
government have attempted to use computed productivity gains as guidelines in the
settlement of wage disputes between managements and unions. Between 1947 and 1966,
the computed average annual productivity increase in manufacturing was set at 2.9
percent, leading to the establishment of a “noninflationary” guideline for wage increases
of 3.9 percent. With growing inflation, resulting briefly in short-term wage and price
 controls, the validity of this guideline suddenly vanished. With inflation reaching
double-digit levels, the government approach of “jawboning” to influence negotiated
settlements has been placed under serious handicaps. An even more serious problem is
that the average annual productivity increase in the United States during a recent 11- year
period has sunk to 1.9 percent as compared with 9 percent of Japan, 5.5 percent in west
Germany, 5.1 percent in France, and 2.8 percent in Great Britain. During this same
period, however, hourly pay has increased over 100 percent. A part of this problem of
pay speedup and productivity slowdown is characteristic of a maturing economy; service
businesses now account for 70 percent of all jobs. Productivity advances in services are
more difficult to effect than in manufacturing.
Though some have failed the widespread of the use of productivity index as a major
breakthrough in compensation, there are several serious drawbacks to its use. Among
these are the following: (1) there is no precise and accurate measure of productivity
acceptable to all; (2) the reported percent increases are generally a long-term average and
are not achieved each year; (3) not all industries participate equally in productivity gains;
and (4) use of any index does not materially reduce controversy in beginning, since the
index is used as the base from which to bargain.

Cost of Living Another formula hailed by many as the answer is the cost-of-living
adjustment of wages. Among the problems engendered by this approach are the
following: (1) no cost of living formula will indicate what the base compensation should
be---it merely indicates how that rate should vary; (2) this approach tends to vary
monetary income but freeze real income, a result with which labor is not content; and (3)
as in the case of productivity indexes, there are certain measurement problems in
ascertaining cost-of living increases. The Consumer Price Index of the Bureau of Labor
Statistics, however, is widely accepted and followed by many employers and labor
organizations.

Cost-of-living adjustment of compensation constitutes no fundamental solution to

equitable compensation to employees. It is useful as a stopgap device in times of inflation
when labor is pressed to keep up with the rise in prices. It is an essential ingredient of
long-term labor contracts unless provision is made to reopen the wage clause
periodically. The United Auto Workers agreement, for example, provides for quarterly
cost-of-living adjustments amounting to a 1-cent increase for every 0.3 percent advance
in the Consumer Price Index.

Government Our varying levels of government often have very specific things to
say about wages and salaries despite the theoretical and nebulous nature of equitable
compensation. There are at least three major federal laws that deal directly with the
subject of compensation. The Fair Labor Standards Act, often called the Wage and Hour
law, specifies a minimum hourly wage and a standard workweek for all firms engaged
from 25 cents to $3.35 per hour in 1982. The law applies to enterprises engaged in
interstate commerce with gross annual volume of sales of at least $362,500. Over 50
million employees are covered.

The Equal pay Act of 1962 is an amendment to the Fair Labor Standards Act and
specifies that equal work requiring equal skill, effort, and responsibility under equal
working conditions shall be accorded equal pay, regardless of sex of employee. Any
differences must be rationally justified through systematic study, usually in the form of a
job evaluation plan. Adjustment of differences cannot take the form of reducing pay of
the higher-paid person. One airline has been ordered to pay about $25 million in back
wages to stewardesses who since 1968 were paid less than male employees doing the
same work.
 Hours worked in excess of 40 per week must be compensated at the regular rate
plus a penalty of half time. Thus, if an employee’s rate is $4 an hour, a 50-hour
workweek would result in straight time pay of $200(50 x $4) and overtime pay of $20 (10
x $2) for a total of $220. Employees assigned to executive, administrative, or professional
positions are usually excluded from coverage by the act. Labor organizations constantly
press for increases in the minimum wage, decrease in the standard workweek, and
increases in the penalty for overtime hours, all in interest of increasing total
compensation for labor.

The Walsh-Healey and Davis-Bacon Acts apply to employees dealing with the
federal government as contractors, the former applying to those with contracts whose
value is in excess of $10,000 and the latter to those having public works contracts with
values in excess of $2,000. Under these two acts, the minimum wage is a rate established
by the Department of Labor; it has been higher than that set by the Fair Labor Standards
Act. The prevailing minimum wage is paid to a majority of workers in a particular craft
in a specific geographic area. If there is no prevailing wage for a majority, the amount is
determined on a weighed-average basis. The standard straight-time period is the 8-hour
workday rather than the week. Hours worked in excess of this standard must be
compensated with the half-time penalty.

In addition to these acts, there are numerous state laws specifying minimum wages.
Usually these rates are lower than those placed in federal legislation, but some 20 states
have minimums of $3.35 or higher. It can also be contented that the federal government
is instrumental in salary determination through its insistence upon collective bargaining
with organized labor as required by the Wagner and Taft-Harley Acts.

Equity and Compensation

If our first goal of attracting capable employees to the organization is to be

achieved, personnel must perceive that the compensation offered is fair and equitable.
Equity is concerned wit felt justice according to law or right. Homan’s exchange theory
predicts greater feelings of equity between people whose exchanges are in equilibrium.
When an employee receives compensation from the employer, perceptions of equity are
affected by two factors: (1) the ratio of compensation to one’s inputs of effort, education,
training, endurance of adverse working conditions, and so on, and (2) the comparison of
this ratio with the perceived ratios of significant other people with whom direct contact is
made. Equity usually exists when a person perceives that the ratio of outcomes to input is
in equilibrium, both internally with respect to self and relation to others.

Gross Moderate Equity

Over-reward Over-reward
High (1) (2) (3)
Moderate Equity Moderate
Over-reward under-reward
Medium (4) (5) (6)
Equity Moderate Gross under-
under-reward reward
Low (7) (8) (9)
Low Medium High

Figure 12.1 Equity in compensation

 In Figure 12.1 nine different situations are proposed. Equity theory hypothesizes
that the correlation of pay and contribution that exists in cells 3, 5, and 7 would result in
feelings of equity. In all other cells, feelings of dissonance are likely to exist. Research
conducted with respect to under-reward situations (6,8 and 9) clearly indicates that
employee satisfaction is lower than in either the equity or over-reward situations.
Employee contributions exceed their outcomes of money. Resulting dissatisfaction often
leads to efforts to reestablish equilibrium, such as ”borrowing” from the supply room to
increase rewards, trying to adversely affect the efforts and pay of others, convincing self
that pay is not out of line, quitting or frequently absenting oneself from the organization,
promoting labor organization, and so on.

Concerning the over-reward situations (cells 1, 2 and 4), original research

conducted by Adams suggested that feelings of discomfort and guilt resulting from
inequitably higher pay would lead to actions to reduce dissonance. He led an
experimental group of employees to believe that the pay allocated was significantly in
excess if their qualifications. In one experiment, the overpaid group, compensated on an
hourly basis, produced a quantity significantly in excess of an appropriately paid control
group. In a second experiment under a system of incentive piecework, the overpaid group
tended to reduce dissonance by restricting output so that total pay was more in line with
equity expectations. And in a final experiment, the overpaid group restricted its quantity
but increase its quality in order that total pay received might be in line with contributions.
Other research has not demonstrated the same strength of impact upon an overpaid group
as for an underpaid one. For example, a second study supported hypotheses with respect
to underpaid personnel; they tended to decrease inputs over a period of time in
comparison with those equitably paid as well as with those overpaid. The overpaid group,
however, tended to parallel the equity group in output. Concerning satisfaction, however,
overpaid did express more overall dissatisfaction than did those from equitably paid
groups. Thus, there is some indication of guilt from receiving more compensation than
deserved, but such feelings were not translated into action.

It has been observed that many organizations pursue a pay increase policy
characterized by cells 4, 5 and 6. The employee of average contribution is accorded an
average increase in pay, but those above and below average are allocated compensation
amounts not significantly different. Thus superior personnel are moderately under-
rewarded, leading to lower contributions or withdrawal from the firm. Inferior personnel
are moderate over-rewards, leading to little or no change in behavior but effecting
acceptable levels of employee satisfaction. It is this condition that led Herzberg to
conclude that pay cannot be an effective motivator of employee behavior. Figure 12-1
and equity theory would suggest that the problem maybe one of improper design of
compensation systems, rather than the fundamental inability of pay to motivate.

To cope with possible feelings of inequity, various organizations follow a practice

of imposing secrecy with respect to compensation received. This is particularly true for
salaries of executives and other personnel not covered by union contracts. Research has
shown that personnel often underestimate pay of higher-level managers and overestimate
the pay of both peers and those one level below. Thus even if conditions exist that would
favor equity, it will not be perceived if compensation is kept secret. On the other hand, if
a firm desires to “go public” with its salaries, it had better be able to evaluate
performance levels in an objective manner. There are many situations where job outputs
are both intangible and intertwined in a dependent fashion with other jobs. Unless some
form of acceptable objective assessment can be developed, pubic pay systems may well
lead to lower performance and morale, accompanied by strained relationships between
superiors and subordinates.
Comparable Value

As indicated earlier, the Equal Pay Act prohibits employers from discriminating
between employees on the basis of sex by paying at a rate less than that paid to
employees of the opposite sex. This applies when the jobs are equal, requiring he same
skill, effort, and responsibility, and performed under similar working conditions.
However, unequal pay is authorized if pay is based on a security system, a merit system,
an incentive wage system, or any other system based on factors other than sex.

Despite this 20-year old law, the average compensation of females has been
running at approximately 60 percent of that for males. This varies by major occupational
areas, with the least discrepancy found in professional, technical, operative, and service
occupations. Research shows that even when men and women begin their careers as
equals, in the same type of job, the former soon move ahead. In comparing 40 male
graduates and 40 female graduates from the Columbia Graduate School of Business, the
average starting salaries in 1969 were approximately the same. Ten years later, females
were receiving an average of $34,036 per year while males were making $48,000 per
year. Various explanations fort this difference have been suggested as follows:

1. Supervisors subconsciously or consciously undermine females subordinates

by not giving them difficult assignments, thereby not violating the Equal Pay
Act on the surface.
2. Supervisors assume that female employees are not as interested in promotions
and fail to introduce them to senior officials in the firm.

3. Females may perform at a lower level caused by stress and tension of working
in a male-dominated environment.

4. Females are more likely to choose staff positions because of the work. Staff
typically pays less than more vital line positions.

5. Women are more likely to bear the brunt of family duties if married. Though
the married male may receive the career benefits of a non working wife, the
married female manager is not like as likely to have such support from her
husband. One study indicated that a male married manager with a non
working wife would make on the average $3,801 more than a male manager
who was single. If the male manager had a working wife, he made
approximately $2,000 more than a single man. Other studies have suggested
that women managers may be more successful in career attainment if they are
not married.

6. Related to the above, female employees are more likely to turn down critical
transfers and job relocations for the sake of the family.

7. Females tend to have more discontinuous work experiences, dropping out of

the labor market frequently than do males. This discontinuity is reflected in
reduced pay.
 Though a portion of the 40 percent discrepancy in pay can be attributed to the
arguments above, it is contended that the greater bulk is created by a labor market that
separates females and males into different occupational areas. As was noted in Figure
12.1, the lowest-paying industries are heavily populated by females. The going rates for
jobs held predominantly by females tend to be considerably lower than those rates for
predominantly male jobs. Rather than accept the market rate as proper rate, it is suggested
that comparisons be made concerning the true value of jobs. Rather than equal that the
major civil rights issue of the 1980s will be of comparable value.

As in the case of the most civil rights issue, we must turn to the courts to
determine what constitutes discrimination. In a landmark case, Country of Washington v.
Gunther, the Supreme Court decide that this issue was covered by the Civil Rights Act,
and not the Equal Pay Act alone. The case was remanded to lower courts to determine if
Gunther’s charge of sexual discrimination had merit. In deciding the merit issue, it will
be difficult to predict the basic approach to be sustained by the courts. In an earlier case,
Christiensen v. State of Iowa, the court refused to overturn the employer’s pay policy
based on meeting market rates. The court noted: “The value of the job to the employer
represents but one factor affecting wages. Other factors may include the supply of
workers willing to do the job and the ability of the workers to band together to bargain
collectively for higher wages. We found nothing in the text and history of the Title IV
suggesting that Congress intended to abrogate the laws of supply and demand or other
economic principles that determine wage rates for various kinds of work. We do not
interpret Title VII as requiring an employer to ignore the market in setting wage rates for
genuinely different work classifications”. One observer suggests that the ultimate
solution will be to reduce the barriers to entry to all male-dominated jobs. This will
increase the labor supply for higher-paying jobs and reduce the supply for the lower-
paying jobs, resulting in a reduction of the pay gap between females and males.

Job Evaluation

As a first step in the pursuit of equity, there should be established a consistent and
systematic relationship among base compensation rates for all jobs within the
organization. The process of such establishment is termed “job evaluation” and is not to
be confused with job analysis, which is concerned with collection of data about jobs. In
job evaluation, one attempts to consider and measure the inputs required of employees
(skill, effort, responsibility, etc.) for minimum job performance, and to translate such
measures into monetary returns.

The immediate objective of the job evaluation process is to obtain internal and
external consistency in wages and salaries. Internal consistency is concerned with the
concept of relative wages within the firm. If, for example, the supervisor is paid less than
a subordinate, these rates are inconsistent.

External consistency refers to a desired relativity of an organization’s structure to

that of the community, the industry, or the nation. The organization may choose to pay
the going rate, more than the rate or less. Wage and salary surveys are necessary for
determination of external consistency. It is here, also, that collective bargaining must
enter the picture. Job evaluation and collective bargaining are not incompatible; they can
and do exist within the same organization. Job evaluation would reduce the area of
collective bargaining by systemizing the determination of internal consistency, which is
concerned with proper wage differentials. Collective bargaining must still work to attain
the objective of external consistency, the raising or lowering of the entire wage structure.
Job evaluation should determine the shape of the wage structure and collective
bargaining the location of the entire structure as a unit. Labor unions can also participate
in the design and administration of the job evaluation system. In a sample of 38 unions
questioned in 1972, 26 had job evaluation provisions on the job contract, with union
leader preference for the point system.

Though internal and external consistency is the immediate objectives of job

evaluation, its ultimate objective is employee and employer satisfaction with wages and
salaries paid. Management wishes the employee to perceive that his or her compensation
is fair and equitable. Management hypothesizes that development of rational consistency;
both internally and externally, will increase the likelihood that compensation will be seen
as just and equitable.

As method of personnel management, job evaluation is not old. Early attempts

along this line took place in the 1920s, and the period of most rapid growth occurred
during the 1940s. The increasingly widespread adoption of job evaluation has been due to
the growing size and complexity of modern organization, as well to societal requirements
for justification of pay differentials accorded female employees and various minority
groups. This demands a systematic and defensible approach to measurement and
recording of job worth.

In establishing this systematic approach to measuring job worth, there are a

number of necessary prerequisites. First, reasonably clear and accurate job descriptions
and specifications must be available to provide data concerning the factors to be
measured. Secondly, a decision must be made concerning what groups of employees and
jobs are to be covered by as ingle evaluation system. Often, there are separate systems for
production and maintenance, clerical and administrative, scientific and professional, and
managerial employees. If all personnel are deemed to be in one market as they are all in
one firm, there will have to be some means of relating these multiple systems to assure
equitable treatment. A final prerequisite is the “selling” of the idea of systematic
evaluation to all participants in the system. Selling the approach is the first step and the
last step, and the insistence upon it is consistent with the concept that a correct salary
must be satisfactory to both employee and employer.

JOB EVALUATION SYSTEMS

There are in use today four basic systems of job management. They fall into two
categories. The first category covers the simpler methods, which make no use of detailed
job factors. The job is treated as a whole, and job descriptions rather than job
specifications, are often utilized. In this category we place two systems sometimes known
as the nonquantitative systems, (1) simple ranking and (2) grading. These systems are
most popular among governmental organizations, one survey showing that over 85
percent of state and county governments make use of the grading method (sometimes
called “classification”).

The second category covers systems that use a more detailed approach. Job
factors are selected and measured n, and the firm’s job analysis program must result in
job specifications that describe requirements for each of these factors. This category is
known as the quantitative approach and includes (1) the point system and (2) the factor-
comparisons system. These systems are most widely used in private industry, with the
point system being used by approximately 75 percent of the firm that undertake job
evaluation. Many firms use more than one system. Though the ranking system would
seem most adaptable to the smaller enterprise, various large organizations use a simple
ranking process in aligning middle- and upper-manager positions, while applying a more
detailed point system to the many operative jobs. In addition, an excellent way of
ascertaining the accuracy of one system is to check its answer by applying another
system to the same jobs; there should be a substantial amount of agreement between the
answers obtained by the two systems. In a survey of 39 unions representing over 20,000
locals, the order of use for factory jobs was (1) point system, (2) factor comparison, (3)
ranking, (4) a combination of methods, and (5) grading. When applied to office jobs, the
usage was the same except for a switching of positions by the point and factor
comparison systems.

SIMPLE RANKING

Since most of the business organizations of the United States are relatively small
in size, as measured by the number of personnel, a simple and inexpensive system of job
measurement has great potential usefulness. Ranking should involve the preparation of
brief job descriptions, although some firms merely attempt to rank job titles. These
descriptions are handed to a committee of judges, with instructions to place them in the
order of worth, without respect to persons at present performing these jobs or to the
present wage rates paid. No specific factors are selected for consideration.

Several techniques of ranking can be of value in this process of evaluation. First,

the top and bottom jobs should be selected as bench marks for the remainder of the
ranking process. They, at least, provide a point of departure on which there is generally
full agreement among the judges. Each job can be compared with every other job, one at
a time. A third technique is that of using a committee for the judging. Admittedly, there
is a great deal of conjecture and some arbitrariness in any system of job evaluation, and
the averaging of ranks by a group of informed evaluators often results in a more accurate
judgment. A fourth device that can be used in ranking is the organization chart, if one
exists. Job evaluation ranks should not violate the organizational ranking of jobs
depicted on the chart, or, if they do violate the chart, perhaps the chart should be
modified.

The defects of the simple ranking system are may. Its greatest virtue, simplicity,
is also a disadvantage, in that the measurement is somewhat crude. It is hard to measure
whole jobs. In addition, there is no predetermined scale of values, or yardstick, for the
judges to use. Each judge has her or his own set of criteria, and it is difficult to explain
the results to a job incumbent. The end result of this system is a list of jobs in the order
of worth.

JOB GRADING

In the ranking system there is no predetermined yardstick of values. In the job

grading approach there is one such yardstick consisting of job classes or grades. Jobs are
measured as whole jobs. A scale of values is created with which jobs and their job
descriptions can be compared. This scale consists of grades and grade descriptions. For
example, it may be determined that twelve job grades are to be utilized for a category of
jobs. Twelve grade descriptions must then be prepared. Such descriptions must be
sufficiently broad to include several jobs. In a sense, a grade description is a job-class
description, as compared with a job-description.
 There are two approaches to writing grade descriptions that will create a single
scale of values for measuring the worth of jobs. Jobs may first be ranked and natural
classes determined. If, for example, X and Y jobs are in one class, and A, N, and M are in
another, these job descriptions can be used to create the two grade descriptions. It is also
possible to convert a factor-comparison system and a point system into a grade-
description system through this same process. The second approach is to ask a committee
to determine in advance a series of grade definitions. Such definitions can be checked by
grading some known key jobs against them.

When the scale of values is established, the process of job evaluation through the
grading system consists in reading the job description, reading the grade descriptions, and
then allocating the job to one particular grade. All jobs within one grade are treated alike
in the matter of base salary.

Job grading is considered to be an improvement over ranking in that a

predetermined scale of values is provided. In addition, this method arrives at a series of
classes or grade, which is precisely the point at which both the point and factor-
comparison systems also arrive. The grading system merely goes there directly by
evaluating the job as a whole job; the other two systems create job classes out of a
detailed measurement of job factors. Evaluation under the grading system can be
supported by the evidence of job descriptions and job grade descriptions. It is also a
relatively simple and inexpensive system to operate.

The primary disadvantage of the job grading approach is that broad generalities
must be used in defining grades. These somewhat vague statements often lead to heated
arguments between jobholder and management, but the definitions must be general in
order to include several jobs, since whole jobs are being measured. Another difficulty is
that the grading approach usually requires multiple systems for different types of jobs; for
example, grade descriptions for office jobs differ widely from those for production jobs.

POINT SYSTEM

The most widely used job evaluation method is the point system. It, along with
the factor-comparison system, involves a more detailed, quantitative, and analytical
approach to the measurement of job worth. This system can be best described through the
presentation and discussions of a series of steps for its design and installation. A
suggested procedure is as follows:

1) Select job factors or characteristics.

2) Construct a scale or yardstick of values for each job factor.
3) Evaluate all jobs in terms of the yardstick.
4) Conduct a wage survey for selected key jobs.
5) Design the wage structure.
6) Adjust and operate the wage structure.
Selection of the Job Factors

In contrast to the ranking and grading methods, which measure jobs as whole
jobs, the point system is a more analytical approach and deals with job components or
factors. A job factor is a specific requirement levied upon the jobholder, which she or he
must contribute, assume, or endure. In general, there are four major job factors in use: (1)
skill, (2) responsibility, (3) effort, and (4) working conditions. In another sense, these are
the values for which an employer pays money. One buys a certain amount and level of
skill and effort. One also buys the abilities to assume certain amounts of responsibility
and to endure certain specific working conditions.

The number of factors used in any one system varies with the organization. Some
use only the four listed above. More frequently, these four major factors are divided into
a number of smaller factors; the most common number used is approximately ten or
eleven.

The measurement of skill is accomplished indirectly through the evaluation of the

job requirements for education, experience, and initiative. Responsibility is more
specifically evaluated through a measurement of the amount and value of things and the
number and kind of personnel for which the job incumbent is accountable. In most
instances, effort is divided into mental and physical energy required to be expended,
though occasionally the requirement for emotional effort is considered important.
Working conditions constitute one factor that labor and management is agreed is directly
and specifically compensable. Its measurement is concerned with the necessity for
enduring disagreeable and hazardous conditions.

The selection of specific job factors to be used in any one system must be made
by the organization concerned, as each system should be tailored to specific
requirements. In various instances, statisticians have proved that the use of limited
number of key factors will provide the same final evaluation as the use of three times as
many factors. Nevertheless, if employees perceive that twelve factors are more believable
than four, then the former is the correct number for the system.

As the contents of jobs are altered by technology and automation, it is logical that
job evaluation systems should change in response. Traditional approaches are difficult to
apply because of the greater degree of interdependence among automated jobs. There
must be greater concentration upon interrelationships. In addition, it is common practice
to introduce a greater degree of flexibility in job assignments; jobs are enlarged and
people are rotated from station to station. In general, it is suggested that increased amount
will cause greater job evaluation weights to be given to the value of the equipment,
amount of discretion and initiative required, increased responsibility, increased tension,
required higher educational levels.

Elliot Jacques has recommended that all job factors be discarded and replaced by
a single index – the time span of discretion. This is the length of time that elapses
between the point at which a subordinate begins a task and the point at which the
supervisor would normally examine performance against quantity and quality standards.
He proposes the existence of an intuitive awareness of equity derived from an
unconscious estimate of one’s capacity, level of work to which assigned, and
compensation received. As a single index, many researchers are doubtful that it will give
satisfactory results. One study found that the time span measure and the result of the job
is moved from the specialist system correlated 0.82. In effect, the evaluation of the job is
moved from the specialist in the personnel department to the supervisor as he reports the
time spans of discretion. Doubts concerning its reliability are introduced inasmuch as
there are multiple raters instead of a centralized core applying a common set of scales to
all jobs.

With respect to pay systems for scientists and engineers, there is evidence of
basing compensation upon no job factors directly. In a sample of 120 major companies in
aerospace, chemical, electrical, petroleum, and research industries, 56% used maturity
curves. Pay is thereby governed by the number of academic degrees, the years of
professional experience, and the quality of performance, all of which are personal factors
and not job factors. It is assumed that management will assign the maturing scientist and
engineer to progressively more difficult tasks, thereby introducing the job factors. This
approach avoids the problems of having to define jobs in a precise fashion. A study
previously cited discovered a correlation o0.64 between a job grading system and results
obtained by a maturity curve. This same study indicated that there was less perceived
equity on the part of engineers and scientists when the maturity curve was used.

Construction of the Factor Scales

For each factor selected as important, a yardstick or scale values must be

constructed to permit measuring the factor in each job. The first decision is that of
deciding the total number of points that will be utilized in the entire system. A more
important decision is a determination of the percentage of these points that will be
allocated to skill, effort, responsibility, and working conditions.

In most systems, the factor of skill is allocated the greatest percentage of value.
Responsibility is ordinarily second in importance, with effort and working conditions
given approximately the same value. The NEMA-NMTA is as follows:

Factor Number of Points Percentage

Skill 250 50
Responsibility 100 20
Effort 75 15
Working conditions 75 15

In the Xerox plan, a grouping of the ten functions would produce 55% for skill
(education, training, experience, complexity), 40% for responsibility (accountability,
contacts, guidance of others, confidential information), 2.5% for working conditions, and
2.5% for physical effort.

In recent years, there has been a definite tendency, in many plans, to decrease the
importance of skill and increase that of responsibility. As suggested above, the reasons
for this are the mechanization and automation that transfer more skill from humans to
machines, thus decreasing the requirement for worker skill and increasing worker
responsibility for equipment, processes, and results.

Just as a committee should select the factors to be used, so should the weights be
determined. Assignment of relative values is largely subjective in nature. With the total
value of each factor thus determined, yardsticks can now be derived. These yardsticks are
composed of points and definitions of degrees of the particular factor. For example, let us
consider the education factor of the NEMA-NMTA plan. The total value is 70 points of
the 250 allocated to skill. Five degrees of education have been established with an
arithmetic progression of 14 points. A job requiring only the ability to read and write
will be allocated 14 points, while one requiring a college degree will be awarded the
maximum of 70 points.

Thus, a scale of values for education has been derived which can be used to
measure that factor in any job in the system. Similar yardsticks must be derived for all
other factors. Some systems are enormously complex with many definitions and possible
point allocations. In the Hay plan, fro example, the know-how factor has 360 possible
point totals while the accountability factor has 540. the more objective the definition of
degrees, the higher the reliability of each scale. The reliabilities of the education and
experience factors in the NEMA-NNTA system have range in the .90s. the reliability of
the total system in one instance was .94, meaning that raters using this same system on
the same set of job derived substantially the same answers.

EVALUATION OF THE JOBS

If reliable scales for each factor have been constructed, and if detailed job
specifications are available the evaluation process has been greatly simplified. It consists
of reading the job specifications carefully, comparing that information with degree of
definitions on factor scales, and deciding at which degree the job falls on each factor. A
totaling of the points for all factors will give the evaluation of the job in terms of point.

In practice, the evaluation of jobs is generally done a committee, the members of

which may have varying degrees of familiarity with the job to be rated. In one study of
twelve raters evaluating five jobs on each of fourteen factors it was determined that the
degree of rater familiarity had a significant effect on five of these factors –adaptability,
decision making, mental work, working conditions and managerial requirements. It has
also been determined that the more detailed the job specification the higher the ratings are
likely to be. Reliable scales and detailed, but consistently written, job specifications will
do much to prevent trouble and controversy in these rating meetings.

Conducting the Wage Survey

As a result of the preceding step, jobs have been evaluated and differentials
established in terms of points. We must translate these point values into monetary values.
The basic means of accomplishing this translation is through the wage survey. At this
point, the going rate enters the picture. Through the survey we hope to discover the
going rate for various jobs and to key our entire structure to these rates.

The first step in a wage survey is to select key jobs, ones whose duties are clearly
defined, reasonably stable, and representative of all levels of job worth. Thus, a sample
of jobs is created. Secondly, a sample of firms in the labor market area must be chosen.
The labor market for different jobs can vary from local to regional to national in scope.
With both samples selected, the final task is to obtain appropriate wage information,
being careful to ensure that the job comparisons being made are valid. Job content, the
varying qualities of personnel on these jobs, and the total compensation program must be
carefully analyzed, compared, and equated.
 The data obtained from the survey are analyzed and averaged. Dollar values of
key jobs can now be plotted on the wage chart. By drawing a wage -trend line that is
closest to all points plotted, we have a line that approximates the going rates for all jobs
in the structure. This line can be drawn freehand or by using the “method of least
squares.” Wage rates for all other jobs can now be interpolated by reading up from the
point values to the wage line.

The obtainment of current and accurate compensation data can be greatly

facilitated by a computer-assisted data exchange. System Development Corporation has
been active in forming a group of thirty firms which have agreed to contribute to a large,
centralized compensation data base on a semiannual basis. Standard job family and
subfamily codes have been developed, and the system staff takes the lead in ascertaining
comparability of company job descriptions with these codes. Data are collected on rate
ranges, actual high and low salaries and number of jobs incumbents. These reports can
be requested by each company: (1) a complete breakdown of all rates within the
requesting company, (2) compensation data for bench mark key jobs from all
participating companies, and (3) detailed comparisons with selected companies with
whom the requesting company has a mutual agreement.

Policies of Wage Structure Design

In many instances, the design of the wage structure revolves around the
establishment of job classes and rate ranges. Ordinarily, jobs are not treated separately
but are grouped to form a job class. All jobs within a class are treated in the same way.
In a point system, classes are established by dividing the point range into the desired
number of classes; that is, from 120 points to 150 points could constitute one class, 150 to
180 would be the spread for another, and so on. Almost all firms group jobs into classes
for purposes of economical wage administration.

The firm has a choice of paying flat rates for each job lass or varying rates within
a rate range for each class. Flat rates would result in the wage structure. Rate ranges
would result in the creation of the structure. If the structure consists of flat rates, there
are usually a greater number of job classes.

Rate ranges permit varying compensation within the same job class. The location
of the rate ranges in relation to the going rate trend line is a matter of compensation
policy. Most choose to be competitive and will pay the going rate for about the mid-point
in each range. Some firms choose to pay above – average rates in the hope of attracting
above – average personnel. Other firms follow a policy of lower than average base rates,
with emphasis being placed on a additional income possible through various incentive
arrangements.

Adjusting and Operating the Wage Structure

The wage structure that has been developed constitutes a standard according to
which wages can be administered. Ideally, all wages paid should be within the limits the
established by the structure. In the beginning, there will be some out–of-line rates, “red-
circle” rates, of those who are receiving more than the proper amount, as well as
substandard rates of those receiving less.
 It is a cardinal principle of wage and salary administration that no individual shall
receive a cut in pay as a result of the installation of job evaluation. Consequently, the firm
will live with the red-circle rate until it can be placed into the proper structure through
such means as a general increase in the rate structure, promotion of the individual to a job
of higher worth, or waiting until the job is vacated through transfer, retirement, or
resignation. The substandard rate can be raised immediately to the minimum authorized
level. All future pay-rate changes should be in line with the designed limits of the
systematic wage structure.

Factor - Comparison System

The fourth system of job evaluation is the factor-comparison system. In essence, it

is an application of the person-to-person system of merit rating to job evaluation. The
steps in this system are as follows:

1) Select job factors.

2) Select key jobs.
3) Determine correct rates of key jobs.
4) Rank key jobs under each job factor.
5) Allocate the correct rate of each key job among the job factors.
6) Evaluate all other jobs in terms of these factor yardsticks.
7) Design, adjust, and operate the wage structure.

The first step is the same as for the point system, the selection of job factors. The
factor-comparison system uses fewer factors, usually not more than seven. The selection
of key jobs and the determination of correct rates are similar to the steps described for the
point system above. The fourth step constitutes a refinement of the ranking system.
Instead of being ranked as whole jobs, the jobs are ranked by one factor at a time.

Factor comparison thus incorporates a job-to-job type of rating. It is s refinement

of simple ranking in that comparisons are accomplished job-to-job, by factors, rather than
as whole jobs. Instead of using money values today, most firms convert the dollar
amounts into points to avoid adjusting their scales to changing price and wage levels. The
final step of designing and operating the structure involves substantially the same
problems as described under the point system.

Human Relations Effects of Job Evaluation

Job evaluation is a systematic, rather than a scientific, process of establishing

wages and salaries. It possesses a high degree of reliability but its validity must be
determined by ascertaining the impact upon employee satisfaction. One way to do this
would be by collecting and analyzing data with respect to employee complaints and
grievances concerning pay. Morale surveys could also be adapted to this purpose. In
addition, realizing the impact of relative pay upon perceived equity, a comparison of
organization pay rates with going rates in the local community should provide some
evidence bearing upon probable validity. There is no basis for contending that evaluation
and wage/salary surveys are scientific and provide incontestable answers. Consequently,
we must be heavily concerned with employee and labor union reactions to specific
challenges to the system and its result.
 A second difficulty arising from the installation of job evaluation is that it will
usually promote an immediate increase in the number of grievances concerning wages.
Job evaluation gives the wage structure a sharp definition that it did not have before and,
in effect, turns a spotlight on wages. When this new clarity of structure is combined with
the system’s admitted lack of infallibility, it is obvious that grievances will be filed. It is
not so certain that these same grievances were not already present prior to job evaluation;
the sharp definition provided by job evaluation merely provides a basis on which the
grievance can be filed. The solution to this problem is to wait and process all grievances
judiciously and fairly. If the system has a reasonable degree of reliability and validity, the
first burst of grievances will die down, leaving the level of satisfaction higher than it was
before job evaluation.

Finally, there is often a conflict between worker management values in job

evaluation. As indicated earlier, management generally considers, in rating a job, the
general factors of skill, responsibility, effort, and working conditions. To these, workers
would add the values of (1) the type of supervision received, (2) the congeniality of other
workers, (3) the steadiness of the work, (4) the amount of overtime, and (5) the tightness
of incentive standards. Obviously, no job evaluation system could ever encompass all the
variables of a job that make it attractive to a worker. At times the job evaluation system
may reverse the order of worth that the employees themselves have established. The
solution to this type of problem usually lies in the managerial ability to be flexible rather
than rigid. Where two jobs were reversed, it may be possible to consider both jobs to be
in the same class and at least minimize the difference between workers and management.

Proposed EEOC Guidelines

Inasmuch as the Gunther decisions specifies that pay system can be challenged
under the Civil Rights Act, the EEOC has moved to establish some guidelines in the use
of job evaluation procedures. Some groups have challenged existing systems as
mechanisms for perpetuating higher pay for male-dominated jobs. For example, the more
weight given to the working conditions factor, the better traditional male jobs will fare
under the system.

Though at the time of this writing, no official guidelines have been presented, the
following are likely candidates foe adoption:

1) A firm should use a single system encompassing all jobs to reduce potential for
discriminating against certain classes of jobs.
2) The choice of factors should be equally appropriate to all jobs and not biased in
favor of jobs held mainly by one particular sex or race.
3) If scores for predominantly female jobs are generally lower, the employer may be
required to defend the use of such factor scales on the basis of business necessity.
4) Uses of existing wages to derive factors weights may be unacceptable unless it
can be shown that such weights are unbiased by sex.
5) The system as a whole should (a) be documented, (b) be explained to all, (c) use
well-trained raters, (d) be regularly audited to update job descriptions, (e) provide
for an appeal mechanism, and (f) involve representatives of employees in its
design and administration.
Summary

The first and most difficult problem in wage and salary administration is the
establishment of base compensation for the job. This problem is enormously complicated
by such factors as supply and demand, labor or organizations, the firm’s ability to pay,
variations in productivity and cost of living, and governmental legislation, including the
Civil Rights Act. On order to attract and retain needed personnel for the organization,
employees must perceive that compensation offered is equitable in relation to their
background inputs and relative contributions. Outside of haphazardly establishing or
bargaining over each individual rate, the only usable method of solving this problem at
present is job evaluation, a systematic and orderly process for establishing the worth of
jobs.

There are four alternative methods of job evaluation; (1) simple ranking, (2) job
grading, (3) the point system, and (4) factor comparison. The significant elements of
these systems are summarized in Figure 12-11.

The introduction of a pay system is an event of major importance to employees,

and its effect upon them cannot be ignored. It is a valid system if it results in a structure
acceptable to both employee and employer. In general, structures that are internally and
externally consistent have the greatest chance of effecting overall satisfaction. Under-
reward, over-reward, and inconsistency of reward not only tend to lower satisfaction but
encourage that often proves dysfunctional to organizational objectives. A sound,
systematic, consistent system of compensation, determination will do much to promote
equity and satisfaction, provided that such a system is understood and reasonably
accepted by most employees.

BRIEF CASE: Present your analysis using the case analysis format, and answer the
questions following the case.

A small group of nurses employed by Central City filed charges against the city
for violating Title VII of the Civil Rights Act for systematically discriminating in pay on
the basis of sex. They maintained that though the city did not intend to discriminate, it
systematically underpaid nurses in comparison with other jobs in the city. They pointed
out that of the accounting jobs, only 18% were held by females; in engineering, only 2%.
However, females held 98% of the city nurses jobs as well as 74% of the social work
positions. Though the average pays in accounting and engineering jobs was in excess of
A small group of nurses employed by Central City filed charges against the city for
violating Title VII of the Civil Rights Act for systematically discriminating in pay on the
basis of sex. They maintained that though the city did not intend to discriminate, it
systematically underpaid nurses in comparison with other jobs in the city. They pointed
out that of the accounting jobs, only 18% were held by females; in engineering, only 2%.
However, females held 98% of the city nurses jobs as well as 74% of the social work
positions. Though the average pays in accounting and engineering jobs was in excess of
$20,000.00 per year, the starting salary of a graduate nurse with a college degree was
$12,000.00. The city defended its policy on the basis that it made periodic wage and
salary service and pay the competitive pay rate in the community.
Questions

1) What are the comparable values of nurses, social workers, accountants, and
engineers? How could you measure this?
2) What is your view of the city’s defense of using competitive market rates? Should
commissions and courts overrule markets? Why or why not?