Reward Management Internal and External Equity Spirit of New Pay

REY JIMSON F.
MUROS
REWARD MANAGEMENT
• Job Evaluation: Internal Equity

• Establishing pay levels: External Equity
• The spirit of new pay
REWARD MANAGEMENT • Establishing pay levels: External Equity • The spirit of new pay
“ Advice on the design of reward system emphasizes the importance

of establishing pay differentials which are felt to be fair.
Equity theory explains how workers develop perceptions of

fairness in the distribution of resources.
Perceptions of pay unfairness have been related to a range of

negative effects for organizations and individuals, including job
dissatisfaction, reduced organizational commitment, loss of
trust in the organization, depression and somatic symptoms
”
such as headaches and stomach aches.
“ There is evidence of high levels of support pay differentials to

reflect differences in responsibility, knowledge, skills, and abilities
and performance, but this may be due to employees’ attitude to
pay simply mirroring widely shared social norms about the way
pay should be determined.
Pay equity legislation requires that equal pay be paid for jobs of
equal worth or value to the organization. Thus, traditional reward
models emphasize the importance of internal equity, and the
method most often used to establish and maintain internal
”
constancies is job evaluation.
Formal job evaluation is a generic label for a variety of processes

used to establish pay structures by systematically comparing jobs
in terms of their relative contribution to the organization’s
overarching goals.
It can be defined as “A systematic process designed to determine

the relative worth of jobs within a single work organization.”
The goal of job evaluation is to achieve internal equity by

determining a hierarchy of jobs that is based on the relative
contribution of each job to the organization. This hierarchy is
then used to allocate rates of pay to jobs regardless of the
employee working in that role. The importance to managers of
job evaluation has increased because of equal pay legislation,
which requires, either implicitly or explicitly, that gender-
neutral job evaluation schemes be adopted and used to
determine and compare the value of jobs within the
organization.
Job evaluation is often misunderstood, so the following three characteristics

of all formal job evaluation methods need to be emphasized:
1
The technique is systematic rather than scientific: it depends on a series of
subjective judgements
2
The premise that job evaluation is based on the worth of the job rather
than on the worth of the employee in that particular job is fundamental.
3
The validity of the job evaluation process, or how accurately the method
assesses job worth, is suspect.
Intersectional thinking and analysis expose gender-bias. A higher

weighting is given to physical demands and continuous service, which
tend to favor men, and by the gender association of job titles.
For example, an evaluator assigning significantly lower ratings, that is,

an estimated value to jobs with a female-stereotyped title, such as
secretary, than to the same job with a more gender-neutral title, such
as assistant. Such a non-analytical approach would be open to legal
challenges. Further, job evaluation involves discretionary decision-
making and therefore departmental power can affect the assessment.
Although it is difficult to develop a subject-free measure of value, most

organizations use what is described as analytical job evaluation in which jobs
are broken down into individual elements involving four steps:
01 Gathering the job analysis data
Selecting compensable factors

02
03 Evaluating the job
Assigning pay to the job

04
Gathering the job analysis data
Information must be collected via a method of job analysis, and validity should
be a guiding principle in this first step. The job analyzer must accurately
capture all the job's content because ambiguous, incomplete or inaccurate job
descriptions can result in jobs being incorrectly evaluated.
Selecting compensable factors
Compensable factors are the factors the organization chooses to reward

through differential pay. The most typical compensable factors are skill, effort,
knowledge, responsibility and working conditions.
Evaluating the job
JOB RANKING RANK

In ranking, jobs are ordered from the least to Most Valued
the most valued in the organization, this rank 1. Forklift driver 1. Inspector
order or hierarchy of jobs being based on a 2. Machinist 2. Machinist
subjective evaluation of relative value. In a 3. Inspector 3. Secretary
4. Secretary 4. Forklift driver
typical factory, we might finish up with the
5. File clerk 5. Laborer
rank order shown in Table 1 6. Laborer 6. File Clerk
Least Valued
Table 1 Typical job ranking
Factor
Job Title
Mental Responsibi Physical Tota
Skill Working Conditions
Evaluating the job

Effort lity Effort l
Forklift
driver 10 10 10 10 5 45
Machinist
20 15 17 8 10 70
Inspector
20 20 40 5 5 90
Secretary
20 20 35 5 5 85
File clerk
10 5 5 5 5 30
Laborer
5 2 2 17 9 35
The point method evaluates jobs on the basis of a set of compensable factors in
order to establish a hierarchy of jobs. Internal jobs are compared with each
other across several factors, such as skill, mental effort responsibility, physical
effort and working conditions. For each job, the compensable factors are
ranked according to their relative importance in each job. Once each benchmark
job has been ranked on each factor, the decision-maker allocates points to each
factor. Each job's relative value, and hence its location in the pay structure, is
determined by adding up the points assigned to each compensable factor.
A variation of the point system is the widely used plan, which employs a
standard point matrix applicable across organizational and national boundaries.
Factor
Job Title
Mental Responsibi Physical Tota
Skill Working Conditions
Evaluating the job

Effort lity Effort l
Forklift
driver 10 10 10 10 5 45
Machinist
20 15 17 8 10 70
Inspector
20 20 40 5 5 90
Secretary
20 20 35 5 5 85
File clerk
10 5 5 5 5 30
Laborer
5 2 2 17 9 35
The results of the evaluation might look like those displayed in Table 2.
The point values allocated to each compensable factor are then added
up across factors, allowing jobs to be placed in a hierarchy according
to their total point value. In our example in Table 2, this would mean
that the machinist's wage rate would be twice that of the laborer. Such
a differential might be unacceptable, but this difficulty can be
overcome by tailoring the job evaluation scheme to the organization's
pay policy and practical objectives.
Evaluating the job
Factor
Mental Physical Working
Job Title Skill Responsibility Total
Effort Effort Conditions
Forklift driver 10 10 10 10 5 45
Machinist 20 15 17 8 10 70
Inspector 20 20 40 5 5 90
Secretary 20 20 35 5 5 85
File clerk 10 5 5 5 5 30
Laborer 5 2 2 17 9 35
Table 2 Point system matrices

Assigning pay to the job
The final outcome of the evaluation exercise is a hierarchy of jobs

in terms of their relative value to the organization. Assigning pay to
this hierarchy of jobs is referred to as pricing the pay structure and
requires a policy decision on the pay structure in the organization.
Despite its reported demise, job evaluation is alive and kicking in

the public sector, driven in large part by concern about pay for work
of equal value.
REWARD MANAGEMENT • The spirit of new pay

This section examines two aspects of pay structure, pay

dispersion and the basis of the pay level.
Pay structures can range from a relatively flat or egalitarian pay

distribution with limited differences across levels and jobs or
positions, to pay distributions that are hierarchical, displaying
wide differences across levels and positions.

Prior to the Covid-19 pandemic, the average UK salary for

fulltime workers was £36, 611 (₱2.5M) but the gender gap in
Britain is 137 %, which means that, on average, men earn 13.7 %
more than women.
For example, in the age category 22-29, the average salary of

men is £28,386 (₱1.97M) and £24,715 (₱1.72M) for woman.
Which shows a gap of £3,671 (₱255K).

With respect to the basis of the pay level, any job reflects its relative
and absolute worth. A job's relative worth to the organization is
determined by its ranking through the job evaluation process,
whereas its absolute worth is influenced by what the labor market
pays for similar jobs. Both globally and nationally, labor market rates
differ considerably, a factor that has encouraged the offshoring of
work from high-wage economies to those where local wage rates that
are much lower.

In most developed economies, pay rates may be determined

through bilateral negotiations between the employer and
trade union/s over pay and conditions of employment. In
Britain, during the Covid-19 crisis, the issue of pay and the
value we assign to it has become particularly divisive.

Source:
Table 3 UK salaries for selective occupations and CEOs, 2013 Office for National Statistics (2019)
Über-salary earners James ‘Jes’ Staley, Barclays Bank £ 5.9 million

Willie Walsh, BA £ 3.2 million
Sharon White, John Lewis £ 990,000
Over £40,000 Air traffic controller £ 85,714
Medical practitioner £ 79,157
Police officer £ 41,017
£ 31,000 - £ 40,000 Business sales executive £ 37,720
Office manager £ 33,458
Nurse £ 32,338
£ 20,000 - £ 30,000 Probation officer £ 27,129
Administrative occupation £ 25,388
Refuse collector £ 20,316
Under £ 20,000 Sales assistant £ 18,655
Care worker £ 18,413
Shelf-filler £ 17,233
Table 3 shows the value we assign to a range of occupations.
To answer the question 'How do organizations assign a pay

rate?
Most organizations rely on pay surveys of benchmark jobs. The

data from these are used to anchor the organization's pay scale,
other jobs then being slotted in on the basis of their relative
worth to the organization.

In determining the pay level, an organization will have to

combine the results of the job evaluation process (internal
equity criteria) and labor market data (external competitiveness
criteria)
Each grade being made up of a number of jobs within the
organization.
The jobs in each category are considered equal for pay purposes.
Each grade has its own pay range defining the lower and upper
limits of pay for jobs in that grade, and all the jobs within the
grade have the same range Jobs,

The actual minimum and maximum pay rates paid by the organization's
competitors are established by survey data. Individual levels of pay
within the range may reflect differences in performance or seniority.
As depicted, organizations can structure their rate ranges to overlap a

little with adjacent ranges so that an employee with experience or
seniority might earn more than an entry-level person in the pay grade.
Both market survey information and job evaluation translate the

concepts of external competitiveness and internal equity into pay
practices.
Once a pay has been established, management has

three choices:
to lead the competition,

to match what other organizations are paying, or
to lag behind what competitors are paying their
employees

The least-risk approach is to set the pay level to match that

of the competition, although some organizations may set
different pay policies for different categories of employee
with different skill sets.
An organization could, for example, adopt a lead policy for

critical skills, such as computer design engineers, a match
policy for less critical skill sets and a lag policy for jobs that
could be easily filled in the local labor market.

The construction of a pay structure using both equity (job

evaluation) and labor market data (pay surveys) presents
a largely deterministic view of reward management.

This prescriptive approach has been questioned in a number of related

ways.
First, research avers considerable divergent pay practices between and

within organizations.
Second, external and internal equity considerations are largely

inappropriate' in terms of upper management pay and scientific
professionals.
Third, the pay issues and challenges found in each organization are
typically unique and less structured than traditional models suggest.

Thus, while guided by external and internal equity considerations, pay

rates will be influenced by many factors, including HR strategy,
organizational culture and collective bargaining. Finally, prescriptive
reward models neglect 'societal effects' and wider socioeconomic,
political and cultural factors, which shape pay practices.

REWARD MANAGEMENT
The new pay agenda, with its focus on aligning reward with
corporate strategy, while no longer so new, caught the
zeitgeist. The espoused theory of strategic reward is
predicated on the notion of strategic choice, which involves
managers choosing a reward system that is judged to be
closely aligned with the organization's strategy.
REWARD MANAGEMENT
The design of an effective reward system demands not only

a close articulation between the business strategy of an
organization and the reward system, but also a clear fit
between the reward system and the other design features of
the organization.
REWARD MANAGEMENT
The model draws upon four neoliberal principles a strategic

orientation to reward. Flexible pay that is responsive to product
and labor market conditions, individualization of the
employment contract, and, in particular, pay related to
performance; and unitarism, a perspective that assumes
management and employees share a common set of interests or
goals in the pursuit of mutual gain and which thus regards
organizational conflict harmful and to be avoided.
REWARD MANAGEMENT
The strategic approach has been used as an analytical tool

for explaining developments in, and factors influencing, the
choice of reward systems over the last three decades. The
multiple neoliberal imperatives, for example deregulation,
global cost pressures and flexible work methods, explain
why managers may choose a PBR (payment by results) pay
scheme based on individual performance. In contrast, where
the product market requires a high-quality manufacturing
strategy, they may choose a pay-for-knowledge and profit-
sharing scheme.
REWARD
REWARDMANAGEMENT
MANAGEMENT
Since the 2000s, diversity and its management has become a

feature of modern organizations and has argued for diverse
reward options. A reward strategy that takes cognizance of
diversity and adopts a more individualized approach to pay will.
When individualization is well executed and well managed it is

the best way to develop a superior relationship with an
organization's most important source of competitive advantage,
its talent.
REWARD
REWARDMANAGEMENT
MANAGEMENT
The concept of total rewards is too generic and is outdated, and

proposes the notion of smart rewards but is differentiated by four
elements of emerging reward strategy:
- a focus on a few core values;
- a stronger basis in evidence and measurement;
- greater worker voice through rewards, and
- a dialogic mode of communication.
These employee-engaging reward practices are more likely to be
performance-enhancing. This suggests that an effective reward system
should reward employees for the right things, in the right way, and for
the right reasons.
REWARD
REWARDMANAGEMENT
MANAGEMENT
Individualizing reward in the contemporary workplace
The individualization of rewards has made it possible to control

wage-earners individually, and thus to make workers more
compliant. A variable pay scheme is a widely used method to
individualize pay. Despite the simplicity of the title 'variable pay
scheme' (VPS), this reward option has been defined in different
ways and comes in many guises. Historically, the most typical
form of variable pay was merit pay or performance-related pay
(PRP).
REWARD
REWARDMANAGEMENT
MANAGEMENT
Individualizing reward in the contemporary workplace • The spirit of new pay
The principle of Performance Related Pay (PRP) can be

characterized by the linking of an individual employee's pay
increase to an appraisal process. As part of the new pay
agenda, PRP has moved away from subjective assessments
based on individual behavioral traits towards those assessed
against an objective criterion (that is, individual outputs). PRP
has also been extended from managerial and professional
occupations downwards to other job categories in general. The
contemporary PRP scheme, it is claimed, is based solely on
performance and tied more closely to the overall objectives of
the organization.
REWARD
REWARDMANAGEMENT
MANAGEMENT
Individualizing reward in the contemporary workplace • The spirit of new pay
It characterizes PRP as a means of translating and signaling market-based

organizational goals into personalized performance criteria.
PRP (Performance-Related Pay) is not to be confused with PBR (Payment by Result)
pay schemes.
The difference between these two similar pay schemes,
Whereas PRP is determined through a subjective assessment of individual
performance by a manager, PBR is measured according to objective criteria - the
amount done or its value, rather than the hours worked.
Another pay incentive scheme is profit-related pay, which links part or the whole of
employees pay to the profit levels of all or part of the organization.
REWARD
REWARDMANAGEMENT
MANAGEMENT
REWARD MANAGEMENT

Reward Management Internal and External Equity Spirit of New Pay

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REY JIMSON F.

• Job Evaluation: Internal Equity

“ Advice on the design of reward system emphasizes the importance

Equity theory explains how workers develop perceptions of

Perceptions of pay unfairness have been related to a range of

“ There is evidence of high levels of support pay differentials to

Formal job evaluation is a generic label for a variety of processes

It can be defined as “A systematic process designed to determine

The goal of job evaluation is to achieve internal equity by

Job evaluation is often misunderstood, so the following three characteristics

Intersectional thinking and analysis expose gender-bias. A higher

For example, an evaluator assigning significantly lower ratings, that is,

Although it is difficult to develop a subject-free measure of value, most

01 Gathering the job analysis data

Selecting compensable factors

Assigning pay to the job

Selecting compensable factors

Compensable factors are the factors the organization chooses to reward

Evaluating the job

JOB RANKING RANK

Evaluating the job

Evaluating the job

Evaluating the job

Table 2 Point system matrices

Assigning pay to the job

The final outcome of the evaluation exercise is a hierarchy of jobs

Despite its reported demise, job evaluation is alive and kicking in

• Establishing pay levels: External Equity

REWARD MANAGEMENT • The spirit of new pay

This section examines two aspects of pay structure, pay

Pay structures can range from a relatively flat or egalitarian pay

REWARD MANAGEMENT • The spirit of new pay

Prior to the Covid-19 pandemic, the average UK salary for

For example, in the age category 22-29, the average salary of

REWARD MANAGEMENT • The spirit of new pay

REWARD MANAGEMENT • The spirit of new pay

In most developed economies, pay rates may be determined

REWARD MANAGEMENT • The spirit of new pay

Über-salary earners James ‘Jes’ Staley, Barclays Bank £ 5.9 million

Table 3 shows the value we assign to a range of occupations.

To answer the question 'How do organizations assign a pay

Most organizations rely on pay surveys of benchmark jobs. The

REWARD MANAGEMENT • The spirit of new pay

In determining the pay level, an organization will have to

REWARD MANAGEMENT • The spirit of new pay

As depicted, organizations can structure their rate ranges to overlap a

Both market survey information and job evaluation translate the

Once a pay has been established, management has

to lead the competition,

REWARD MANAGEMENT • The spirit of new pay

The least-risk approach is to set the pay level to match that

An organization could, for example, adopt a lead policy for

REWARD MANAGEMENT • The spirit of new pay

The construction of a pay structure using both equity (job

REWARD MANAGEMENT • The spirit of new pay

This prescriptive approach has been questioned in a number of related

First, research avers considerable divergent pay practices between and

Second, external and internal equity considerations are largely

REWARD MANAGEMENT • The spirit of new pay

Thus, while guided by external and internal equity considerations, pay

REWARD MANAGEMENT • The spirit of new pay

• The spirit of new pay