Week 9 Discussion 1 BUS 325
TROWELL1911
9.docxHR, 3e
Angelo S. DeNisi, Ricky W. Griffn
The amount of value people create for an organization and what the organization gives them as compensation for that value are important determinants of organizational competitiveness. If employers pay too much for the value created by workers, then profits (and hence competitiveness) will suffer. But if they pay too little or demand too much from their workers for what they are paying, they will suffer in different ways: lower-quality workers, higher turnover, or employee fatigue and stress. Clearly, then, managing compensation and benefits are important activities for any organization. And just as clearly, Nucor managers have a keen understanding of the relationship between worker compensation and company performance.
Compensation and benefits refer to the various types of outcomes employees receive for their time at work. Compensation is the set of rewards that organizations provide to individuals in return for their willingness to perform various jobs and tasks within the organization. Benefits are the various rewards, incentives, and other items of value that an organization provides to its employees beyond wages, salaries, and other forms of financial compensation. The term total compensation is sometimes used to refer to the overall value of financial compensation plus the value of additional benefits that the organization provides.
Compensation is the set of rewards that organizations provide to individuals in return for their willingness to perform various jobs and tasks within the organization.
Benefits generally refer to various rewards, incentives, and other things of value that an organization provides to its employees beyond their wages, salaries, and other forms of direct financial compensation.
In this chapter, we cover the basic concepts of compensation and benefits. We start by examining how compensation strategies are developed, and then we turn to the administration of compensation programs and how organizations evaluate their compensation programs. We look at benefits, discussing the basic reasons for benefit plans and describing different types of benefit plans typically found in organizations. Next we consider the often controversial topic of executive compensation, discussing the basic components of executive-compensation packages and why they are so controversial. We conclude with a discussion of legal issues associated with compensation and benefits and the ways in which organizations can evaluate their compensation and benefit programs.
9-1 DEVELOPING A COMPRATION STRATEGY
Compensation should never be a result of random decisions but instead the result of a careful and systematic strategic process. 3 Embedded in the process is an understanding of the basic purposes of compensation, an assessment of strategic options for compensation, knowledge of the determinants of compensation strategy, and the use of pay surveys.
9-1a Basic Purposes of Compensation
Compensation has several fundamental purposes and objectives. First, the organization must provide appropriate and equitable rewards to employees. Individuals who work for organizations want to feel valued and be rewarded at a level commensurate with their skills, abilities, and contributions to the organization. In this regard, an organization must consider two different kinds of equity. In addition, compensation serves a “signaling” function. Organizations signal to employees what they feel is important (and less important) for an employee to focus on by paying for certain kinds of activities or behaviors (and not for others). As we discuss in more detail in the next chapter, compensation can serve as an incentive to employees to increase their efforts along desired lines. We turn first to the issues of fairness and equity.
© Josh randall/ Shutterstock.com
Internal equity in compensation refers to comparisons made by employees to other employees within the same organization. In making these comparisons, the employee is concerned that he is equitably paid for his contributions to the organization relative to the way other employees are paid in the firm. For example, a female account manager learns that most other account managers in the firm are paid more than she is. She may look closely at the situation and determine that these other account managers have similar experience and similar responsibilities, and so become unhappy with her compensation and ask for a raise. In this case, she may also threaten to sue for pay discrimination. Of course, on the other hand, when the female account manager looks more closely, she may determine that she has fewer responsibilities and less experience, and so she concludes that there is no equity problem. In any case, problems with internal equity can result in conflict, feelings of mistrust, low morale, and even legal action in some cases.
Internal equity in compensation refers to comparisons made by employees to other employees within the same organization.
External equity in compensation refers to comparisons made by employees with similar employees at other firms performing similar jobs. For example, an accountant may experience internal equity relative to her accounting colleagues in her work group because she knows they are all paid the same salary. But if she finds out that another major employer in the same community is paying its accountants higher salaries for comparable work, then she might be concerned about external equity. Problems with external equity may result in higher turnover (because employees will leave for better opportunities elsewhere), dissatisfied and unhappy workers, and difficulties in attracting new employees.
External equity in compensation refers to comparisons made by employees to others employed by different organizations performing similar jobs.
How does an employer learn about compensation rates at other firms? In some cases, a human resource manager might simply ask a colleague for such information, but there are potential charges of “price-fixing” if such discussions are too detailed. More commonly, much of the information concerning external equity comes from a pay survey , or a survey of compensation paid to employees by other employers in a particular geographic area, industry, or occupational group. Some such surveys, especially for executive and managerial jobs, are conducted by professional associations such as the Society for Human Resource Management, and the results are then made available to all members. Individual employees may have access to this information, or they may seek their own comparative data on the Internet. Indeed, as discussed more fully in this chapter’s Closing Case feature, “Negotiating Salaries on the Web,” the Internet is making this practice increasingly common and easy today.
Pay surveys are surveys of compensation paid to employees by other employers in a particular geographic area, industry, or occupational group.
Other organizations also routinely conduct wage surveys. Business publications such as Business Week, Fortune, and Nation’s Business routinely publish compensation levels for various kinds of professional and executive positions. In addition, the Bureau of National Affairs and the Bureau of Labor Statistics also are important sources of government-controlled wage and salary survey information. To obtain the exact data they need, however, many larger firms design their own pay surveys, which allows the firm to take advantage of the expertise available in such firms and minimize their own risk and the prospects of making a significant error or mistake in the conduct of the survey. 4 Figure 9.1 presents a sample section from a pay survey.
A survey such as this one is sent to other organizations in a given region. In this case, the survey would go to organizations in various industries, but other surveys might be targeted to a specific industry. The jobs that are the focus of the survey should be benchmark jobs—that is, everyone understands the nature of the job, the content is fairly stable, and the job is likely to be found in a wide variety of organizations. In some surveys, specific benchmark jobs are coded to ensure that everyone reacts to the same job. Also, some surveys ask more specific questions about other areas of compensation. Data from surveys such as this are then summarized for each job.
WAGING WAR OVER WAGES The intent and application of the overtime pay law seems perfectly clear. The Fair Labor Standards Act (FLSA) of 1938 requires workers to be paid time-and-a-half for any hours worked beyond 40 each week. The law should be well understood. Yet over the last several years, the number of employee lawsuits alleging violations of the overtime laws has grown tremendously. American companies pay out more than $1 billion annually to settle the claims.
The FLSA aided the country’s recovery from the Great Depression by encouraging workers to work longer hours and for employers to hire additional workers. The modern workforce and business environment have changed so much since the 1930s, however, that the justification for the law is no longer so straightforward. In 1938, there was a clear distinction between white-collar workers (exempt from overtime pay) and blue-collar labor (eligible for overtime). White-collar jobs were seen as easier and less in need of legal protection. By the 1960s however, professionals worked more hours on average than working-class employees. Today, there is a blurred distinction between “management” and “workers.”
Employers must judge whether an employee is exempt from overtime, based on the uses of “discretion and independent judgment.” But as businesses become more standardized and controlled, fewer and fewer workers work independently. If an accountant’s work consists primarily of entering data or checking facts, then he or she is not acting independently. Computer programmers “get to pick whatever code they want to write, but [only to] implement someone else’s desires,” says Mark Thierman, a labor attorney.
Some companies simply cheat their employees. For example, Hollywood Video had to pay $7.2 million in damages to workers who had been required to punch out their time cards before closing the cash register nightly. The “off the clock” time was documented by store surveillance cameras. Walmart settled one suit for $72.5 million because of “off the clock” time and has several other lawsuits pending.
Companies can also make good faith mistakes in classifying employees as exempt or nonexempt because of the complex and changing nature of work. When does the workday begin for utility workers who download their day’s schedule from home computers every morning? Do workers who check e-mail remotely deserve overtime? Can an employee claim overtime for working at home or during lunch? What about flight time, on-call time, time spent entertaining, or time spent on continuing education?
Eighty-six percent of the U.S. workforce—115 million workers—is covered by overtime laws. This enormous number of affected workers makes this issue potentially much more damaging than other class-action matters. White-collar workers often resist the idea of claiming overtime pay. “They associate it with a labor pool that is valued for brawn rather than brains,” suggests Business Week writer Michael Orey. Yet the FLSA applies to employees paid either wages or salaries, regardless of income, education, or job title. “You don’t have to be stupid to get overtime,” says Thierman. “In fact you’re stupid if you don’t get overtime.” As professionals become more aware of and comfortable c pay, organizations may have to come up with billions more in compensation. One middle manager declares the new attitude toward overtime pay. “If a company wants my knowledge 24/7, they should have to pay for it, whenever they use it. No different from using the muscles of an assembly-line worker.” 5
THINK IT OVER
1. What types of behavior are encouraged by companies who do not pay overtime to their white-collar workers? What behaviors are encouraged when companies do pay overtime?
2. Some experts are concerned that if American white-collar workers increase their compensation by demanding and receiving overtime pay, then offshore labor will gain an even larger cost advantage, hurting U.S. companies. Do you agree or disagree?
FIG 9.1 Example of a Pay Survey
© Cengage Learning®
A survey such as this one is sent to other organizations in a given region. In this case, the survey would go to organizations in various industries, but other surveys might be targeted to a specific industry. The jobs that are the focus of the survey should be benchmark jobs, where everyone understands the nature of the job, the content is fairly stable, and the job is likely to be found in a wide variety of organizations. In some surveys, specific benchmark jobs are coded to ensure that everyone reacts to the same job. Also, some surveys ask more specific questions about other areas of compensation. Data from surveys such as this one are then summarized for each job.
Both internal and external equity are clearly important for an organization’s compensation strategy. Perceptions of external inequity can lead to the type of job search that results in the voluntary turnover problems discussed in Chapter 6 . But when a female employee, for example, perceives internal inequity vis-à vis a male employee, this can also lead to a lawsuit. Recall from Chapter 2 that the Equal Pay Act of 1963 stipulates that men and women who perform essentially the same job must be paid the same. If there are differences in the compensation paid to men and women, then such differences may be defensible if they are based on factors such as performance differentials. In any case, the organization may well find itself in court defending these decisions when there are perceptions of internal inequity.
Under the Equal Pay Act 1962, men and women who perform essentially the same job must be paid the same.
© iStockphoto.com /Sachin Bhavsar
Compensation can also serve a motivational purpose—that is, individuals should perceive that their efforts and contributions to the organization are recognized and rewarded. Individuals who work hard and perform at a high level should be compensated at a level higher than individuals who do just enough to get by and who perform at only an average or below average rate. 6 If everyone perceives this situation to be true, then employees will believe that the reward system is fair and just and that internal equity exists, and they will be more motivated to perform at their highest level. Clearly, then, organizations must adequately and effectively manage compensation. Underpayment can cause the problems discussed above, although it is also important for organizations to control costs and not overpay individuals for the value of their contributions (which could lead to problems with internal equity) or provide excess or superfluous benefits or rewards. 7 Thus, the ideal compensation system would be one that reflects an appropriate balance of organizational constraints, costs, budgets, income, and cash flow relative to employee needs, expectations, demands, and market forces. We will discuss specific models of motivation in Chapter 13 and incentive pay plans in Chapter 14 .
The Fair Labor Standards Act established a minimum hourly wage for jobs and further stipulated that wages for hourly workers must be paid at a rate of one and a half times the normal rate for work in excess of 40 hours per week.
© iStockphoto.com /kycstudio
The fundamental purpose of compensation, then, is to provide an adequate and appropriate reward system for employees so that they feel valued and worthwhile as organizational members and representatives. Compensation represents more than the number of dollars a person takes home in her or his pay envelope. It also provides a measure of the employee’s value to the organization and functions indirectly as an indicator of his or her self-worth. 8
An important distinction in the field of compensation is the difference between wages and salaries. Wages generally refer to hourly compensation paid to operating employees. Time is the basis for wages—that is, the organization pays individuals for specific blocks of their time such as payment by the hour. Most jobs that are paid on an hourly wage basis are lower-level or operational jobs within the organization. These employees are also eligible for the overtime provisions of the Fair Labor Standards Act (discussed in Chapter 2 ), which means they are eligible for extra pay if they work more than 40 hours a week. These employees are typically paid every 1 or 2 weeks. Salary , on the other hand, describes compensation on a monthly or annual basis and compensates employees not for how much time they spend in the organization but for their overall contributions to the organization’s performance. In general, salaries are paid to professional and managerial employees within an organization. Plant managers, product managers, and professional managers in areas such as marketing and finance and accounting, for example, are all likely to be paid on an annual basis; most of these employees are exempt from the overtime provisions of the Fair Labor Standards Act.
Wages generally refer to hourly compensation paid to operating employees; the basis for wages is time.
Salary is income paid to an individual on the basis of performance, not on the basis of time.
FIG 9.2 Strategic Option for Compensation
© Cengage Learning®
9-1c Strategic Options for Compensation
Most organizations establish a formal compensation strategy that dictates how they will pay individuals. Several decisions are embedded within such a strategy. The first relates to the basis for pay. Traditionally, most organizations based pay on the functions performed on the job, but more recently they have begun to rely on skill-based pay and pay-for-knowledge programs. In this way, organizations signal to their employees the relative importance of what someone does on the job versus what they bring to the job.
The second decision in developing a compensation strategy focuses on the bases for differential pay within a specific job. In some organizations, especially those with a strong union presence, differences in actual pay rates are based on seniority: With each year of service in a particular job, wages go up by a specified amount, so the longer one works on the job, the more that person makes, regardless of the level of performance on the job. Most public school systems use a seniority system to pay teachers: They get a base salary increase for each year of service they accumulate. As already noted, unions have historically preferred pay based at least in part on seniority.
Sometimes the relationship between seniority and pay is expressed as something called a maturity curve , a schedule specifying the amount of annual increase a person receives. This curve is used when the annual increase varies based on the actual number of years of service the person has accumulated. Organizations that use maturity curves might argue that a new person tends to learn more (in part because there is more to learn) than more experienced employees and thus may deserve a larger increase. Meanwhile, more senior people may already be earning considerably higher income anyway and also have fewer new tasks to learn. In any event, the assumption under a seniority-based pay system is that employees with more experience can make a more valuable contribution to the organization and should be rewarded for that contribution. These systems also encourage employees to remain with the organization.
A maturity curve is a schedule specifying the amount of annual increase a person will receive.
In other organizations, differences in pay are based on differences in performance, regardless of time on the job. These systems are generally seen as rewarding employees who are good performers rather than those who simply remain longer with the organization. For such systems to succeed, however, the organization has to be certain that it has an effective system for measuring performance (as will be discussed in Chapter 10 ). Most major companies base at least a portion of individual pay on performance, especially for managerial and professional employees. Performance-based incentives will be discussed in more detail in Chapter 14 .
A third decision in developing a compensation strategy deals with the organization’s pay rates relative to going rates in the market. As shown in Figure 9.2 , the three basic strategic options are to pay above-market compensation rates, market compensation rates, or below-market compensation rates. 9 This decision is important because of the costs it represents to the organization. 10
A firm that chooses to pay above-market compensation, for example, will incur additional costs as a result. This strategic option essentially indicates that the organization pays its employees a level of compensation that is higher than that paid by other employers competing for the same kind of employees. Of course, it also anticipates achieving various benefits. Some organizations believe that they attract better employees if they pay wages and salaries that are higher than those paid by other organizations; that is, they view compensation as a competitive issue. They recognize that high-quality employees may select from among several different potential employers and that they have a better chance of attracting the best employees if they’re willing to pay them an above-market rate. Above-market pay policies are most likely to be used in larger companies, particularly those that have been performing well.
In addition to attracting high-quality employees, an above-market strategy has other benefits. Above-market rates tend to minimize voluntary turnover among employees. By definition, above-market rates mean that an employee who leaves a company paying such wages may have to take a pay cut to find employment elsewhere. Paying above-market rates also might be beneficial by creating and fostering a culture of elitism and competitive superiority. Google and Netflix both pay higher-than-average salaries as a way to retain their most valued employees in industries where turnover and mobility are high.
© Georgios Kollidas/ Shutterstock.com
The downside to above-market compensation levels, of course, is cost. The organization simply has higher labor costs because of its decision to pay higher salaries to its employees. Once these higher labor costs become institutionalized, employees may begin to adopt a sense of entitlement, coming to believe that they deserve the higher compensation, making it difficult for the organization to be able to adjust its compensation levels downward.
Another strategic option is to pay below-market rates. The organization that adopts this strategy is essentially deciding to pay workers less than the compensation levels offered by other organizations competing for the same kinds of employees. Thus, it is gambling that the lower-quality employees it is able to attract will more than offset the labor savings it achieves. Organizations most likely to pursue a below-market rate are those in areas with high unemployment. If lots of people are seeking employment and relatively few jobs are available, then many people are probably willing to work for lower wages. Thus, the organization may be able to pay lower than the market rate and still attract reasonable and qualified employees. In other situations, employers may be able to pay below-market rates because of various offsetting factors. For instance, some employers in Hawaii find that the state’s beautiful setting and mild weather allow them to pay below-market salaries—some people are willing to work for less money just to be able to live in Hawaii. Again, the benefit to this strategy is lower labor costs for the organization.
On the other hand, the organization will also experience several negative side effects. Morale and job satisfaction might not be as high as the organization would prefer. Individuals are almost certain to recognize that they are being relatively underpaid, and this situation can result in feelings of job dissatisfaction and potential resentment against the organization. In addition, turnover may also be higher because employees will be continually vigilant about finding better-paying jobs. Compounding the problem even further is the fact that the higher-performing employees are among the most likely to leave, and the lower-performing employees are among the most likely to stay.
Finally, a third strategic option for compensation is to pay market rates for employees—that is, the organization may elect to pay salaries and wages that are comparable to those available in other organizations, no more and no less. Clearly, the organization that adopts this strategy is taking a midrange perspective. The organization assumes that it will get higher-quality human resources than a firm that takes a below-market strategy. At the same time, it is willing to forgo the ability to attract as many high-quality employees as the organization that takes an above-market strategy.
The advantages and disadvantages of this strategy are also likely to reflect midrange comparisons with the other strategies. The organization will have higher turnover than a firm paying above-market rates but lower turnover than an organization paying below-market rates. An organization that adopts a market-rate strategy is likely to believe it can provide other intangible or more subjective benefits to employees in return for their accepting a wage rate that is perhaps lower than they might be paid elsewhere. For example, job security is one important subjective benefit that some organizations provide.
Employees who perceive that they are being offered an unusually high level of job security may therefore be willing to take a somewhat lower wage rate and accept employment at a market rate. Universities frequently adopt this strategy because they believe that the ambience of a university environment is such that employees do not necessarily expect higher salaries or higher wages. Microsoft also uses this approach. It offsets average wages with lucrative stock options and an exceptionally pleasant physical work environment.
9-1d Determinants of Compensation Strategy
Several different factors contribute to the compensation strategy that a firm develops. One general set of factors has to do with the overall strategy of the organization itself. As detailed in Chapter 4 , a clear and carefully developed relationship should exist between a firm’s corporate and business strategies and its human resource strategy. 11 This connection, in turn, should also tie into the firm’s compensation strategy. Thus, a firm in a high-growth mode is constantly striving to attract new employees and may find itself in a position of having to pay above-market rates to do so. On the other hand, a stable firm may be more likely to pay market rates given the relatively predictable and stable nature of its operations. Finally, an organization in a retrenchment or decline mode may decide to pay below-market rates because it wants to reduce the size of its workforce anyway. 12
A firm pursuing a strategy of stability will likely pay market rates given the relatively predictable and stable nature of its operations.
In addition to these general strategic considerations, several other specific factors determine an organization’s compensation strategy. One obvious factor is simply the organization’s ability to pay. An organization with a healthy cash flow or substantial cash reserves is more likely to be able to pay above-market wages and salaries. On the other hand, if the organization suffers from a cash flow crunch, has few cash reserves, and is operating on a tight budget, it may be necessary to adopt a below-market wage strategy. The organization’s ability to pay is thus an important consideration. During the economic stagnation of recent years, many firms have found themselves in this predicament. In response, several major companies reduced the pay increases they granted to their employees. 13
In addition, the overall ability of the organization to attract and retain employees is a critical factor. For example, if the organization is located in an attractive area, has several noncompensation amenities, and provides a comfortable, pleasant, and secure work environment, it might be able to pay somewhat lower wages. But if the organization is located in, for example, a high-crime area or a relatively unattractive city or region, and if it has few noncompensation amenities that it can provide to its employees, it may be necessary to pay higher wages simply as a way of attracting and retaining employees.
Union influences are another important determinant of an organization’s compensation strategy. If an organization competes in an environment that is heavily unionized, such as the automobile industry, then the strength and bargaining capabilities of the union influence what the organization pays its employees. On the other hand, if the organization does not hire employees represented by unions or if the strength of a particular union is relatively low, then the organization may be able to pay somewhat lower wages and the union influence is minimal or nonexistent.
© Myotis/ Shutterstock.com
Once a compensation strategy has been chosen, it is necessary to determine exactly what employees on a given job should be paid. The starting point in this effort has traditionally been job evaluation. We will briefly describe this more traditional method first, but then discuss a more innovative and strategic approach to determining what to pay.
Job evaluation is a method for determining the relative value or worth of a job to the organization so that individuals who perform that job can be compensated adequately and appropriately. In other words, job evaluation is mostly concerned with establishing internal pay equity. Several job-evaluation techniques and methods have been established. 14 Among the most commonly used are classification, point, and factor-comparison systems.
Job evaluation is a method for determining the relative value or worth of a job to the organization so that individuals who perform that job can be compensated adequately and appropriately.
Classification system An organization that uses a classification system attempts to group sets of jobs together into classifications, often called grades. After classifying is done, each set of jobs is then ranked at a level of importance to the organization. Importance, in turn, may be defined in terms of relative difficulty, sophistication, or required skills and abilities necessary to perform that job. A third step is to determine how many categories or classifications to use for grouping jobs. The most common number of grades is anywhere from eight to ten, although some organizations use the system with as few as four grades and some with as many as eighteen.
The classification system for job evaluation attempts to group sets of jobs together into clusters, which are often called grades.
The U.S. postal system is a good example of an organization that uses the classification system. The U.S. postal system has sixteen job grades, with nine pay steps within each grade. Once the grades have been determined, the job evaluator must write definitions and descriptions of each job class. These definitions and descriptions serve as the standard around which the compensation system is built. Once the classes of jobs are defined and described, jobs that are being evaluated can be compared with the definitions and descriptions and placed into the appropriate classification.
FIG 9.3 Job-Classification System
Source: U.S. Office of Personnel Management
A major advantage of the job-classification system is that it can be constructed relatively simply and quickly. It is easy to understand and easy to communicate to employees. It also provides specific standards for compensation and can easily accommodate changes in the value of various individual jobs in the organization. On the other hand, the job classification assumes that a constant and inflexible relationship exists between the job factors and their value to the organization, which sometimes results in jobs within a grade not fitting together very well. Figure 9.3 presents an example of a job-classification system.
Job-classification systems require clear definitions of classes and benchmark jobs for each class. The most widely known example of a job-classification system is the General Schedule (GS) system used by the federal government. This system has eighteen grades (or classes). Most federal employees fall into one of fifteen grades; the top three grades have been combined into a single “supergrade” that covers senior executives.
Figure 9.3 describes three grades from the GS system. An example of a job classified as a GS-1 would be a janitor; a GS-6 job would be a light truck driver; and an example of a GS-10 job would be an auto mechanic. Within each grade are ten pay steps based on seniority so that the range of salaries for a GS-6 job starts at just under $20,000 a year and goes up to more than $25,000 a year.
Point system The most commonly used method of job evaluation is the point system. 15 The point system is more sophisticated than the classification system and is also relatively easy to use. The point system requires managers to quantify, in objective terms, the value of the various elements of specific jobs. Using job descriptions as a starting point, managers assign points to the degree of various compensable factors that are required to perform each job—that is, any aspect of a job for which an organization is willing to provide compensation. For instance, managers might assign points based on the amount of skill required to perform a particular job, the amount of physical effort needed, the nature of the working conditions involved, and the responsibility and authority involved in the performance of the job. Job evaluation simply represents the sum of the points allocated to each of the compensable factors for each job.
The point system for job evaluation requires managers to quantify, in objective terms, the value of the various elements of specific jobs.
Point systems typically evaluate eight to ten compensable factors for each job. The factors chosen must not overlap one another, and they must immediately distinguish between substantive characteristics of the jobs, be objective and verifiable in nature, and be well understood and accepted by both managers and employees. Not all aspects of a particular job may be of equal importance, so managers can allocate different weights to reflect the relative importance of these aspects to a job. These weights are usually determined by summing the judgments of various independent but informed evaluators. Thus, an administrative job within an organization might result in weightings of required education, 40 percent; experience required, 30 percent; predictability and complexity of the job, 15 percent; responsibility and authority for making decisions, 10 percent; and working conditions and physical requirements for the job, 5 percent.
© Sergii Korolko/ Shutterstock.com
Because the point system is used to evaluate jobs, most organizations also develop a point manual. The point manual carefully and specifically defines the degrees of points from first to fifth. For example, education might be defined as follows: (1) first degree, up to and including a high school diploma, 25 points; (2) second degree, high school diploma and 1 year of college education, 50 points; (3) third degree, high school diploma and 2 years of college, 75 points; (4) fourth degree, high school education and 3 years of college, 100 points; and (5) fifth degree, a college degree, 125 points. These point manuals are then used for all subsequent job evaluation.
The point manual, used to implement the point system of job evaluation, carefully and specifically defines the degrees of points from first to fifth.
Factor-comparison method A third method of job evaluation is the factor-comparison method . Like the point system, the factor-comparison method allows the job evaluator to assess jobs on a factor-by-factor basis. At the same time, it differs from the point system because jobs are evaluated or compared against a standard of key points; instead of using points, a factor-comparison scale is used as a benchmark. Although an organization can choose to identify any number of compensable factors, commonly used systems include five job factors for comparing jobs: responsibilities, skills, physical effort, mental effort, and working conditions. Managers performing a job evaluation in a factor-comparison system are typically advised to follow six specific steps.
The factor-comparison method for job evaluation assesses jobs, on a factor-by-factor basis, using a factor-comparison scale as a benchmark.
1. The comparison factors to be used are selected and defined. The five universal factors are used as starting points, but any given organization may need to add factors to this set.
