Module 2
Internal Alignment: Determining The Structure
A. Defining Internal Alignment
Setting objectives is our first issue in a strategic approach to pay. Our second
issue, internal alignment, addresses relationships inside the organization. Matthew
doesn’t tell us how the work in the vineyard was organized. Perhaps laborers worked in
teams: some trimmed while others tied the vines. Does trimming require more judgment
than tying? How do the responsibilities and pay of the trimmer relate to the
responsibilities and pay of the tier, the householder’s cook, or the steward? Internal
alignment addresses the logic underlying these relationships. The relationships form a
pay structure that should support the organization strategy, support the work flow, and
motivate behavior toward organization objectives.
Lockheed decided that six levels of engineering work would support the
company’s strategy of researching, designing, and developing advanced technology
systems. Work flow refers to the process by which goods and services are delivered to the
customer. The pay structure ought to support the efficient flow of that work and the
design of the organization.8 For example, financial service firms in the United States
traditionally offer investment advice and products through client centers. At Merrill
Lynch, customer associates used to take all calls from clients or new prospects and route
them to financial advisors (FAs). If the caller wanted a specific transaction, such as
purchasing a stock, mutual fund, or certificate of deposit, the customer associate passed
the information on to an FA who was legally certified to make the purchase. No one at
Merrill Lynch “owned” a client. Personal long-term relationships were not emphasized.
The structure ought to make clear the relationship between each job and the
organization’s objectives. This is an example of “line-of-sight.” Employees should be
able to “see” the links between their work, the work of others, and the organization’s
objectives. And the structure ought to be fair to employees. The vineyard owner’s
internal pay structure may have been aligned with his business strategy, but the employee
dissatisfaction raises concerns about its fairness to employees.
An internal pay structure can be defined by (1) the number of levels of work, (2)
the pay differentials between the levels, and (3) the criteria or bases used to determine
those levels and differentials. One feature of any pay structure is its hierarchical nature:
the number of levels and reporting relationships. Some are more hierarchical, with
multiple levels; others are compressed, with few levels.10 The stated goal of GE
Healthcare is to provide “transformational medical technologies and services that are
shaping a new age of patient care.”
The pay differences among levels are referred to as differentials. If we assume
that an organization has a compensation budget of a set amount to distribute among its
employees, there are a number of ways it can do so. It can divide the budget by the
number of employees to give everyone the same amount. The Moosewood Restaurant in
Ithaca, New York, adopts this approach. But few organizations in the world are that
egalitarian. In most, pay varies among employees.11 Work that requires more knowledge
or skills, is performed under unpleasant working conditions, or adds more value is
usually paid more.
Work content and its value are the most common bases for determining internal
structures. Content refers to the work performed in a job and how it gets done (tasks,
behaviors, knowledge required, etc.). Value refers to the worth of the work: its relative
contribution to the organization objectives. A structure based on content typically ranks
jobs on skills required, complexity of tasks, problem solving, and/or responsibility. In
contrast, a structure based on the value of the work focuses on the relative contribution of
these skills, tasks, and responsibilities to the organization’s goals. While the resulting
structures may be the same, there are important differences. In addition to relative
contribution, external market value (i.e., what competitors pay for this job) may also be
included. Or it may include rates agreed upon through collective bargaining, or even
legislated rates (minimum wage). In centrally planned economies such as Cuba, job
values in all organizations are set by a government agency. Following the nowdiscarded
approaches of the former Soviet Union and China, Cuba’s government dictates a
universal structure: 8 levels for industrial workers, 16 levels for technical and engineering
work, and 26 levels for government employees.
Use value reflects the value of goods or services an employee produces in a job.
Exchange value is whatever wage the employer and employee agree on for a job. Think
about IBM software engineers living in Bangalore, Kiev, and Purchase, New York. Their
work content is very similar in all three locations. Now think about them working
together on the same project— same company, same job content, same internal job. They
have the same use value. Wage rates in Bangalore and Kiev are a lot lower than in
Purchase, New York. The jobs’ exchange value varies.13 For promotions, IBM treats
these jobs as being at the same level in the structure. But the external markets in India,
Ukraine, and the United States yield very different pay rates.
Adam Smith was an early advocate of letting economic market forces influence
pay structures. He was the first to ascribe both an exchange value and a use value to
human resources. Smith faulted the new technologies associated with the Industrial
Revolution for increasing the use value of labor without a corresponding increase in
exchange value (i.e., higher wages). Karl Marx took this criticism even further. 15 He
said that employers unfairly pocketed the surplus value created by the difference between
use and exchange value. He urged workers to overthrow capitalistic systems to become
owners themselves and reap the full use value of their labor.
A countering theory put forth in the last half of the 19th century, marginal
productivity, says that employers do in fact pay use value.16 Unless an employee can
produce a value equal to the value received in wages, it will not be worthwhile to hire
that worker. One job is paid more or less than another because of differences in relative
productivity of the job and/or differences in how much a consumer values the output. In
the short run especially, interesting things can happen. For example, some advanced
practice nurses with extensive training (specifically, nurse anesthetists) now earn an
average of $189,190 per year, which is more than some primary care doctors. These
nurses earn less than physician anesthesiologists, $271,440 (an alternative survey
estimate is $398,000), but can perform some of the same tasks.17 Not surprisingly, they
are in high demand. Surgeons may be fine with the situation because it removes a
possible constraint on being able to do surgery. Hence, differences in skill and
productivity provide a rationale for the internal pay structure.
In the United States, equal employment legislation forbids pay systems that
discriminate on the basis of gender, race, religion, or national origin. The Equal Pay Act
and the Civil Rights Act require “equal pay for equal work,” with work considered equal
if it requires equal skill, equal effort, and equal responsibility and is performed under
equal working conditions. An internal structure may contain any number of levels, with
differentials of any size, as long as the criteria for setting them are not gender, race,
religion, or national origin.
One former radio show host defined culture by what songs we know in common
—camp songs, religious hymns, the big hits of the year when we were 15. A General
Mills executive says culture is the foods we eat. A more academic definition of culture is
“the mental programming for processing information that people share in common.”24
People who share a mind-set might agree on what size pay differential is fair. In ancient
Greece, Plato declared that societies are strongest when the richest earn a maximum of
four times the lowest pay. Aristotle favored a five-times limit. In 1942, President Franklin
Roosevelt proposed a maximum wage: a 100 percent tax on all income above 10 times
the minimum wage.
One former radio show host defined culture by what songs we know in common
—camp songs, religious hymns, the big hits of the year when we were 15. A General
Mills executive says culture is the foods we eat. A more academic definition of culture is
“the mental programming for processing information that people share in common.”24
People who share a mind-set might agree on what size pay differential is fair. In ancient
Greece, Plato declared that societies are strongest when the richest earn a maximum of
four times the lowest pay. Aristotle favored a five-times limit. In 1942, President Franklin
Roosevelt proposed a maximum wage: a 100 percent tax on all income above 10 times
the minimum wage. Human capital—the education, experience, knowledge, abilities, and
skills required to perform the work—is a major influence on internal structures.26 The
greater the value added by the skills and experience, the more pay those skills will
command. Lockheed’s structure pays consultant engineers more than lead or senior
engineers because the human capital required in the consultant engineer job brings a
greater return to Lockheed. It is more crucial to Lockheed’s success.
The organization’s other human resource policies also influence internal pay
structures. Most organizations tie money to promotions in order to induce employees to
apply for higher-level positions.33 If an organization has more levels, it can offer more
promotions, but there may be smaller pay differences between levels. The belief is that
more frequent promotions (even without significant pay increases) offer a sense of
“career progress” to employees. Pay structures change in response to external factors
such as skill shortages. Over time, distorted pay differences may become accepted as
equitable and customary; efforts to change them are resisted. Thus, pay structures
established for organizational and economic reasons at an earlier time may be maintained
for cultural or political reasons. It may take another economic jolt to overcome the
resistance. Then new norms form around the new structure. This “change-and-congeal”
process does not yet support the continuous changes occurring in today’s economy. 41
New norms for employee acceptance will probably need to include recognition that
people must become accustomed to constant change, even in internal pay relationships.
Aligned pay structures support the way the work gets done, fit the organization’s
business strategy, and are fair to employees. Greater internal alignment—fit—is more
likely to lead to success. Misaligned structures become obstacles. They may still motivate
employee behavior, but it may be undesirable behavior. Wayne Knight’s computer
programmer character (Dennis Dedry) might never have stolen dinosaur embryos in the
movie Jurassic Park if he had been given the pay raise he felt he deserved. But what does
it mean to fit or tailor the pay structure to be internally aligned? Two strategic choices are
involved: (1) how specifically tailored to the organization’s design and work flow to
make the structure and (2) how to distribute pay throughout the levels in the structure.
A low-cost, customer-focused business strategy such as that followed by
McDonald’s or Walmart may be supported by a closely tailored structure. Jobs are well
defined with detailed tasks or steps to follow. You can go into a McDonald’s in
Cleveland, Prague, or Shanghai and find they all are similar in key ways. Their pay
structures are, too. There are seven jobs in each McDonald’s (under supervisors and
managers). All are very well defined in order to eliminate variance in how they are
performed. Cooking french fries takes nine steps. It seems hard to make a mistake in
these jobs.44 It is also hard to be the very best french fryer in the whole company.
Differences in pay among jobs are very small.
Before managers recommend a pay structure for their organizations, we hope they
will not only look at organization strategy, work flow, fairness, and employee motivation,
but also look at the research. Both economists and psychologists have something to tell
us about the effects of various structures. As we noted earlier, employees judge the equity
(fairness) of their pay by making multiple comparisons.47 Evidence based on a study of
2,000 school teachers suggests that teachers are more likely to feel their internal pay
tructures are fair when they are paid relatively highly within the structure. They will also
feel pay structures are fair even when they are relatively low in the internal structure if
they work in a high-paying school district. Applying these findings to Lockheed’s
engineers, advisors, and consultant engineers, we would assume they are more likely to
say the internal structure is fair if they are in one of the higher pay levels. Engineers at
lower levels will think Lockheed’s structure is fair only if Lockheed pays more than its
aerospace defense industry competitors. What we don’t know is how the lead engineer
with 10 years experience will judge the pay structure if Lockheed hires new people into
lead engineer jobs with only five years of experience. This kind of situation is unlikely to
occur with unionized teachers’ pay structures, but it is very common in other
organizations.
It is important to be clear that the terms equity and equal are not interchangeable.
Outcomes such as pay can be unequal across employees, but pay can nevertheless be
perceived as equitable or fair, if those perceived as making larger performance
contributions are the ones receiving higher pay. Equity theory says that people compare
the ratio of their own outcomes (e.g., pay, status, enjoyment) to inputs (e.g., effort,
ability, performance) with the outcome to input ratio as noted above, one or more
comparison with others (internal, external, or themselves in a past or future situation).
Perceived equity results if the ratios are very similar. The ratios can be similar despite
differences in pay if performance differences are perceived to exist.
Economists have focused more directly on the motivational effects of structures
as opposed to people’s perceptions of structures. Consider, for example, a golf
tournament where the prizes total, say, $100,000. How that $100,000 is distributed
affects the performance of all players in the tournament. Compare a 3-prize schedule of
$60,000, $30,000, and $10,000 with a 10-prize schedule of $19,000, $17,000, $15,000,
$13,000, and so on. According to tournament theory, all players will play better in the
first tournament, where the prize differentials are larger. 53 There is some evidence to
support this. Raising the total prize money by $100,000 in the Professional Golf
Association tournament lowered each player’s score, on average, by 1.1 strokes over 72
holes.54 And the closer the players got to the top prize, the more their scores were
lowered. (Note to nongolfers: A lower score is an improvement.)
But what about team settings?58 Virtually all the research that supports
hierarchical structures and tournament theory was conducted in situations where
individual performance matters most (auto racing, bowling, golf tournaments) or, at best,
where the demand for cooperation among a small group of individuals is relatively low
(professors, stockbrokers, truck drivers).59 In contrast to individual performers, team
sports provide a setting where both an individual player’s performance as well as the
cooperative efforts of the entire team make a difference.60 Using eight years of data on
Major League Baseball, Matt Bloom found that teams with small differences in player
salaries did better than those with large differentials. In addition to affecting team
performance, egalitarian structures had a sizable effect on individual players’
performance, too. A mediocre player improved more on a team with an egalitarian
structure than on a team with a hierarchical structure. It may also be that the egalitarian
pay structure reflects a more flexible, supportive organization culture in which a
mediocre player is given the training and support needed to improve.
Sometimes internal pay structures are adopted because they have been called a
“best practice.”65 Organizations simply copy or imitate others. Recent examples of such
“benchmarking” behavior include the rush to outsource jobs, to emphasize teams, to
deemphasize individual contributions, and to shift to a competency-based pay system,
often with little regard to whether any of these practices fit the organization or its
employees and add value. Let’s turn again to that “So what?” question and the pay model.
Why worry about internal alignment at all? Why not simply pay employees whatever it
takes to get them to take a job and to show up for work every day? Why not let external
market forces or what competitors are paying determine internal wage differentials? Or
why not let a government agency decide?
Research shows that an aligned structure can lead to better organization
performance.69 If the structure does not motivate employees to help achieve the
organization’s objectives, then it is a candidate for redesign. Internal pay structures imply
future returns. The size of the differentials between the entry level in the structure and the
highest level can encourage employees to remain with the organization, increase their
experience and training, cooperate with co-workers, and seek greater responsibility.
Writers have long agreed that departures from an acceptable wage structure will
occasion turnover, grievances, and diminished motivation.76 But that is where the
agreement ends. One group argues that if fair (i.e., sizable) differentials among jobs are
not paid, individuals may harbor ill will toward the employer, resist change, change
employment if possible, become depressed, and “lack that zest and enthusiasm which
makes for high efficiency and personal satisfaction in work.”
Others, including labor unions, argue for only small differentials within pay levels
and for similar work, in the belief that more egalitarian structures support cooperation
and commitment and improve performance. As with all rules, there are exceptions. For
example, in U.S. professional sports like baseball and hockey, players are unionized, yet
the players’ unions do not strive for egalitarian pay. To the contrary, these unions have,
over the years, negotiated strongly for free agent rights for players, which allows for
individual players, especially the top performers, to achieve high salaries, much higher
than those of average players.
While the research on internal alignment is very informative, there is still a lot we
do not know. What about the appropriate number of levels, the size of the differentials,
and the criteria for advancing employees through a structure? We believe the answers lie
in understanding the factors discussed in this chapter: the organization’s strategic intent,
its design and work flow, human capital, and the external conditions, regulations, and
customs it faces.
We also believe that aligning the pay structure to fit the organization’s conditions
is more likely to lead to competitive advantage for the organization and a sense of fair
treatment for employees. On the other hand, sometimes people take the notion of internal
alignment too far. At a Houston oil company, official policy was that wall hangings were
related to position in the structure. Top brass got original art, while employees at the
bottom of the structure got photos of the company’s oil refineries. One analyst
commented, “It was so level specific that you could tell immediately upon entering an
office the minimum salary level of that person.”
B. Job Analysis
Three people sit in front of their keyboards scanning their monitors. One is a
customer representative in Ohio, checking the progress of an order for four dozen web-
enabled cell phones from a retailer in Texas, who just placed the four dozen into his
shopping cart on the company’s website. A second is an engineer logging in to the project
design software for the next generation of these phones. Colleagues in China working on
the same project last night (day, in China) sent some suggestions for changes in the new
design; the team in the United States will work on the project today and have their work
waiting for their Chinese colleagues when they come to work in the morning. A third
employee, in Ireland, is using the business software recently installed worldwide to
analyze the latest sales reports. In today’s workplace, people working for the same
company no longer need to be down the hallway from one another. They can be on-site
and overseas. Networks and business software link them all. Yet all their jobs are part of
the organization’s internal structure.
If pay is to be based on work performed, some way is needed to discover and
describe the differences and similarities among these jobs—observation alone is not
enough. Job analysis is that systematic method. Two products result from a job analysis.
A job description is the list of tasks, duties, and responsibilities that make up a job. These
are observable actions. A job specification is the list of knowledge, skills, abilities, and
other characteristics that are necessary for an individual to have to perform the job. Thus,
the description focuses on the job and the specification focuses on the person.
Potential uses for job analysis have been suggested for every major human
resource function. Often the type of job analysis data needed varies by function. For
example, identifying the skills and experience required to perform the work clarifies
hiring and promotion standards and identifies training needs. In performance evaluation,
both employees and supervisors look to the required behaviors and results expected in a
job to help assess performance. At one point, IBM identified every role (490 in all)
performed by its 300,000-plus workers, managers, and executives. For example, IBM’s
vice president for learning had the roles of learning leader and manager. IBM also
measured and monitored 4,000 skill sets.2 An internal structure based on job-related
information provides both managers and employees a work-related rationale for pay
differences. Employees who understand this rationale can see where their work fits into
the bigger picture and can direct their behavior toward organization objectives. Job
analysis data also help managers defend their decisions when challenged.
In compensation, job analysis has two critical uses: (1) It establishes similarities
and differences in the work contents of the jobs and (2) it helps establish an internally fair
and aligned job structure. If jobs have equal content, then in all likelihood the pay
established for them will be equal (unless they are in different geographies). If, on the
other hand, the job content differs, then the differences, along with the market rates paid
by competitors, are part of the rationale for paying jobs differently.
Job titles, departments, the number of people who hold the job, and whether it is
exempt from the Fair Labor Standards Act are all examples of information that identifies
a job. While a job title may seem pretty straightforward, it may not be. An observer of the
U.S. banking system commented that “every employee over 25 seems to be a vice
president.” A study accuses the U.S. government of creating more new job titles in a
recent six-year period than in the preceding 30 years.7 Some of the newer positions
include deputy to the deputy secretary, principal assistant deputy undersecretary, and
associate principal deputy assistant secretary. Most of these titles were created at the
highest levels of government service, often to attract a specific person with unique skills.
Our personal favorite is at the Jet Propulsion Laboratory in Pasadena, California, where
the head of the Interplanetary Network Directorate is, naturally, the director of the
Directorate.8 On the other hand, your tax dollars were at one point paying the wages of
484 deputy assistant secretaries, 148 associate assistant secretaries, 220 assistant assistant
secretaries, and 82 deputy assistant assistant secretaries.
In addition to the job description having sections that identify, describe, and
define the job, the Americans with Disabilities Act (ADA) requires that essential
elements of a job—those that cannot be reassigned to other workers—must be specified
for jobs covered by the legislation. If a job applicant can perform these essential
elements, it is assumed that the applicant can perform the job. After that, reasonable
accommodations must be made to enable an otherwise-qualified handicapped person to
perform those elements.11 ADA regulations state that “essential functions refers to the
fundamental job duties of the employment position the individual with a disability holds
or desires.” The difficulty of specifying essential elements varies with the discretion in
the job and with the stability of the job. Technology changes tend to make some tasks
easier for all people, including those with disabilities, by reducing the physical strength
or mobility required to do them. Unfortunately, employment rates for people with
disabilities are still low.
The level at which an analysis begins influences whether the work is similar page
118 or dissimilar. The three jobs described in the beginning of the chapter— customer
representative, engineer, account analyst—all involve use of computers, but a closer look
showed that the jobs are very different. At the job-family-level bookkeepers, tellers, and
accounting clerks may be considered to be similar jobs, yet at the job level they are very
different. An analogy might be looking at two grains of salt under a microscope versus
looking at them as part of a serving of french fries. If job data suggest that jobs are
similar, the jobs must be paid equally; if jobs are different, they can be paid differently.
The most common way to collect job information is to ask the people who are
doing a job to fill out a questionnaire. Sometimes an analyst will interview the jobholders
and their supervisors to be sure they understand the questions and that the information is
correct. Or the analyst may observe the person at work and take notes on what is being
done. The advantage of conventional questionnaires and interviews is that the
involvement of employees increases their understanding of the process. However, the
results are only as good as the people involved. If important aspects of a job are omitted,
or if the jobholders themselves either do not realize or are unable to express the
importance of certain aspects, the resulting job descriptions will be faulty. If you look at
the number of jobs in an organization, you can see the difficulty in expecting a single
analyst to understand all the different types of work and the importance of certain job
aspects. Different people have different perceptions, which may result in differences in
interpretation or emphasis. The whole process is open to bias and favoritism.14 As a
result of this potential subjectivity, as well as the huge amount of time the process takes,
conventional methods have given way to more quantitative (and systematic) data
collection.
Collecting job analysis information through one-on-one interviews can be a
thankless task. No matter how good a job you do, some people will not be happy with the
resulting job descriptions. In the past, organizations often assigned the task to a new
employee, saying it would help the new employee become familiar with the jobs of the
company. Today, if job analysis is performed at all, human resource generalists and
supervisors do it. The analysis is best done by someone thoroughly familiar with the
organization and its jobs and trained in how to do the analysis properly. The decision on
the source of the data (jobholders, supervisors, and/or analysts) hinges on how to ensure
consistent, accurate, useful, and acceptable data. Expertise about the work resides with
the jobholders and the supervisors; hence, they are the principal sources. For key
managerial/professional jobs, supervisors “two levels above” have also been suggested as
valuable sources since they may have a more strategic view of how jobs fit in the overall
organization. In other instances, subordinates and employees in other jobs that interface
with the job under study are also involved.
What happens if the supervisor and the employees present different pictures of the
jobs? While supervisors, in theory, ought to know the jobs well, they may not,
particularly if jobs are changing. People actually working in a job may change it. They
may find ways to do things more efficiently, or they may not have realized that certain
tasks were supposed to be part of their jobs. 3M had an interesting problem when it
collected job information from a group of engineers. The engineers listed a number of
responsibilities that they viewed as part of their jobs; however, the manager realized that
those responsibilities actually belonged to a higher level of work. The engineers had
enlarged their jobs beyond what they were being paid to do. No one wanted to tell these
highly productive employees to slack off. Instead, 3M looked for additional ways to
reward these engineers rather than bureaucratize them.
In addition to involvement by analysts, jobholders, and their supervisors, support
of top management is absolutely essential. Support of union officials in a unionized
workforce is as well. They know (hopefully) what is strategically relevant. They must be
alerted to the cost of a thorough job analysis, its time-consuming nature, and the fact that
changes will be involved. For example, jobs may be combined; pay rates may be
adjusted. If top managers (and unions) are not willing to seriously consider any changes
suggested by job analysis, the process is probably not worth the bother and expense.
Descriptions of managerial/professional jobs often include more detailed
information on the nature of the job, its scope, and accountability. One challenge is that
an individual manager will influence the job content.20 Professional/managerial job
descriptions must capture the relationship between the job, the person performing it, and
the organization objectives— how the job fits into the organization, the results expected,
and what the person performing it brings to the job. Someone with strong information
systems and finance expertise performing the compensation manager’s job will probably
shape it differently, based on this expertise, than someone with strong negotiation and/or
counseling expertise.
HRNet, an Internet discussion group related to HR issues, provoked one of its
largest responses ever with the query, “What good is job analysis?” Some felt that
managers have no basis for making defensible, work-related decisions without it. Others
called the process a bureaucratic boondoggle. Yet job analysts are an endangered species.
Many employers, as part of their drive to contain expenses, no longer have job analysts.
The unknown costs involved are too difficult to justify One expert writes, “Whenever I
visit a human resources department, I ask whether they have any [job analysis]. I have
not had a positive answer in several years, except in government organizations.”21 Yet if
job analysis is the cornerstone of human resource decisions, what are such decisions
based on if work information is no longer rigorously collected?
Offshoring refers to the movement of jobs to locations beyond a country’s
borders. Historically, manual, low-skill jobs were most susceptible to offshoring. Similar
differences in cost in other low-skill occupations (e.g., in call centers) have had similar
ramifications. (So, when you call for an airline reservation or help with your printer, you
may well reach someone in another country.) Of course, as we also noted, labor cost is
only part of the story. There are productivity differences across countries as well,
meaning that lower labor costs may in some cases be offset by lower productivity.
Availability of workers with needed education and skills is another potential constraint.
Proximity to customers is yet another issue. Sometimes that argues for moving offshore,
sometimes it does not.
he estimates are based on (1) expert judgment of potential automation, based on
answers to the question “Can the tasks of this job be sufficiently specified, conditional on
the availability of big data, to be performed by state of the art computercontrolled
equipment” and (2) an estimate of the “potential bottlenecks” to automation, as indicated
by the following job attributes/requirements: finger dexterity, manual dexterity, cramped
workspace/awkward position, originality, fine arts, social perceptiveness, negotiation,
persuasion, and assisting/caring for others. For example, with respect to manual dexterity,
a low level, which would increase probability of automation, would correspond to “Screw
a light bulb into a light socket”; medium (level) would be “Pack oranges in crates as
quickly as possible”; and a high (level) would be “Perform open heart surgery with
surgical instruments.”26 We thus see, for example, that there is a very low probability
that the jobs of physicians and surgeons will be (completely) automated. In contrast, there
is a high probability that the jobs of cashiers and tellers will become automated. Perhaps
less expected, a number of white-collar jobs (e.g., real estate brokers, loan officers, tax
preparers) have a high probability, as do models and umpires.
As firms spread work across multiple countries, there is an increasing need to
analyze jobs to either maintain consistency in job content or else be able to measure the
ways in which jobs are similar and different. For example, for a software development
team to work equally effectively with programmers in the United States and India, the job
descriptions and job specifications need to be measured and understood. One potential
challenge is that norms or perceptions regarding what is and what is not part of a
particular job may vary across countries. However, a study of three different jobs (first-
line supervisor, general office clerk, and computer programmer) in the United States,
China, Hong Kong, and New Zealand found that ratings of the importance and amount of
work activities and job requirements were “quite similar” across countries, suggesting
that job analysis information “is likely to transport quite well across countries.”
If you measure something tomorrow and get the same results you got today, or if I
measure and get the same result you did, the measurement is considered to be reliable.
This doesn’t mean it is right—only that repeated measures give the same result.
Reliability is a measure of the consistency of results among various analysts, various
methods, various sources of data, or over time. Reliability is a necessary, but not
sufficient, condition for validity. Does the analysis create an accurate portrait of the
work? There is almost no way of showing statistically the extent to which an analysis is
accurate, particularly for complex jobs. No gold standard exists; how can we know?
Consequently, validity examines the convergence of results among sources of data and
methods. If several job incumbents, supervisors, and peers respond in similar ways to
questionnaires, then it is more likely that the information is valid. However, a sign-off on
the results does not guarantee the information’s validity.
If job holders and managers are dissatisfied with the initial data collected and the
process, they are not likely to buy into the resulting job structure or the pay rates attached
to that structure. An analyst collecting information through one-on-one interviews or
observation is not always accepted because of the potential for subjectivity and
favoritism. One writer says, “We all know the classic procedures. One [worker] watched
and noted the actions of another … at work on [the] job. The actions of both are biased
and the resulting information varied with the wind, especially the political wind.”39
However, quantitative computer-assisted approaches may also run into difficulty,
especially if they give in to the temptation to collect too much information for too many
purposes. After four years in development, one application ran into such severe problems
due to its unwieldy size and incomprehensible questions that managers simply refused to
use it.
To be valid, acceptable, and useful (see below), job information must be up to
date. Some jobs stay relatively stable over time, while others may change in important
ways, even over short time periods. As Exhibit 4.19 shows, most organizations report that
they have up-to-date job information, but a substantial portion report that job information
is not up to date. That can hinder not only compensation practice and decisionmaking, but
also employee selection, training, and development. Most organizations do not engage in
any regular (e.g., annual or biannual) updating of job analysis information, instead being
more likely to update job information when the significant changes are believed to have
occurred or when the job is being reevaluated for compensation purposes.40 It may be
useful to develop a systematic protocol for evaluating when job information needs to be
updated.
Usefulness refers to the practicality of the information collected. For pay
purposes, job analysis provides work-related information to help determine how much to
pay for a job—it helps determine whether the job is similar to or different from other
jobs. If job analysis does this in a reliable, valid, and acceptable way and can be used to
make pay decisions, then it is useful. In the face of all the difficulties, time, expense, and
dissatisfaction, why on earth would you as a manager bother with job analysis? Because
workrelated information is needed to determine pay, and differences in work determine
pay differences. There is no satisfactory substitute that can ensure the resulting pay
structure will be work-related or will provide reliable, accurate data for making and
explaining pay decisions.
C. Job-Based Structures and Job Evaluation
Perspectives differ on whether job evaluation is based on job content or job value.
Internal alignment based on content orders jobs on the basis of the skills required for the
jobs and the duties and responsibilities associated with the jobs. A structure based on job
value orders jobs on the basis of the relative contribution of the skills, duties, and
responsibilities of each job to the organization’s goals. But can this structure translate
directly into pay rates, without regard to the external market, government regulations, or
any individual negotiation process? Most people think not. Recall that internal alignment
is just one of the building blocks of the pay model. Job content matters, but it is not the
only basis for pay. Job value may also include the job’s value in the external market
(exchange value). Plus, pay rates may be influenced by collective bargaining or other
negotiations.
Some see job evaluation as a process for linking job content and internal value
with external market rates. Aspects of job content (e.g., skills required and customer
contacts) take on value based on their relationship to market wages. Because higher skill
levels or willingness to work more closely with customers usually commands higher
wages in the labor market, then skill level and nature of customer contacts become useful
criteria for establishing differences among jobs. If some aspect of job content, such as
stressful page 146 working conditions, is not related to wages paid in the external labor
market, then that aspect may be excluded in the job evaluation. In this perspective, the
value of job content is based on what it can command in the external market; it has no
intrinsic value.1 But not everyone agrees. Job evaluation, as we will see, is an important
tool for organizations that wish to differentiate themselves from competitors if, for
example, their particular strategy relies more heavily on certain jobs or skills than is the
case in other organizations (i.e., in the market).
Those using job evaluation to make pay decisions sometimes see things
differently. They see job evaluation also as a process that helps gain acceptance of pay
differences among jobs—an administrative procedure through which the parties become
involved and committed. Its statistical validity is not the only issue. Its usefulness also
comes from providing a framework for give-and-take—an exchange of views.
Employees, union representatives, and managers haggle over “the rules of the game” for
determining the relative value of work. If all participants agree that skills, effort,
responsibilities, and working conditions are important, then work is evaluated based on
these factors. As in sports and games, we are more willing to accept the results if we
accept the rules and believe they are applied fairly. 2 This interpretation is consistent with
the history of job evaluation, which began as a way to bring peace and order to an
oftenchaotic and dispute-riven wage-setting process between labor and management.
Diversity in the work can be thought of in terms of depth (vertically) and breadth
(horizontally). The depth of work in most organizations probably ranges from strategic
leadership jobs (CEOs, general directors) to the filing and mail distribution tasks in entry-
level office jobs. Horizontally, the breadth of work depends on the nature of business.
Relatively similar work can be found in specialty consulting firms (e.g., compensation or
executive search firms). The breadth of work performed in some multinational
conglomerates such as General Electric mirrors the occupations in the entire nation. GE
includes jobs in businesses spanning financial services, entertainment (NBC), aircraft
engines, medical instruments, power systems, and home appliances.
The number of job evaluation plans used hinges on how detailed an evaluation is
required to make pay decisions and how much it will cost. There is no ready answer to
the question of “one plan versus many.” Current practice (not always the best answer for
the future, since practice is based on the past) is to use separate plans for major domains
of work: topexecutive/leadership jobs, managerial/professional jobs, operational/technical
jobs, and office/administrative jobs. Open the door on some organizations and you will
find additional plans for sales, legal, engineers/scientists, and skilled trades.
Ranking simply orders the job descriptions from highest to lowest, based on a
global definition of relative value or contribution to the organization’s success. Ranking
is simple, fast, and easy to understand and explain to employees; it is also the least
expensive method, at least initially. However, it can create problems that require difficult
and potentially expensive solutions because it doesn’t tell employees and managers what
it is about their jobs that is important. Two ways of ranking are common: alternation
ranking and paired comparison. Alternation ranking orders job descriptions alternately at
each extreme. Evaluators reach agreement on which jobs are the most and least valuable
(i.e., which is a 10, which is a 1), then the next most and least valued (i.e., which is a 9,
which is a 2), and so on, until all the jobs have been ordered. The paired-comparison
method uses a matrix to compare all possible pairs of jobs.
Alternation-ranking and paired-comparison methods may be more reliable
(produce similar results consistently) than simple ranking. Nevertheless, ranking has
drawbacks. The criteria on which the jobs are ranked are usually so poorly defined, if
they are specified at all, that the evaluations become subjective opinions that are
impossible to justify in strategic and work-related terms. Further, evaluators using this
method must be knowledgeable about every single job under study. The numbers alone
turn what should be a simple task into a formidable one—50 jobs require 1,225
comparisons—and as organizations change, it is difficult to remain knowledgeable about
all jobs. Some organizations try to overcome this difficulty by ranking jobs within single
departments and merging the results. However, even though the ranking appears simple,
fast, and inexpensive, in the long run the results are difficult to defend and costly
solutions may be required to overcome the problems created.
Picture a bookcase with many shelves. Each shelf is labeled with a paragraph
describing the kinds of books on that shelf and, perhaps, one or two representative titles.
This same approach describes the classification method of job evaluation. A series of
classes covers the range of jobs. Class descriptions are the labels. A job description is
compared to the class descriptions to decide which class is the best fit for that job. Each
class is described in such a way that the “label” captures sufficient work detail yet is
general enough to cause little difficulty in slotting a job description onto its appropriate
“shelf” or class. The classes may be described further by including titles of benchmark
jobs that fall into each class.
Point methods have three common characteristics: (1) compensable factors, with
(2) factor degrees numerically scaled, and (3) weights reflecting the relative importance
of each factor. 8 Each job’s relative value, and hence its location in the pay structure, is
determined by the total points assigned to it. Point plans are the most commonly used job
evaluation approach in the United States and Europe. They represent a significant change
from ranking and classification methods in that they make explicit the criteria for
evaluating jobs: compensable factors.
Compensable factors are based on the strategic direction of the business and how
the work contributes to these objectives and strategy. The factors are scaled to reflect the
degree to which they are present in each job and weighted to reflect their overall
importance to the organization. Points are then attached to each factor weight. The total
points for each job determine its position in the job structure. Just as with ranking and
classification, point plans begin with job analysis. Typically a representative sample of
jobs, that is, benchmark jobs, is drawn for analysis. The content of these jobs is the basis
for defining, scaling, and weighting the compensable factors.
Compensable factors play a pivotal role in the point plan. These factors reflect
how work adds value to the organization. They flow from the work itself and the strategic
direction of the business. In effect, this firm determined that its competitive advantage
depends on decisions employees make in their work. And the relative value of the
decisions depends on their risk, their complexity, and their impact on the company.
Hence, this firm is signaling to all employees that jobs will be valued based on the nature
of the decisions required by employees in those jobs. Jobs that require riskier decisions
with greater impact have a higher relative worth than jobs that require fewer decisions
with less consequence.
The leadership of any organization is the best source of information on where the
business should be going and how it is going to get there. Clearly, the leaders’ input into
factor selection is crucial. If the business strategy involves providing innovative, high-
quality products and services designed in collaboration with customers and suppliers,
then jobs with greater responsibilities for product innovation and customer contacts
should be valued higher. Or if the business strategy is more Walmart-like, “providing
goods and services to delight customers at the lowest cost and greatest convenience
possible,” then compensable factors might include impact on cost containment, customer
relations, and so on.
Compensable factors reinforce the organization’s culture and values as well as its
business direction and the nature of the work. If the direction changes, then the
compensable factors may also change. For example, strategic plans at many companies
call for increased globalization. Procter & Gamble and 3M include a “multinational
responsibilities” factor in their managerial job evaluation plan. Multinational
responsibilities are defined in terms of the type of responsibility (in developing policies
and strategies, whether the role is assisting, leading, or having full responsibility,
including approval authority), the percent of time devoted to international issues, and the
number of countries covered. (Do you suppose that managers at 3M or P&G got raises
when Czechoslovakia, Yugoslavia, and the Soviet Union rearranged themselves into a
greater number of smaller, independent countries?)
Employees and supervisors are experts in the work actually done in any
organization. Hence, it is important to seek their answers to what should be valued in the
work itself. Some form of documentation (i.e., job descriptions, job analysis, employee
and/or supervisory focus groups) must support the choice of factors. Work-related
documentation helps gain acceptance by employees and managers, is easier to
understand, and can withstand a variety of challenges to the pay structure. For example,
managers may argue that the salaries of their employees are too low in comparison to
those of other employees or that the salary offered a job candidate is too low. Union
leaders may wonder why one job is paid differently from another. Allegations of pay
discrimination may be raised. Employees, line managers, union leaders, and
compensation managers must understand and be able to explain why work is paid
differently or the same. Differences in factors that are obviously based on the work itself
provide that rationale or even diminish the likelihood of the challenges arising.
Acceptance of the compensable factors used to slot jobs into the pay structure
may depend, at least in part, on tradition. For example, people who work in hospitals,
nursing homes, and child care centers make the point that responsibility for people is
used less often as a compensable factor, and valued lower, than responsibility for
property. 11 This omission may be a carryover from the days when nursing and child care
service were provided by family members, usually women, without reimbursement.
People now doing these jobs for pay say that properly valuing a factor for people
responsibility would raise their wages. So the question is, acceptable to whom? The
answer ought to be the stakeholders.
The use of existing, standardized plans (e.g., the Hay Group plan described
below) offers the advantage of being able to compare the relative scope, content, and
internal value of jobs in the organization to similar jobs in other organizations, which can
be very helpful in deciding what to pay jobs relative to similar jobs in other
organizations. However, as noted, to the degree that job value and pay are to be uniquely
tailored to the organization’s strategy and values, the job evaluation system will also need
to be tailored. Although a wide variety of factors are used in standard existing plans, the
factors tend to fall into four generic groups: skills required, effort required, responsibility,
and working conditions. These four were used more than 60 years ago in the National
Electrical Manufacturers Association (NEMA) plan and are also included in the Equal
Pay Act (1963) to define equal work. Many of these early point plans, such as those of
the National Metal Trades Association (NMTA) and NEMA, and the Steel Plan, were
developed for manufacturing and/or office jobs.
A remaining issue to consider is how many factors should be included in the plan.
Some factors may have overlapping definitions or may fail to account for anything
unique in the criterion chosen. In fact, the NEMA plan explicitly states that the
compensable factor experience should be correlated with education. One writer calls this
the “illusion of validity”—we want to believe that the factors are capturing divergent
aspects of the job and that both are important.14 It has long been recognized that factors
overlap or are highly correlated, raising the concern about double counting the value of a
factor. Indeed, in the Hay plan, problem solving is calculated as a percentage of Know-
How. So, by definition, one builds on the foundation established by the other. It is a
central principle of the Hay plan that the factors are not independent—the reason that
know-how is required is because of the problems that have to be solved in order to
achieve the results that are required (accountability)—and that the relative proportions of
the factors that come together in a job provide important insights to the job. This notion
of relative proportions is the Profile concept in the Hay Group Guide Chart—Profile
Method.
Once the factors are determined, scales reflecting the different degrees (i.e.,
levels) within each factor are constructed. Each degree may also be anchored by the
typical skills, tasks, and behaviors taken from the benchmark jobs that illustrate each
factor degree. Returning to Exhibit 5.9, there are 8 levels or degrees of the Job Controls
and Complexity compensable factor (of which 3 levels or degrees are shown). Most
factor scales consist of four to eight degrees. In practice, many evaluators use extra,
undefined degrees such as plus and minus around a scale number. So what starts as a 5-
degree scale—1, 2, 3, 4, 5—ends up as a 15-degree scale, with −1, 1, 1+, −2, 2, 2+, and
so on. The reason for adding plus/minus is that users of the plan believe more degrees are
required to adequately differentiate among jobs. If we are trying to design 15 levels into
the job structure but the factors use only three or five degrees, such users may be right.16
However, all too often inserting pluses and minuses gives the illusion of accuracy of
measurement that is simply not the case.
Once the degrees have been assigned, the factor weights can be determined.
Factor weights reflect the relative importance of each factor to the overall value of the
job. Different weights reflect differences in importance attached to each factor by the
employer. For example, the National Electrical Manufacturers Association plan weights
education at 17.5 percent; another employer’s association weights it at 10.6 percent; a
consultant’s plan recommends 15.0 percent; and a trade association weights education at
10.1 percent.
Job evaluation has traditionally supplemented committee judgment for
determining weights with statistical analysis.19 The committee members recommend the
criterion pay structure, that is, a pay structure they wish to duplicate with the point plan.
The criterion structure may be the current rates paid for benchmark jobs, market rates for
benchmark jobs, rates for jobs held predominantly by males (in an attempt to eliminate
gender bias), or union-negotiated rates.20 Once a criterion structure is agreed on,
statistical modeling techniques are used to determine the weight for each factor and the
factor scales that will reproduce, as closely as possible, the chosen structure. The
statistical approach is often labeled policy capturing to differentiate it from the committee
a priori judgment approach. Not only do the weights reflect the relative importance of
each factor, but research clearly demonstrates that the weights influence the resulting pay
structure.21 Thus, selecting the appropriate pay rates to use as the criteria is critical. The
job evaluation and its results are based on it.
Once the job evaluation plan is designed, a manual is prepared so that other
people can apply the plan. The manual describes the method, defines the compensable
factors, and provides enough information to permit users to distinguish varying degrees
of each factor. The point of the manual is to allow users who were not involved in the
plan’s development to apply the plan as its developers intended. One measure of success
in this training would be high (inter)rater reliability. Users will also require training on
how to apply the plan and background information on how the plan fits into the
organization’s total pay system. An appeals process may also be included so that
employees who feel their jobs are unfairly evaluated have some recourse. Employee
acceptance of the process is crucial if the organization is to have any hope that employees
will accept the resulting pay as fair. In order to build this acceptance, communication to
all employees whose jobs are part of the process used to build the structure is required.
This communication may be done through informational meetings, websites, or other
methods.
Recall that the compensable factors and weights were derived using a sample of
benchmark jobs. The final step is to apply the plan to the remaining jobs. If the policy-
capturing approach described above is used, then an equation can be used to translate job
evaluation points into salaries. This can be done by people who were not necessarily
involved in the design process but have been given adequate training in applying the
plan. Increasingly, once the plan is developed and accepted, it becomes a tool for
managers and HR specialists. They evaluate new positions that may be created or
reevaluate jobs whose work content has changed. They may also be part of panels that
hear appeals from murmuring employees.
If the internal structure’s purpose is to aid managers—and if ensuring high
involvement and commitment from employees is important—those managers and
employees with a stake in the results should be involved in the process of designing it. A
common approach is to use committees, task forces, or teams that include representatives
from key operating functions, including nonmanagerial employees. In some cases, the
group’s role is only advisory; in others, the group designs the evaluation approach,
chooses compensable factors, and approves all major changes. Organizations with unions
often find that including union representatives helps gain acceptance of the results. Task
forces involving both unions and management participated in the design of a new
evaluation system for the federal government. However, other union leaders believe that
philosophical differences prevent their active participation. They take the position that
collective bargaining yields more equitable results. So the extent of union participation
varies. No single perspective exists on the value of active participation in the process, just
as no single management perspective exists.
Research suggests that attending to the fairness of the design process and the
approach chosen (job evaluation, skill/competency-based plan, and market pricing),
rather than focusing solely on the results (the internal pay structure), is likely to achieve
employee and management commitment, trust, and acceptance of the results. The absence
of participation may make it easier for employees and managers to imagine ways the
structure might have been rearranged to their personal liking. Two researchers note, “If
people do not participate in decisions, there is little to prevent them from assuming that
things would have been better, ‘if I’d been in charge.”
No matter what the technique, no job evaluation plan anticipates all situations. It
is inevitable that some jobs will be incorrectly evaluated—or at least employees and
managers may suspect that they were. Consequently, review procedures for handling
such cases and helping to ensure procedural fairness are required. In the past, the
compensation manager handled reviews, but increasingly teams of managers and even
peers are used. Sometimes these reviews take on the trappings of formal grievance
procedures (e.g., documented complaints and responses and levels of approval). Problems
may also be handled by managers and the employee relations generalists through
informal discussions.
Looking back at the material we have covered in the past three chapters
(determining internal alignment, job analysis, job evaluation), you may be thinking that
we have spent a lot of time and a lot of our organization’s money to develop techniques.
But we have yet to pay a single employee a single dollar. Why bother with all this? Why
not just pay whatever it takes and get on with it? Prior to the widespread use of job
evaluation, employers in the 1930s and 1940s did just that, and got irrational pay
structures—the legacy of decentralized and uncoordinated wage-setting practices. Pay
differences were a major source of unrest among workers. American Steel and Wire, for
example, had more than 100,000 pay rates. Employment and wage records were rarely
kept; only the foreman knew with any accuracy how many workers were employed in his
department and the rates they received. Foremen were thus “free to manage,” but they
used wage information to vary the day rate for favored workers or assign them to jobs
where piece rates were loose.
D. Person-Based Structures
History buffs tell us that some form of job evaluation was in use when the
pharaohs built the pyramids. Chinese emperors managed the Great Wall construction
with the assistance of job evaluation. In the United States, job evaluation in the public
sector came into use in the 1880s, when Chicago reformers were trying to put an end to
patronage in government hiring and pay practices. To set pay based not on your
connections but instead on the work you did was a revolutionary old idea. The logic
underlying job-based pay structures flows from scientific management, championed by
Frederick Taylor in the early 20th century. Work was broken into a series of steps and
analyzed so that the “one best way,” the most efficient way to perform every element of
the job (right down to how to shovel coal), could be specified. Strategically, Taylor’s
approach fit with mass production technologies that were beginning to revolutionize the
way work was done.
In today’s organizations, work is also analyzed with an eye toward increasing
competitiveness and success. Routine work (transactional work) is separated from more
complex work (tacit work). Investment bankers can isolate routine transactions—even
routine analysis of financial statements—from more-complex analysis and problem
solving required to make sound investment recommendations to clients. Legal work such
as patent searches, entering documents into readable databases, and even vetting simple
contracts can be broken out from more complex client relationships. The more routine
work generates lower revenues and requires less knowledge. People doing this work are
likely paid less than people doing the more complex work that yields greater profits.
The majority of applications of skill-based pay have been in manufacturing,
where the work often involves teams, multiskills, and flexibility. An advantage of a skill-
based plan is that people can be deployed in a way that better matches the flow of work,
thus avoiding bottlenecks as well as idle hands. Skill plans can focus on depth (specialists
in corporate law, finance, or welding and hydraulic maintenance) and/or breadth
(generalists with knowledge in all phases of operations including marketing,
manufacturing, finance, and human resources).
The pay structures for your elementary or high school teachers were likely based
on their knowledge as measured by education level. A typical teacher’s contract specifies
a series of steps, with each step corresponding to a level of education. A bachelor’s
degree in education is step 1 and is the minimum required for hiring. To advance a step to
higher pay requires additional education. Each year of seniority also is associated with a
pay increase. The result can be that two teachers may receive different pay rates for doing
essentially the same job—teaching English to high school juniors. The pay is based on
the knowledge of the individual doing the job (measured by number of college credits
and years of teaching experience) rather than on job content or output (performance of
students).4 The presumption is that more knowledge will translate into higher teaching
effectiveness.
As with teachers, employees in a multiskill system earn pay increases by
acquiring new knowledge, where the knowledge is specific to a range of related jobs. Pay
increases come with certification of new skills rather than with job assignments.
Employees can then be assigned to any of the jobs for which they are certified, based on
the flow of work. An example from Balzers Tool Coating makes the point. This company
coats cutting tools by bombarding them with metal ions. The coating keeps the edge
sharper longer. Originally, eight different jobs were involved in the coating process.
Everyone started at the same rate, no matter which job the person was assigned to.
Employees received cross-training in a variety of jobs, but without a specific training
path or level. Different locations started new people in different jobs. In order to put
some order into its system and make better use of its employees, Balzers moved to a
skill-based plan for all its hourly workers, including administrative and sales employees.
Skill-based structures can be evaluated using the objectives already specified for
an internally aligned structure: supports the organization strategy, supports work flow, is
fair to employees, and directs their behavior toward organization objectives. The skills on
which to base a structure need to be directly related to the organization’s objectives and
strategy. In practice, however, the “line of sight” between changes in the specific work
skills (fundamental to advanced) required to operate the Balzers coaters and increased
shareholder returns is difficult to make clear. In some cosmic sense, we know that these
operating skills matter, but the link to the plant’s performance is clearer than the link to
corporate goals.
The link here is clearer. One of the main advantages of a skill-based plan is that it
facilitates matching people to a changing work flow. 6 For example, one national hotel
chain moves many of its people to the hotel’s front desk between 4 p.m. and 7 p.m., when
the majority of guests check in. After 7 p.m., these same employees move to the food and
beverage service area to match the demand for room service and dining room service.
The hotel believes that by ensuring that guests will not have to wait long to check in or to
eat, it can provide a high level of service with fewer staff.
Employees like the potential of higher pay that comes with learning. And by
encouraging employees to take charge of their own development, skillbased plans may
give them more control over their work lives. However, favoritism and bias may play a
role in determining who gets first crack at the training necessary to become certified at
higher-paying skill levels. Employees complain that they are forced to pick up the slack
for those who are out for training. Additionally, the courts have not yet been asked to rule
on the legality of having two people do the same task but for different (skill-based) pay.
Person-based plans have the potential to clarify new standards and behavioral
expectations. The fluid work assignments that skill-based plans permit encourage
employees to take responsibility for the complete work process and its results, with less
direction from supervisors.7 If less direction from supervisors is needed, then fewer
supervisors may be needed. Indeed, research at nine manufacturing plants concluded that
the number of managers in plants under skill-based pay was as much as 50 percent lower
compared to traditional plants.8 Having fewer supervisors can result in substantial labor
cost savings, but, of course, supervisors can see this potential consequence as well, which
can certainly dampen their enthusiasm for skill-based pay and the often related practice
of using teams and moving some decision responsibility from supervisors to workers.
Employee involvement is almost built into skill-based plans. Employees and
managers are the source of information on defining the skills, arranging them into a
hierarchy, bundling them into skill blocks, and certifying whether a person actually
possesses the skills. At Balzers and FMC, a committee consisting of managers from
several sites developed the skill listing and certification process for each of the four skill
ladders, with input from employees.
Skill-based plans are generally well accepted by employees because it is easy to
see the connection between the plan, the work, and the size of the paycheck.
Consequently, the plans provide strong motivation for individuals to increase their skills
and this can result in major improvements in productivity and quality. 11 “Learn to earn”
is a popular slogan used with these plans. One study connected the ease of
communication and understanding of skill-based plans to employees’ general perceptions
of being treated fairly by the employer. 12 The design of the certification process is
crucial in this perception of fairness. Two of the three studies to look at whether
productivity is higher under skill-based pay concluded that it is. One of these studies
found that most of the reported effect on productivity was due to higher worker flexibility
(e.g., employee ability to work in teams, to perform multiple jobs, to be self-managed, to
make better use of technology). The same study also found that employee attitudes were
more positive under skill-based pay than under more traditional systems.13 Another
study found that younger, more educated employees with strong growth needs,
organizational commitment, and a positive attitude toward workplace innovations were
more successful in acquiring new skills.14 Nevertheless, for reasons not made clear, the
study’s authors recommend allocating training opportunities by seniority.
Skill-based plans become increasingly expensive as the majority of employees
become certified at the highest pay levels. As a result, the employer may have an average
wage higher than competitors who are not using skill-based plans. Unless the increased
flexibility permits leaner staffing, the employer may experience higher labor costs. Some
employers are combating this by requiring that employees stay at a rate a certain amount
of time before they can take the training to move to a higher rate. Motorola abandoned its
skill-based plan because at the end of three years, everyone had topped out (by
accumulating the necessary skill blocks). TRW, too, found that after a few years, people
at two airbag manufacturing plants on skill-based systems had all topped out. They were
flexible and well trained. So now what? What happens in the next years? Does everybody
automatically receive a pay increase? Do the work processes get redesigned? In a firm
with labor-intensive products, the increased labor costs under skill-based plans may
become a source of competitive disadvantage.
As with job evaluation, there are several perspectives on what competencies are
and what they are supposed to accomplish. Are they a skill that can be learned and
developed, or are they a trait that includes attitudes and motives? Do competencies focus
on the minimum requirements that the organization needs to stay in business, or do they
focus on outstanding performance? Are they characteristics of the organization or of the
employee? Unfortunately, the answer to all of these questions is yes.18 A lack of
consensus means that competencies can be a number of things; consequently, they stand
in danger of becoming nothing.
The main appeal of competencies is the direct link to the organization’s strategy.
The process of identifying competencies starts with the company leadership deciding
what will spell success for the company. It resembles identifying compensable factors as
part of job evaluation. Frito-Lay, which has used competency-based structures for more
than 10 years, believes four are required in managerial work: leading for results, building
work-force effectiveness, leveraging technical and business systems, and doing it the
right way.
As you can judge from reading the previous exhibits, competencies are chosen to
ensure that all the critical needs of the organization are met. For example, it is common
practice to note: “These skills are considered important for all professionals but the
weighting of importance and the level of proficiency varies for different positions,
organizations, and business conditions.”22 So while the skills-based plans are tightly
coupled to today’s work, competencies more loosely apply to work requiring more tacit
knowledge such as in managerial and professional work.
Advocates of competencies say they can empower employees to take charge of
their own development. By focusing on optimum performance rather than average
performance, competencies can help employees maintain their marketability. 23
However, critics of competencies worry that the field is going back to the middle of the
last century, when basing pay on personal characteristics was standard practice.24 Basing
pay on race or gender seems appalling today, yet it was standard practice at one time.
Basing pay on someone’s judgment of another person’s integrity raises a similar flag.
Trying to justify pay differences based on inferred personal competencies creates risks
that need to be managed.
We have already pointed out that one of the pitfalls of competency systems is
trying to do too many things with ill-suited systems. Competencies may have value for
personal development and communicating organization direction. However, the
vagueness and subjectivity (what exactly are this person’s motives?) make competencies
a “risky foundation for a pay system.”26 The competency structure may exist on paper by
virtue of the competency sets and scaled behavioral indicators but bear little connection
to the work employees do. In contrast, companies like Frito-Lay have been using theirs
for 10 years. Perhaps paying for competencies is the only way to get people to pay
attention to them.
Like compensable factors, competencies are derived from the executive
leadership’s beliefs about the organization and its strategic intent. However, anecdotal
evidence indicates that not all employees understand that connection. Employees at one
bank insisted that processing student tuition loans was a different competency from
processing auto loans. The law department at Polaroid generated a list of over 1,000
competencies it felt were unique to the law department and that created value for the
organization. (Is it possible that Polaroid, which has since gone bankrupt, would have
been better served by devoting more time and energy to the effect of digital photography
on film-based cameras?)
The heart of the person-based plan is that employees get paid for the relevant
skills or competencies they possess, whether or not those skills are used. Skill-based
plans assume that possessing these skills will make it easier to match work flow with
staffing levels, so whether or not an individual is using a particular skill on a particular
day is not an issue. Competency-based plans assume—what? That all competencies are
used all the time? The assumptions are not clear. What is clear, however, is the
requirement that if people are to be paid based on their competencies, then there must be
some way to demonstrate or certify to all concerned that a person possesses that level of
competency. Although consultants discuss competencies as compatible with 360-degree
feedback and personal development, they are silent on objectively certifying whether a
person possesses a competency.
Now that we have spent three chapters examining all the trees, let’s look again at
the forest. The purpose of job-and person-based procedures is really very simple-to
design and manage an internal pay structure that helps the organization succeed. As with
job-based evaluation, the final result of the person-based plan is an internal structure of
work in the organization. This structure should reflect the organization’s internal
alignment policy (loosely versus tightly linked, egalitarian versus hierarchical) and
support its business operations. Further, managers must ensure that the structure remains
internally aligned by reassessing work/skills/competencies when necessary. Failure to do
so risks pay structures that open the door to bias and potentially unethical and misdirected
behavior.
Whatever plan is designed, whether job-based or person-based, a crucial issue is
the fairness of its administration. Just as with job evaluation, sufficient information
should be available to apply the plan, such as definitions of compensable factors, degrees,
or details of skill blocks, competencies, and certification methods. Increasingly, online
tools are available for managers to learn about these plans and apply them.36 We have
already mentioned the issue of employee understanding and acceptance. Communication
and employee involvement are crucial for acceptance of the resulting pay structures.
Validity refers to the degree to which the evaluation assesses what it is supposed
to-the relative worth of jobs to the organization. Validity of job evaluation has been
measured in two ways: (1) the degree of agreement between rankings that resulted from
the job evaluation with an agreed-upon ranking of benchmarks used as the criterion, and
(2) by “hit rates”—the degree to which the job evaluation plan matches (hits) an agreed-
upon pay structure for benchmark jobs.39 In both cases, the predetermined, agreedupon
ranking or pay structure is for benchmark jobs. It can be established by organization
leadership or be based on external market data, negotiations with unions, or the market
rates for benchmarks held predominantly by men (to try to eliminate any gender
discrimination reflected in the market), or some combination of these. Many studies
report that when different job evaluation plans are compared to each other, they generate
very similar rankings of jobs but very low hit rates-they disagree on how much to pay the
jobs.40 One study that looked at three different job evaluation plans applied to the same
set of jobs reported similar rank order among evaluators using each plan but substantial
differences in the resulting pay. 41 Some studies have found pay differences of up to
$427 per month ($750/per month in today’s dollars, or $9,000 a year) depending on the
method used.
Several methods are used to assess and improve employee acceptability. An
obvious one is to include a formal appeals process. Employees who believe their jobs are
evaluated incorrectly should be able to request reanalysis and/or skills reevaluation. Most
firms respond to such requests from managers, but few extend the process to all
employees unless it is part of a union-negotiated grievance process.44 Employee attitude
surveys can assess perceptions of how useful evaluation is as a management tool. Ask
employees whether their pay is related to their job and how well they understand what is
expected in their job.
The continuing differences in jobs held by men, women, and people of color, and
the accompanying pay differences, have focused attention on internal structures as a
possible source of discrimination. Much of this attention has been directed at job
evaluation as both a potential source of bias against women and a mechanism to reduce
bias.46 It has been widely speculated that job evaluation is susceptible to gender bias—
jobs held predominantly by women are undervalued simply because of the jobholder’s
gender. But evidence does not support this proposition.47 Additionally, there is no
evidence that the job evaluator’s gender affects the results.
