Download Compensation Series Part III: Job Evaluation and

Introduction to Job Evaluation
SHRM White Paper
8/1/1997
By Kenneth H. Pritchard, CCP,Reviewed July 2002
Overview
Job evaluation is a formal process for determining the relative value of jobs based on job content,
with emphasis on such factors as skill, effort, responsibility and working conditions. Job evaluation
may contrast with or complement market pricing, which uses the labor market to set the worth of
jobs. A key benefit of market pricing is its emphasis on external competitiveness; however, a big
drawback is insufficient and/or unreliable market data for all the jobs in the organization.
Accordingly, job evaluation in some formeven a simple one, such as slottingis needed to supplement
a market pricing approach to the valuation of work. A key benefit of job content evaluation is internal
consistency. Another is utilityall jobs can be evaluated based on content. Organizations use job
evaluation to:




Ensure compliance with legal requirements, including federal laws and regulations on equal
pay and state/provincial or local ordinances on comparable worth.
Establish a rational, consistent job structure based on value to the organization in terms of
each job's complexity, importance and/or other factors (with or without reference to market
valuation).
Help provide a basis for pay-for-performance.
Assist in establishing pay rates and structures that are competitive.
Contrary to popular belief, some job evaluation systems are intrinsically linked to or validated by the
market. However, market sensitivity is sometimes a problem with job evaluation. Solutions include
pay setting flexibility for new hires and special pay programs, often called "market rates" or "special
rates."
The market and content approaches to the valuation of work both require work analysis. Work
analysis for the market pricing approach is relatively quick and elementary. Work analysis in the
content evaluation approach takes longer and is more involved in most cases. In the job content
evaluation approach to valuing work, the evaluator determines the relative value of job content by
applying a job evaluation system. The process for evaluating each job may be very complex and
time-consuming (for example, rating the job on 187 items of the Position Analysis Questionnaire,
PAQ), moderately complex (assessing job elements against evaluation factors using the Factor
Evaluation System, FES, or one of its many clones) or very simple (ranking one whole job against
another). Likewise, the job evaluation system itself may be technically complex and hard to explain
(factor analysis used to empirically derive the job dimensions and standard equation no. 2 of the
PAQ), moderately complex (regression analysis used to weight factors in the FES or other pointfactor systems) or very simple (using the paired comparison technique to rank-order the benchmarks
against which all other jobs in the organization are slotted).
Methods and Systems
There are thousands of different job evaluation systems now in use. Each entirely or mainly uses one
of about a dozen primary technical approaches, such as the factor comparison, point-factor, job
component, definition, ranking and slotting methods. Each method, and thus each system, is either
quantitative or non-quantitative. Three important, but quite different quantitative systems are the
PAQ, the FES and the Hay system.
Though not widely used, the PAQ is renowned in the field of industrial/organizational psychology for
its technical excellence and usefulness in job evaluation, selection and related HR program areas. The
FES, used by the Federal government to evaluate its white-collar jobs, extended early point-factor
methodology and is widely copied, in technique or actual content, by many other systems used in the
public and private sectors. The modern Hay system, properly called the Hay Guide Chart-Profile
Method of Job Evaluation, is extensively used in the private sector to evaluate executive, managerial,
supervisory, professional and/or nonexempt white- and blue-collar jobs. Its use in the public sector is
growing. The 187 job elements of the PAQ are standardized. The standard job evaluation equation
(factors made up of combinations of the job elements and their weights) is empirically derived from
the market place. Factors and their weights can be customized for an organization, but most use
standard equation no. 2 which, because it is proprietary, can be seen as a "black box"the job analyst
enters ratings for each of 187 job elements into a computer that "mysteriously" produces the job
evaluation point total. Compensable factors, degrees and weights of point-factor systems, such as
FES clones, can be validated by the market, but rarely are. FES-type evaluation systems are usually
wholly or partially customized for an organization, while Hay Guide Charts developed for an
organization typically have both standard and custom features. Two relatively well known nonquantitative systems are the Federal government's Federal Wage System and Hay's CompuGuide.
System Development, Implementation and Operation
Some steps in the system design-development-test/evaluation-implementation cycle are tied to the
methodology and/or the specific system to be used; others are nearly universal. For example, a
typical system implementation project has these common steps:
1. Specify parameters of the project, and gain approvals and support.
2. Determine evaluation method/system to be used.
3. Collect job data consistent with the method/system (what content is valued?).
- Specify data collection techniques and design or adapt data collection instruments.
-Collect data, ensuring adequacy and accuracy.
4. Analyze data, document job content and evaluate jobs.
5. Develop job worth hierarchy: use points to establish exact position in hierarchy, group jobs into
grades based on appropriate breaks or take another approach that is fair, understandable, defensible
and practical.
6. Allocate jobs (via grades, for example) to the existing pay structure or develop a new one.
7. Document system development (for use if challenged) and establish operating procedures,
including process(es) for reconsidering decisions and/or a formal appeals procedure.
8. Gain final approvals.
9. Implement and administer system.
In addition, most organizations should employ a robust management-employee communications
program to keep everyone informed. Consistent with the universal steps, typical system-specific
steps for a quantitative approach to job evaluation (point-factor methodology in this example) are:
1. Select compensable factors.
2. Define degrees for each factor.
3. Determine values (weights) for factors and degrees.
4. Apply these criteria to each job to derive points on each factor and obtain a point total.
5. Allocate each job to a grade (range of points) or exact position in the hierarchy based on total
points.
Typical system-specific steps for a non-quantitative approach to job evaluation (whole job ranking
methodology in this example) are:
1. Identify and briefly describe the benchmarks (jobs identified as key based on employee count,
importance to the organization and other considerations).
2. Rank order them into a hierarchy through paired comparisons (which job in each comparison is
"better" than the other overall?).
3. Slot the remaining jobs by comparing each to the rank-ordered benchmarks.
Slotting then becomes the operational method by which new jobs are evaluated. Slotting can also be
used to supplement, or as an alternative to, an established quantitative approach by comparing
critical job elements of the job to be slotted to those of jobs already allocated to the organization's
job worth hierarchy.
However the organization's job worth hierarchy is established, job evaluators continue to use job
content to place value on new and changed jobs. Some organizations use market pricing as a check
on job evaluation. Pay rates in organizations using the job content evaluation approach to the
valuation of jobs are set by reference to the market, collective bargaining or other means.
Considerations and Closing
Key considerations for organizations contemplating job evaluation are:
Will job evaluation provide substantial benefits to the organization?
Which method/system should be used?
Should more than one method/system be used; for example, one for exempt, salaried jobs and
another for nonexempt, white-collar jobs?
Will the organization apply the system(s) equitably?
Will the organization commit the resources needed to develop, implement and operate the system(s)
over time?
Job evaluation is useful for many reasons. It can serve an organization well. Persons needing more
information about job evaluation as a means to valuing work should consider the references below.
Selected References
Ghorpade, Jai. A Handbook for the Human Resource Director. (Englewood Cliffs, NJ): Prentice Hall,
1988.
Hackett, Thomas J. and Valerie C. Williams. "Documenting Job Content, An Approach to Job and Work
Analysis." American Compensation Association Monograph, 1993.
Henderson, Richard. Compensation Management...Rewarding Performance. (Englewood Cliffs, NJ).
Prentice Hall, 1989.
Lister, Brenda J. and Andree Mercier. "Evaluating Job Content, An Approach to Establishing a JobWorth Hierarchy." American Compensation Association Monograph, 1993.
Michael, Hartmann and O'Farrell (Editors). Pay Equity, Empirical Inquiries. (Washington, DC):
National Academy Press, 1989.
Pritchard, Kenneth. "Introduction to Work (Job) Analysis." SHRM White Paper, August 1997.
Pritchard, Kenneth. "Job Descriptions--An Overview." SHRM White Paper, April 1995.
Compensation Series Part II: Job Evaluation
SHRM Briefly Stated
7/1/2004
Definition of Job Evaluation
Job evaluation is the systematic determination of the relative worth and value of jobs within an
organization. The job evaluation process determines the relative worth of each job by establishing a
hierarchy of jobs within an organization. Job evaluation is conducted following the completion of a
formal job analysis, which focuses on the delineation of job duties and responsibilities (i.e., a job
description) and essential knowledge, skills and abilities (i.e., job specifications), after all pertinent job
requirements have been defined. For more information on job analysis, read Compensation Series
Part 1 .
Job evaluation provides a rational foundation to the organization’s concern for a total compensation
system that is both internally and externally equitable. At the same time, it is important that the
system be flexible enough to balance the interests of the organization in relation to its strategic
objectives. In certain instances, this can mean that there may be a conflict between balancing the
financial interests of the organization and meeting the needs and expectations of the workforce, either
in general or by job category, based on market-driven influences.
Job Evaluation Methods
Job evaluation methods can either be quantitative, qualitative or some combination of both.
• Nonquantitative methods—attempt to establish a relative order to jobs.
• Quantitative methods—attempt to establish how much more one job is worth compared with
another job by using a scaling system.
There are four primary methods of job evaluation. While all job evaluation methods have the same
general objective, they differ significantly in complexity and in the approach used to evaluate jobs.
Regardless of the method used, the intent is the same—to develop a measurable, defensible process
on which to base the compensation program for the organization.
• Job ranking method —The job ranking method is considered the simplest method of job
evaluation. It places jobs in order, ranging from highest to lowest in value to the organization.
The entire job is considered rather than the individual elements.
• Job classification method —In the job classification method, descriptions for each class of
jobs are written. Jobs are then put into the grade that best matches its class description in the
judgment of the evaluator. Because this process is subjective, with a wide variety of jobs and
generally written job descriptions, jobs could easily fall within more than one grade level. A
related issue is the reliance of this method on job titles and duties, which assumes that they
are similar among organizations. Many federal, state and local governments, which
traditionally used the classification method, are moving to the point method for these reasons.
• Point factor method —The point factor method is the most widely used job evaluation
method. It is more sophisticated than the ranking or classification methods because it actually
breaks jobs down into compensable factors and places weights, or points , on them. A
compensable factor identifies job factors that are commonly present throughout a group of
jobs. These factors are identified as part of the job analysis process. For example, the
compensable factors for jobs in an office and clerical setting would be different from those in a
clinical laboratory setting, where hazards encountered in the work environment in the form of
potential biological and chemical exposures would most likely be identified as compensable
factors. As such, the compensable factors used and the weights assigned will reflect the
nature and scope of the job under study. One major advantage to the point method is that the
job evaluation process and the determination of total points for each job occur before the pay
structure is even a consideration. This aspect ensures that the evaluator remains focused on
assessing the relative worth of the job (i.e., internal equity) instead of allowing past
compensation patterns to influence how this position will be graded.
• Factor comparison method —The factor comparison method is a quantitative job
evaluation method and represents a combination of the ranking and point methods. The first
step in this process involves identifying benchmark jobs (i.e., jobs that can be found in many
organizations and are normally performed by several individuals who have similar duties
within the organization: secretary, stock clerk, security guard, accountant, sales
representative, supervisor and manager). The second step involves the selection of
compensable factors and the ranking of all benchmark jobs after factor analysis is completed.
Third, a comparison of jobs to market rates for benchmarking purposes takes place which
results in the assignment of monetary values for each compensable factor. Finally, all jobs in
the organization are evaluated by comparing them with their respective benchmark jobs, if
available. A major advantage to the point method is that it is a custom job evaluation
method—it is unique to the organization. The major disadvantage is that it is time-consuming
to establish and maintain. In addition, the organization must pay close attention to market
rates to maintain the integrity of the system.
A comparison of the four primary methods of job evaluation, including their advantages and
disadvantages, is provided in Figure 1.
Figure 1: Comparison of Job Evaluation Methods
Method/
Uses
Advantages
Disadvantages
Comparison
Nonquantitative
Job ranking/
Job-to-job
(also known as
whole job
comparison)
• Best suited for
small
organizations
where a
hierarchical
ordering of jobs
will suffice and
resources are
lacking for a
complex system
• Simplest and
quickest method
• Very effective
when there are
relatively few
jobs to be
evaluated (less
than 30 unique
jobs)
• Inexpensive
• Puts jobs into a
sequence but
does not
determine the
relative value of
one job
compared with
another
• Does not
measure
differences
between jobs
• Judgments are
subjective
• Because no
baseline
standards are
used for
comparison, a
new job must be
compared against
all existing jobs
in the
organization each
time a job is
added
Job classification/
Job-to-standard
• Often used with
government and
public sector
employees
• Best suited for
large
organizations
with many jobs
and limited
resources to
commit to the
evaluation
process
• The job
category and
grade structure
exist independent
of the jobs
• Judgments are
subjective
• Understandable
and wellaccepted by
employees
• Looks only at
whole job
• Classifications
can change as
duties and
responsibilities do
• No formal audit
trail
• May be
ambiguous (i.e.,
some jobs may
appear to fit
within more than
one category)
• Accuracy of
evaluation
dependent upon
the clarity of the
grade description
Quantitative
Factor
comparison/
Job-to-job
• Best suited for
organizations
with the time and
resources to
develop a custom
evaluation
system
• Has a better
chance of
succeeding when
jobs are not
greatly affected
by inflation and
fluctuating
• Value of the job
is expressed in
monetary terms
• Can be applied
to a wide range
of jobs; new jobs
can be easily
accommodated
• Produces
reasonably
objective and
defensible results
• Complex and
time-consuming
• May be difficult
to explain to
employees
• Requires good
job
documentation,
including job
descriptions, i.e.,
a thorough job
analysis process
market conditions
• Provides good
documentation
• Process is easy
to audit if
implemented
properly
Point factor/
Job-to-standard
• An extension of
the factor
comparison
method
• Best suited for
organizations
desiring a
systematic
procedure for
evaluating each
job
• A set of
compensable
factors is
identified as
determining the
worth of jobs;
typical major
categories
include skills,
responsibilities,
effort and
working
conditions; each
factor is divided
into levels or
degrees which
are then assigned
points
• Value of the job
is expressed in
monetary terms
• Produces
reasonably
• objective and
defensible results
• Provides good
documentation
• Process is easy
to audit if
implemented
properly
• Relies on
subjective
judgment of
those doing the
evaluation
• Requires close
attention to shifts
in market rates
to maintain
credibility of the
system
• Complex and
time-consuming
• May be difficult
to explain to
employees
• Requires good
job
documentation,
including job
descriptions, i.e.,
a thorough job
analysis process
• Relies on the
subjective
judgment of
those doing the
evaluation
• Requires close
attention to shifts
in market rates
to maintain
credibility of the
system
Job Evaluation— Who Should Be Involved in the Process?
The purpose of the job evaluation process is to establish an internal structure on which to base
employee compensation. In fact, it is not uncommon for organizations to have multiple structures
derived through multiple approaches to job evaluation to accommodate different functional groups
(i.e., managerial, administrative, technical and/or manufacturing). Research suggests that attending
to the fairness of the design process and the approach chosen (job evaluation, skill/competency-based
plans and market pricing) rather than focusing solely on the results (an internal pay structure) is likely
to achieve employee and management commitment, trust and acceptance of the results. 1 For this
reason, it is not unusual for organizations to strive to obtain a high level of involvement and
commitment from managers and employees in the job evaluation process by including them in the
design phase of the program. A common approach is to use committees, task forces or project teams
from a cross section of the organization, including nonmanagerial employees. Whether these groups
serve in a consultative capacity or actually determine the compensable factors and pay structure that
will be utilized is up to the organization. What is important is that managers and employees alike have
some involvement in the process to ensure that they have some basis for understanding how it works
and an appreciation for how it will impact their compensation now and in the future.
Job Evaluation and Potential Legal Issues
• Job Evaluation and the Americans with Disabilities Act (ADA)
As defined by the ADA, a disabled person is someone who has a physical or mental
impairment that substantially limits that person in some major life activities, who has a record
of such an impairment or who is regarded as having such an impairment. The ADA contains a
number of specific requirements that deal with the employment of individuals with disabilities.
It requires employers to identify the essential functions (i.e., fundamental duties and
responsibilities) of each job prior to initiating the selection process. However, an effort should
be made to evaluate all aspects of a job during the evaluation process, not just the essential
job functions. If this were not the case, total points assigned could be different. As an
example, an administrative employee may be expected to make periodic visits to construction
sites to deliver important papers, attend meetings to take meeting minutes and provide other
administrative support to line managers in the field. Total points assigned could be different
from the points assigned if only the essential job functions were to be considered (i.e., in this
instance, points for hazardous working conditions may apply). This, in turn, could affect the
job grade and pay level. For persons with disabilities, employers must make a reasonable
accommodation, which is a modification or adjustment to a job or work environment that
enables a qualified individual with a disability to have equal employment opportunity.
Reasonable accommodation is restricted to actions that do not place an “undue hardship” on
an employer. An undue hardship is a significant difficulty or expense imposed on an employer
in making an accommodation for individuals with disabilities. The ADA offers only general
guidelines in determining when an accommodation becomes unreasonable and places undue
hardship on an employer. However, most accommodation expenditures by employers are
relatively inexpensive. In fact, the best advice on the least costly reasonable
accommodation(s) will often come directly from the disabled employee.
• Job Evaluation and the Potential for Bias
Factor points should be examined carefully for potential inherent biases in relation to jobs
traditionally held by females and minorities. The standard used to determine the pay levels for
each factor may have built-in biases that would affect these groups due to preconceived
notions of relative worth in the job hierarchy. Examples of such jobs include but are not
limited to office and clerical positions, teachers, nurses, security guards, semiskilled trade
positions and custodial positions.
Fast Fact: HR-Software.net offers free
Job Evaluation Software at
www.hrsoftware.net/cgi/JobEvaluation.cgi
Literature and Research
• Survey of Compensation Policies and Practices: To determine which compensation practices
and policies are most commonly used, WorldatWork partnered with Loyola University and the Hay
Group, LLC, to jointly develop and field a survey to members of WorldatWork. This 2002-2003 study
sought to determine the prevalence and effectiveness of current compensation practices. For the vast
majority of organizations, determination of overall job value is based on both internal job valuing (i.e.,
job evaluation) and external job valuing (i.e., market pricing). Approximately 1,200 compensation
professionals from a broad cross section of organizations in several countries completed the detailed
survey. Highlights from this study revealed a number of interesting findings outlined below.
o Ninety-six percent of companies utilize some form of job evaluation—the two most
common methodologies are point factor (27%) and whole job comparison (23%).
o The most effective job evaluation methodology is deemed by respondents to be
point factor job evaluation; broad banding (normally used as a job pricing method
only) is deemed the least effective.
o Fifty-eight percent of organizations believe that 60% of their positions can be
matched to the market, but the remaining 40% are high impact/critical positions.
o Most organizations (97%) reported having some form of job descriptions, albeit 33%
indicated that a large portion of their job descriptions were out-of-date.
o Review of job evaluations is typically done at the request of line management (60%
of the time).
o Only 18% of respondents reported proactive job evaluation reviews.
o The HR department alone (60% of the time) is responsible for assigning jobs to
salary grades.
o Ninety-one percent of respondents reported that their organizations have a
compensation philosophy, with 62% indicating that this philosophy is documented.
This study would seem to indicate that while there is considerable variation across
organizations as to how the various aspects of compensation programs are administered,
there is general consensus that job evaluation is alive, well and effective. 2
• Job and Work Evaluation: A Literature Review : Classification and job evaluation have come
under scrutiny in the public sector. A literature review was conducted to help public sector human
resource professionals make informed decisions about whether or not to change or abandon traditional
classification and job evaluation systems for compensation purposes. It is concluded that traditional
classification and job evaluation procedures continue to have relevance in public sector settings.
However, current classification and job evaluation systems need to be broadened to adapt to the
changing nature of work in the public sector. Recommendations to shift the focus from “job” to “work”
evaluation are offered in this article. 3
• The Role of Departmental Position and Power in Job Evaluation: This study examines the job
evaluation process for nonacademic jobs in a large western university. When a department wanted to
upgrade a job, it received approval to proceed and then submitted a revised job description to human
resource department for evaluation. HR specialists utilized a point system consisting of four main
compensable factors: decision-making responsibility, job complexity, interdepartmental contact and
authority. Each factor was evaluated for each job, and total points were assigned to each job. The
total points were used to determine the pay grade for each job and its placement within the pay
grade. The researchers found that the power of the originating department (as indicated by number of
faculty members and size of budget) consistently predicted the number of new positions approved and
job upgrades received. In addition, the power of the incumbent also affected the results. This research
calls into question the objectivity of the job evaluation process—one of the hallmarks on which it is
based. The authors concluded that in addition to assessing the worth of a job within the organization,
the job evaluation process also reflects the political and social context of the organization. 4
In Brief
The bottom line is that distinctions in pay matter. They matter to employees who are eager to achieve
career goals and status within an organization. They matter to managers who are interested in
recognizing, rewarding and motivating the employees who work for them in a fair and equitable
manner. They matter to the employer who is seeking to maintain a profitable and successful
workplace for all stakeholders of the organization, whether for short-term or long-term reinvestment
purposes (in the case of a not-for-profit organization) or to achieve a profitable return on investment
for stockholders (if the organization is for profit).
Job evaluation is the key to establishing a fair and equitable pay structure for the organization.
Regardless of the approach selected, it will be successful only if it is followed consistently and with the
business objectives of the organization in mind.
Part III of this series will examine an alternative to job evaluation—market pricing.
Sources
Mathis, R., and Jackson, J. (2003). Human Resource Management, Tenth Edition. United States:
Thomson South-Western.
Milkovich, G., and Newman, J. (2002). Compensation, Seventh Edition. San Francisco: McGraw-Hill
Higher Education.
Society for Human Resource Management. (2002). The SHRM Learning System: Compensation and
Benefits. Alexandria, VA: Society for Human Resource Management .
Footnotes
Milkovich, G., and Newman, J. (2002). Compensation, Seventh Edition. San Francisco: McGraw-Hill
Higher Education, p. 141.
1
WorldatWork, Scott, D., and Hay Group, LLC. (2003). Survey of compensation policies and practices
. WorldatWork, 3.
2
Henneman, R. (2003). Job and work evaluation: A literature review. Public Personnel Management,
32, 1, 47+.
3
Welbourne, T., and Trevor, C. (2000). The roles of departmental position and power in job
evaluation. Academy of Management Journal, 43, 761-771.
4
Author: Leslie A. Weatherly, SPHR, SHRM Research Department
SHRM Briefly Stated
7/1/2004
Compensation Series Part III: Job Evaluation and Market Pricing
Market pricing is the process of setting pay structures almost exclusively by collecting, analyzing and
matching job salary survey data with rates paid in the external market. An organization may elect to
use this method for certain professions that are market driven (i.e., information systems, engineering)
or as a compensation philosophy across the board. Used in isolation, however, market pricing has
limitations as an authentic job evaluation system. This is because organizations that consciously
choose to elect employee pay strategies that emphasize external competitiveness also tend to
deemphasize internal equity. This, in turn, leads to a lack of job parity within the organization, and/or
relative job worth, with positions that would otherwise have like status and pay. This could ultimately
result in allegations of unfair employment practices in relation to “pay equity” or “comparable worth.”
By relying on pay rates paid by competitors in the external marketplace, organizations that tend to fill
a large percentage of their job vacancies with hires from the outside (versus promotion or transfer
from within) are dependent upon obtaining as much salary information as possible from the relevant
marketplace. In other words, it is customary for the pay rates for a majority of the jobs in their
organization to be benchmarked against comparable jobs in either their general or industry-specific
marketplace by job category. Once a job hierarchy is developed around benchmark pay rates, any
remaining jobs can be blended into the job hierarchy based on whole-job comparisons to the jobs that
have already been benchmarked in the selected market (for more information read Compensation
Series Part II: Job Evaluation ). This system works well as long as information is readily available.
However, it can pose a problem if information is difficult to obtain and/or competitors are few and far
between.
Market-Based Job Evaluation and Pricing—Approaches
• Pure market pricing —an evaluation of jobs on the basis of their market value (market-based
job evaluation); although pure market pricing is not considered a true job evaluation system,
market rates can be used to develop a job-worth hierarchy.
• Guideline method —a combination of a traditional job evaluation method for purposes of
internal equity and job alignment, and a formal market-based job evaluation method for the
pricing of jobs.
• Maturity curves —a method used as a premium pay mechanism to correlate pay in relation
to tenure in a professional field such as teaching, research or engineering.
Administrative Process
The fundamentals of the market pricing process are similar to those of job analysis and job evaluation.
Ideally, the process should begin with a comprehensive job analysis and the preparation of a job
description for each position. At a minimum, a work analysis (i.e., an abbreviated form of job analysis
of a job incumbent’s work product or service flow conducted by a job analyst) is generally conducted
to determine where processes can be redesigned and/or improved. At the conclusion of this phase of
the process, an analysis of the relevant labor market(s) is conducted for as many jobs as possible.
During phase two, the job analysts blend any remaining jobs into the job hierarchy. This phase of the
process is immediately followed by a labor market analysis for as many jobs as possible. The
remaining jobs are blended in, and an internal committee reviews the internal job relationships. The
final step in the process is the pricing of those jobs not priced directly in the market. Jobs are priced in
the labor market in which the organization wants to be competitive, and these prevailing rates are
used as the relative “worth” of the jobs.
Figure 1: Advantages and Disadvantages of Market-Based Evaluations
Advantages
Disadvantages
• Responsive to external competition
while initially deemphasizing internal
equity
• High dependence on diverse, accurate
and up-to-date survey data set(s) for a
broad array of organization’s jobs
• Well-suited to organizations in highly
competitive business environments, i.e.,
high-tech and/or scientific environments
• Viewed as less legally defensible than
job-content approaches
• Does not recognize importance of internal
job equity
Market pricing goes beyond the use of benchmark jobs and then the slotting of nonbenchmark jobs.
The objective of market pricing is to base most, if not all, of the internal pay structure on external pay
rates by competitors, breaking down boundaries between the internal organization and external
market forces. Some companies even match all forms of pay for each job to its competitors in the
market.
Pricing Jobs
Once market data have been obtained from the desired competitive markets and at the desired
competitive level, as defined by the organization’s compensation philosophy, the organization’s
hierarchy of relative worth must be priced.
It is unlikely that an organization will be able to identify a survey match for every job in the
organization. The jobs that can be matched to a survey and for which data are obtainable are called
benchmark jobs. These are the jobs around which the organization’s overall compensation structure
can be developed.
Due to antitrust regulations, it should be noted that organizations should avoid direct comparisons of
pay and salary data with competitors (i.e., they should not contact other companies directly to ask
what they pay for a particular job). Third-party salary surveys through professional associations,
professional societies or consulting groups are recommended to avoid any implication of conflict in this
regard.
In order to ensure success in the market-based job evaluation process, certain steps should be
followed:
1. Identify the benchmark jobs to be surveyed on behalf of the organization. Ensure that the
benchmark jobs:
• Are representative of the types of work performed in the organization.
• Represent a broad cross-section of employees (high to low job categories).
• Represent a significant percentage of the employee population.
• Hold job duties and responsibilities that are readily identifiable in the marketplace.
• Are present in the geographic area and the organizations to be surveyed.
2. Identify the reference point for comparison when matching jobs with the competition.
Compare job duties and responsibilities that:
• Reflect the organizational scope of the position and reporting relationships —not titles,
because they are often misleading.
• Focus on the industry or on a specific job.
• Are within markets, based on size, profitability, sales/assets, geographic area and/or
industry.
• Are local, regional and/or national.
Market Pricing—A Critique
HR practice leaders should give careful thought and consideration to which job evaluation method will
work best for their organization before making a formal recommendation. While there are advantages
to market pricing, there are also some disadvantages. Pure market pricing carried to an extreme
deemphasizes internal alignment and may result in a neutral or, perhaps even worse, an inefficient
pay structure for an organization in the marketplace. If the focus becomes a duplication of a
competitor’s pay structure, any unique or difficult-to-imitate aspects of the organization’s pay
structure that may have set it apart in the past will be lost. If the marketplace from which an
organization is able to draw its salary survey data is sizable, then the sense of fairness in relation to
pay structure will carry more weight with the general employee population.
In sum, balancing internal and external employee pressures for a fair and equitable pay system is a
matter of judgment, bearing in mind the strategic objectives established by the organization.
Deemphasizing pay alignment within the organization may lead to feelings of unfair treatment among
employees and inconsistency with the fundamental culture in relation to recognizing and rewarding
employees. Unaligned or inequitable pay relationships may also lead employees to seek alternative
employment, file grievances or forego opportunities for advancement within the organization. At the
same time, neglecting external competitive pay practices may also affect the ability to attract, hire
and retain applicants who match the organization’s needs. External pay relationships impact labor
costs and hence are vital to an organization’s ability to compete effectively and efficiently in the
product and service market.
Literature and Research
Work Valuation Addresses Shortcomings of Both Job Evaluation and Market Pricing
1
The authors argue that few HR leaders are satisfied with traditional job evaluation, which is timeconsuming, bureaucratic and judgmental. At the same time, the limitations of a pure market pricing
approach to job evaluation are discussed, including its heavy reliance on surveys, accurate job
matches and current data. The authors propose an alternative to both methods — work valuation.
Work valuation recognizes the need to tie work performance to the business goals of the organization.
As such, the authors identify a number of factors for consideration. They believe that work should be
broadly defined and not limited to jobs. Under this approach, different types of work would be valued
instead of jobs, including competencies, roles and teams. Another premise is that the individuals who
know the work the best, i.e., the managers, not internal or external HR consultants, should assess the
value of work. Finally, work valuation can be used as a basis for establishing total compensation
levels, including incentive compensation along with base pay.
Determining Base Compensation: Should You Use Market Value or Internal Equity?
2
Employers typically rely on one of two methodologies to determine a base compensation system for
employees: market value or internal equity. However, as noted by the author, the two approaches are
not mutually exclusive. This article provides useful information and concepts for building a fair and
equitable compensation system taking advantage of the best of both systems. Insights into the pitfalls
to avoid with both internal equity systems (i.e., it is a fairly subjective process) and market-based
compensation systems (i.e., it is a very time-consuming and complex process) are also highlighted.
The Case for Computer-Assisted Market-Based Job Evaluation
3
Computer-assisted market-based job evaluation allows an organization to customize aspects of
traditional job evaluation, computer-assisted job evaluation and market pricing in a way that works to
its best advantage. Executives want to pay competitively and strategically. Market salary management
is based on the external value of key business functions (for example, marketing, engineering,
computer science, accounting). For this reason, a computer-assisted approach is valuable in
estimating the market value of nonbenchmark jobs that point-fact computer-based job evaluation
approaches cannot do. Strategic job value is an optional feature that can add to a job’s competitive
market value the importance of the job in terms of influence on profit, return on assets, quality, sales,
cost or other elements that are central to effective business management. No other approach to job
evaluation has the flexibility to allow for strategic job valuing. The article also points out some of the
reasons that problems exist with traditional job evaluation systems, including the following:
• The plans are predominately point-factor plans that are unresponsive to the market and
strategic job value.
• The methodologies tend to emphasize internal alignment rather than external and true
business issues.
• The salary data are drawn from a broad labor market rather than the organization’s specific
labor market.
Sources
American Compensation Association. (1993). Documenting Job Content: An Approach to Job and Work
Analysis. Scottsdale, AZ: American Management Association.
Milkovitch, G., & Newman, J. (2002). Compensation, Seventh Edition. San Francisco: McGraw-Hill
Higher Education.
Pritchard, K. (2002, July). Introduction to market pricing. Retrieved June 10, 2004, from
www.shrm.org/hrresources/whitepapers_published/CMS_000054.asp#P-4_0
Pritchard, K. (2001, May). Introduction to work (job) analysis. Retrieved June 10, 2004, from
www.shrm.org/hrresources/whitepapers_published/CMS_000055.asp#P-4_0
Endnotes
Heneman, R., & LeBlanc, P. (2003). Work valuation addresses shortcomings of both job evaluation
and market pricing. Compensation and Benefits Review, 35, 1, 7-11.
1
Determining base compensation: Should you use market value or internal equity? Interview with
James C. Fox, Fox Lawson & Associates and Employee Benefit Plan Review. (2002). Employee Benefit
Plan Review, 57, 5, 4-5.
2
Schuster, J., Zingheim, P., & Dertien, M. (1990). The case for computer-assisted market-based job
evaluation. Compensation and Benefits Review, 22, 3, 44-54.
3
Author: Leslie A. Weatherly, SPHR, SHRM Research Department
Also in the Compensations Series:
Part I: Job Analysis
Part II: Job Evaluation
Compensation Trends
SHRM White Paper
1/1/2006
By Catherine Dovey, CCP, SPHR
The business world continues to be extremely competitive, and businesses are constantly looking at
ways to maintain a competitive edge. The job market has picked up. Merit increases have gone up
slightly, with 3.5% projected for 2006 by Watson Wyatt and World at Work. Benefits costs continue
to outpace inflation and are projected to continue to increase at this pace in the future. Managers are
asked to do more with less. At the same time, we have mission and value statements that say that
employees are our most valuable assets. How do we keep our costs in line while rewarding
employees?
Start With a Clear Compensation Strategy
When faced with tough economic times, managers get pressure from all sidesemployees, partners,
vendors, distributors, stockholders and suppliers. Having a formal compensation philosophy can help
organizations navigate through pay decisions when business pressures escalate.
A strong compensation philosophy is typically linked to an organizations mission and core
competencies. For example, if research and development is what differentiates an organization from
its competitors, that organization may have a history of hiring the best R&D staff and being willing to
pay for them. Another organization might compete primarily on price and have a philosophy of
paying low to help keep the cost structure in line. Having this philosophical discussion with key
decision makers before linking pay into the discussion can make the pay decision process much
simpler.
Traditional Compensation Plans Are Most Common
A recent survey 1 reported that 80% of organizations are using the 40 th to 60 th percentile to target
base pay. Only 9% of organizations are using broadbands (defined as a range width of 100% or
more), and only 7% use competency-based pay. Fifty percent of companies nationally use traditional
job evaluation techniques such as point factor and whole job systems. Skill-based pay, career
banding and job family systems are still in the single digits, according to this survey.
In spite of the all the articles about new compensation techniques like broadbanding and
competency-based pay, traditional pay plans are still the most common. Some of these new
approaches have had unexpected long-term consequences, such as increased salary or
administration costs. In addition, new or unusual plans can be difficult to communicate and may not
be as easily understood by managers or employees. When it comes to base pay plans, traditional
plans continue to win out. However, organizations should look at building pay systems that support
their goals rather than implementing plans that happen to work well in other organizations.
Merit Budgets Slightly Stronger
Merit budgets are increasing slightly, but are still in the 3.5% to 4% range for most industries in
most parts of the United States. This means that theres not much in the way of pay increases to
spread around. The difference between earning a 3% increase and a 4% increase is unlikely to drive
behavior changes.
So what are some of the alternatives that will allow organizations to reward their highest performers?
Some organizations are linking much larger pay increases to their very highest performers and giving
a little less to the average performers.
Consider using a merit matrix with variable timing. Average performers might get a 5% increase in
18 months, rather than getting a 3% increase every 12 months. Top performers might still receive an
increase every 12 months.
Another alternative is to look at changing the number of performance levels used. The majority of
organizations in the United States use a five-point scale to measure performance. 2 However, with
very small pay increases, it is easier to get a more meaningful differentiation with a three- or fourpoint scale.
Performance Is King
Several studies have shown that there is a direct correlation between high-performing companies and
the time spent on employee performance management. 3 Based on a study conducted by Frank
Russell company, Fortune magazines 100 Best Companies to Work For outperformed the Standard
and Poors 500 by over 430%. 4
Although there are exceptions, most employees dont get out of bed in the morning thinking, Im
going go waste my energy and mess things up at work today. Employees generally want to do a good
job and have a positive impact. Often employees simply dont know what the most critical priorities
are or whether they are spending their time and energy on work that will have a lasting impact on
organizational success. High-performing organizations spend more time communicating with
employees about organizational strategies and linking employee performance to organizational
outcomes. 5
Variable Pay Use Grows
Were continuing to see an increase in the use of variable pay, such as profitsharing, small group
incentives, gainsharing, goalsharing, lump-sum awards and other incentives. Based on a recent
survey, the percentage of companies offering one or more variable pay plans have increased 16%
since 2001. 6 The basic idea behind variable pay is that organizations can share their success when
performance is good without increasing salaries (fixed costs) for future periods. This approach has
become very useful in recent years as the economy has shifted and organizations have needed the
ability to adapt quickly to changing market pressures.
The most common variable pay programs are lump-sum merit awards that are given in lieu of addto-base pay increases for high performers or for individuals who are at the top of their pay range.
In spite of the increase in variable pay plans, most nonexempt employees still earn a very small
amount of their total pay in variable pay form, typically about 5% of base pay. Exempt staff have a
higher percentage of pay at risk, 10% to 12%. 7 Although the percentage of pay may be perceived as
relatively small, the message seems to come through clearly. Employees have more clarity about
what they need to do to earn incentives or rewards. As long as those incentives are linked to
organizational outcomes, there is likely to be a positive effect on organizational performance.
Communication Is Critical
Employees today have access to more data than ever before. In the last few years, HR professionals
have seen an increase in the number of employees who come in and express concern about being
underpaid. While most organizations communicate with employees once a year about the annual
merit pay adjustment, many employees get information more frequently from the Internet. Even
without intentionally looking for it, employees might find themselves on Web sites telling them what
their correct rate of pay is. The salary information on the Internet is not always accurate. First, much
of the data is self-reported, so anyone can report any wage and have it included in the database. The
other issue is that data on the Web often reflects national salary data adjusted based on the cost of
living or average pay rates. While this method may work well in some circumstances, different parts
of the country have different demand for certain skill sets, and this results in pay rates that do not
conform to national averages.
As HR professionals, we can help to educate employees about their pay. We should be talking about
pay rates and trends. If we review survey data and do not make pay structure changes, we should let
employees know that we did the analysis and concluded that their pay rates were competitive.
Employees need assurance that we are monitoring our pay systems and will make adjustments when
they are appropriate.
Keep Your Eye on the Future
Organizations can sometimes be penny-wise and pound-foolish when it comes to current pay levels
and employment policies. At the present time, unemployment has flattened out, and employers are
beginning to have difficulty hiring staff. Most economists and futurist are predicting significant skills
shortage in the near term.
An organizations reputation as an employer doesnt turn on a dime. The job applicants who are
applying to our organizations today will likely be the folks who will be talking to other applicants a
year or more from now. Weve all heard folks talking about how badly they were treated by an
organization or how low the pay is. Organizations have an opportunity to establish a reputation as an
employer of choice before the labor market gets even tighter.
Scott, D., & Hay Group, LLC. (2003, March). Survey of compensation policies and practices.
Scottsdale, AZ: WorldatWork.
1
Shafer, P., & Campbell, B. (2004, May). Paying for performance 2003-2004. WorldatWork and
Hewitt Associates.
2
3
Kotter, J., & Heskett, J. (1992). Corporate culture and performance. New York: The Free Press.
Frank Russell Company. (2004). Transforming your organization: Creating a great place to work.
Delivered by Robert Levering at the Building Trust Conference in Washington, D.C., on April 14,
2004.
4
Becker, B., Huselid, M., & Ulrich, D. (2001). The HR scorecard: Linking people, strategy, and
performance. Boston: Harvard Business School Press.
5
6
WorldatWork. 2004-05 Salary Budget Survey. Scottsdale, AZ: Author.
7
Ibid.
Catherine Dovey, CCP, SPHR, is principal at Dovey HR Strategies, a Seattle-based human resource
management consulting firm. She is also a member of SHRMs Total Rewards/Compensation and
Benefits Special Expertise Panel.
This white paper was originally written in December 2004 and was last updated in January 2006. It is
intended as information only and is not a substitute for legal or other professional advice. The
interpretations, conclusions and recommendations in this paper are those of the author and do not
necessarily represent those of SHRM. All content is for informational use only and is not to be
construed as a guaranteed outcome. SHRM can not accept any responsibility for any errors or
omissions or any liability resulting from the use or misuse of any such information.
Broadbanding
SHRM White Paper
3/1/1993
By Sandra L. O'Neil, SPHR, Revised June 2001 and Reviewed July 2002
The term "broadbanding" has no single definition. Generally it refers to the melding of job clusters
or tiers of positions into relatively wide bands of pay ranges for the express purpose of gaining
flexibility in managing career growth and administering base pay. In effect the bands are
implemented as an alternative to traditional pay grade structures.
Banding collapses a number of pay ranges in a traditional structure into a few broad bands, each
spanning the pay opportunity formerly covered by several separate pay ranges. There is no
standard definition for "a few bands," nor is there a common number of bands from one
organization to another. Nonetheless, companies adopting this approach generally have reduced
the number of pay ranges by one half to two thirds. For example, a company with twelve exempt
grades may only use four or five exempt bands.
As with traditional ranges, the spread of a broadband can vary. It is often around 100 percent, but
may be as narrow as 75 percent or wider than 125 percent or even 200 percent. In broadbands
with range spreads of over 100 percent, the conventional midpoint loses much of its value as a
reference or control point for all jobs in that band.
Why Consider Broadbanding?
Do broadbands represent a significant improvement over traditional pay range structures? Or are
they just a "cosmetic" change? Since broadbanding is still relatively new, its long-term
effectiveness and desirability is still debated by HR professionals. Regardless there are several
needs in the business community that sustain the use of broadband structures.
The Need to Re-examine Reward System Values
Banding requires a re-examination of reward system values, approaches and processes. For most
organizations, that means challenging a support system that has been in place a long time and
very likely looks like all the others. So, why change to banding? Many employers have sound,
strategic reasons for maintaining a traditional compensation system, including the fact that their
organization hierarchy and career development system remain stable and unchallenged. But a
number of organizations in the midst of significant transformation seek an alternative pay
structure to fit a markedly changed organizational culture. For them, neither status quo nor
incremental change is the answer. An all-new direction must be considered.
The Need to Shift Employees' Focus From Forever Higher Pay Grades to Genuine Career Growth
In many organizations, employees are facing fewer advancement opportunities. This is due to a
number of factors, such as the wave of baby boomers bottlenecked in middle- management jobs.
Also, as organizations become leaner and flatter, many promotional opportunities have
disappeared as a result of mergers, restructuring and downsizing. Broadbands help reset employee
expectations and create realistic career aspirations by redefining promotional opportunities.
With fewer bands, employees recognize that promotions (as only defined by a change to higher
grade level) will occur less frequently than before. Also, since the broadbands are typically further
apart than traditional ranges, employees recognize that they must assume significantly greater job
responsibilities to warrant placement in a higher band.
The Need to Encourage a Broadly Skilled Work Force
Companies have to react quickly to competitive challenge. By necessity, employees must be
broadly skilled and adaptive. Companies whose employees are trained to quickly assume new
tasks and projects will be better positioned to compete effectively than companies whose
employees resist these job changes.
Traditional ranges may inhibit skill acquisition and cross training since jobs are narrowly defined
and employees have come to expect a higher pay grade (i.e., promotion) for assuming new or
different duties and responsibilities. Employees may be reluctant to acquire new skills or consider a
new job if the change does not offer a promotion to a higher grade and range. By removing the
numerous and visible classifications among jobs, broadbanding systems encourage employees to
evaluate skill acquisition and cross-training opportunities in terms of their potential for professional
development and personal growth--rather than to simply ask, "Will this move get me into a higher
grade?"
The Need to Pay the Person
Traditional pay structures link an individual's pay through such processes as job evaluation,
market pricing and structure design. This linkage implicitly assumes that the set of responsibilities
and specifications for a job is relatively stable and that there is a "fit" between the employee and
the job. However, most jobs are dynamic, and it is not unusual to find that employees in the same
job possess different skills and qualifications.
Traditional systems overlook the influence an individual has over the content of his or her job and
thus mismatches can and do occur. A banding system provides a wider spread of pay opportunity
in which to recognize and reward different levels of individual contribution. There is room for
employees to enhance or enlarge their jobs without bumping into the grade range maximum.
Broadbands enable companies to base pay decisions on the person performing the job instead of
on the job itself.
The Need to Reduce Administrative Effort
The temptation by managers to request the reevaluation of jobs, based on minor changes in job
responsibility, has increased in recent years due to relatively "tight" merit increase budgets.
Compensation staff and other managers are seeking to reduce the time required to analyze such
minor job changes and to focus instead on jobs that are undergoing significant redesign as might
occur in an organizational restructuring.
In a broadbanding system, jobs still need to be classified. But with fewer groupings, the task of
evaluating jobs becomes easier. Companies may not need complex job evaluation systems such as
point-factor plans to measure and value their jobs. Instead, they may use a combination of
ranking-to-market and whole job slotting to complete this task. Of course, companies using these
methods should not stop documenting the content of jobs, as job descriptions remain useful and
valuable management tools.
Potential Drawbacks
There are some aspects of broadbanding that potentially are problematic. First, traditional pay
grades form clear and distinct boundaries within organizations. These boundaries often delineate
eligibility for management incentives, perquisites or other similar rewards, and there may be
resistance to a new set of rules.
Broadbands will also send different messages to employees with regard to job values. Employees
formerly in higher grade levels may think broadbanding has devalued their jobs by placing them
into a group with formerly lower level employees. Employees formerly in lower grade levels may
mistakenly anticipate a windfall pay increase because of the wider range for the assigned band and
the fact that they share the band with previously higher graded employees or with their immediate
supervisor.
Also, under a traditional structure, narrow range spreads serve as an automatic cost-control
mechanism for base pay. Employers need to be aware that with broadbanding there is the
potential for all employees to float to the maximum, which for many jobs in the band would be
much higher than market value. As such, employers adopting broadbanding need to develop other
cost-control and total payroll planning strategies.
Competitive pay analyses present a special difficulty under broadbanding. The use of market pay
data increases, and there is a greater need for market comparisons and the ability of non-HR
managers to use and interpret market data.
Managing Pay: The Key Issue
The single biggest issue related to broadbanding is the loss of the pay range midpoint as a
barometer of external competitiveness and as a control point for salary planning.
As an alternative to midpoints, some companies establish specific zones or control points within a
band. These reference points, sometimes called "targets," frequently become the primary if not
sole guidance for managers making pay decisions. For example, presume there is a salary band
from $20,000 to $42,000. There could be two target jobs within this salary band: Target Job A
with a minimum target of $31,500, a maximum target of $38,500 and an external value of
$35,000; and Target Job B with a minimum target of $22,500, a maximum target of $27,500 and
an external value of $25,000. Unlike traditional ranges, it is possible for employees in Job A or B to
be compensated outside of these targets without the need for special approvals or procedures. The
targets are intended as guides, not mandates, for managers making pay decisions.
For most companies, broadbanding represents an extraordinary cultural change. They introduce
broadbands because they believe bands make better business sense. It is important to carefully
weigh the strategic effectiveness of the current system versus the flexibility and management
philosophy underlying a broadband system.
Sandra L. O'Neil, SPHR, Member, SHRM Compensation and Benefits Committee, and Principal, HR
Associates, a Miami, Florida based human resources management consulting firm. This paper is
intended as general information, and is not a substitute for legal or other professional advice.
Finding the Right Method for Team Compensation
SHRM White Paper
12/1/2004
By Larry S. Carlton, DBA, SPHR
Introduction
Human resource managers are responsible for designing total compensation packages that must
simultaneously meet employee expectations of adequate compensation while achieving employer
goals of containing labor costs and retaining a fully competent workforce. It may appear a simple
matter to meet both objectives, but in practice the concept involves a complicated array of issues
emerging from both within and beyond the workplace. HR managers need to consider the
dynamics of social contracts, personality types, industry standards, employee expectations,
competitive imperatives, cultural and national diversity, legal requirements and a myriad of other
interrelated issues in order to fully meet organizational needs.
The purpose of this white paper is to simplify this maze by outlining some of the basic concepts in
developing a team-based compensation package. In order to provide some framework in which to
understand the dynamics of compensation development, the following topics will be explored:
Individual versus team compensation.
Types of teams.
Types of team compensation programs.
Examples of possible team compensation approaches.
In exploring the broad challenge of developing team compensation packages, a systematic
approach to some of the underlying issues may help HR professionals come to terms with the
many dynamics affecting effective integration of compensation policies with organizational
strategic objectives. This paper will attempt to provide such a framework as a beginning approach
to developing effective total compensation packages for team-based business units.
Individual Versus Team Compensation
While team-based organizational units are not new in the global workplace, they are becoming
increasingly popular as business continues to evolve in a competitive transnational environment.
Much has been written in the past two decades about the benefits of team orientation, especially in
the wake of such popular approaches as Total Quality Management (TQM), ISO 900(x) certification
and a myriad of other (albeit some unabashedly faddish) trends in organizational design. The
element that ties all of these sometimes disparate organizational approaches is the imperative to
remain competitive in an increasingly global market. American firms, in particular, have been
undergoing a remarkable wave of reengineering efforts that have transformed the workplace in
ways perhaps unimagined in past decades.
In some ways this transformation in the American workplace may seem remarkably un-American.
After all, American culture and history are filled with examples of rugged individualism and the
demand for the recognition of individual effort. On the other hand, teamwork is also highly
regarded as the way America works. Perhaps the ultimate example of how Americans resolve this
apparent individual versus team dichotomy is the modern professional sports team. Individual
players, often referred to as superstars, command stratospheric salaries and are afforded rarely
paralleled adulation. Yet, even the top performers depend on the efforts of other team members in
order to reach their remarkable achievements. A superstar receives numerous awards and a
multimillion dollar salary for maintaining double-digit scoring averages, but would be hard-pressed
to perform at a similar level without the blocking, rebounding and passing contributions of the
other team members.
It is misleading, however, to carry the professional sports analogy too far in discussing business
entities. It is therefore important to design company compensation packages based on a realistic
comparison of real people working in normal jobs. According to Milkovich and Newman (2004, pp.
286-287), most employees believe that pay should somehow be tied to performance. The authors
cite numerous studies supporting this idea. The challenge to HR professionals is in the design of
compensation packages that recognize individual effort within the framework of developing team
reward criteria.
Caudron (1994, p. 40) cites a common dilemma in establishing team-based pay systems:
Unfortunately, in most companies today the compensation system is based on paying employees
for their individual performance. This makes it hard for workers to buy into the team concept. Why
should they become team players if they are still going to be reviewed and paid based on
individual merit? She explains that in her research examples of group incentive plans are relatively
rare. Even companies that have extensive experience in developing self-directed work teams have
not significantly changed the compensation systems that support a team structure. She cites
several examples of organizations that have attempted to switch to a team-based approach,
explaining the difficulties of the transformation in each experience and what organizations continue
to experience in the endeavor.
Milkovich (2002, pp. 309-311) outlines five typical causes for the failure of team-based
approaches. First, there is great variety in team composition. Teams can be full-time, temporary,
project-specific, cross-functional or can take a variety of other visages. The lack of standardization
leads to lack of definition of what a team actually means.
Secondly, there is a level problem. This term defines the difficulty in determining optimum group
size. Too largeand individuals are unlikely to see how their inputs can significantly affect group
performance. Too smalland groups tend to engage in unwanted behaviors (such as hoarding best
performers and resisting the introduction of new members). Additionally, it is difficult to design
effective rewards for groups that have different objectives.
A third problem comes with the inherent complexity of the team compensation plan. In practice,
developing team plans can become overly complicated in the effort to ensure equity-based
performance. Perhaps because the typical American business culture is so deeply rooted in the
idea of rewarding individual performance, some plans develop very complex equations to
accommodate individual-within-the-group performance.
Fourth, there is the problem of team control. It is difficult to base team rewards on quantitative
objectives when the achievement of those objectives depends on factors beyond the teams
control. For example, rewarding a farm-worker team on the basis of total bushels picked may be
considered grossly unfair when the team is penalized for bad weather conditions.
The final common problem involves effective communication of the compensation plan. Most
organizational design teams devote more time to developing the mechanics of the compensation
plan than to explaining it to employees, with an accompanying confusion on the part of employees
as to how the compensation plan actually works.
Types of Teams
Adding to the difficulty of determining team-based compensation policies is the underlying problem
of defining exactly what a team is. Shonk (1992, p. 1) defines a team as two or more persons who
must coordinate their activities to accomplish a common goal. While this definition may appear
somewhat simplistic, focusing on the key term coordinate helps an HR manager grasp the concept.
A highly integrated group of people who continuously coordinate their individual activities to
achieve group objectives is one way to begin the process of defining teams. Shonk (1992, pp. 4-5)
goes on to explore some reasons why team-based organizations are important. There are several
compelling reasons why organizations adopt team structures, including increased quality,
flexibility, coordination, productivity, employee satisfaction and development, and decreased costs.
More importantly, in practice, teams might take form of many structures, including (Shonk, 1992,
pp. 27-31):
Suggestion teams are temporarily chartered to develop solutions to particular problems, but are
usually not given authority to implement those solutions.
Problem-solving teams are similar to the above, but are often given at least limited autonomy in
implementing the recommended solutions.
Semiautonomous teams usually have significant inputs into the planning, organizing and
controlling functions affecting work unit issues.
Self-managing teams are fully responsible for managing their daily activities. These teams have
great leeway in setting goals, allocating resources, hiring and replacing team members and
recommending solutions to external problems.
It is apparent that the above teams are defined by the level of autonomy they have in addressing
work-related issues. For managers, this is one approach to defining the structure of groups in
order to allocate a fair compensation strategy for rewarding group results.
There are numerous other approaches to defining teams. Teams can be formed along functional
lines, cross-functional alignment, geographic boundaries, product lines or other defined
parameters. It makes sense, then, for the HR manager to help define a team approach that is
germane to the type of work being done and to enlist the employees in determining what those
parameters should be. One common theme in the literature of team development is the
importance of enlisting employee inputs in determining team structure.
Another key component in developing team structure is alignment with corporate strategic
direction. James Fairfield-Sonn of the University of Hartford highlights the importance of linking
strategy to team development, regardless of the size of the company or the nature of its essential
business. He cites two examples of companies with widely different structures. One is a
manufacturing concern producing plumbing, heating and air conditioning supplies. The other is an
entity providing residential rehabilitation services for inmates convicted of substance-abuse-related
crimes. While radically different in basic structure and organization, both of these concerns
redesigned the way in which work is accomplished by developing team-based structures aligned
with basic strategic direction. The author concludes with the observation that a team-based
approach to complete work is neither inherently good nor inherently bad, but it is critically
important to form teams made up of individuals who are convinced of the utility of team-based
approaches and who have a clear understanding of how team achievement links to overall
organizational goals.
Types of Team Compensation Programs
Just as it is difficult to clearly describe team components, it is similarly difficult to clearly
determine how to best compensate teams. Milkovich (2002, pp. 308-309) asks the basic question
of whether or not any incentive plan actually boosts performance. He determines that the answer
is undoubtedly yes, but he is equally emphatic in describing the intrinsic difficulties of assigning
fair distribution of group rewards to individual performance. He goes on to outline several
quantitative approaches that have had some success in the business environment.
One such approach is the gain-share plan. In this construct, employees are rewarded when the
team achieves some type of quantifiable performance gain. Often, this is tied to gains in profits.
Other measures may include reduced waste and scrap, lower labor costs, increased market share,
etc. According to Milkovich, some of the key elements of a gain-share plan include:
Strength of reinforcement, implying that incentive pay should be tied to behaviors that help
achieve team objectives.
Productivity standards that are clearly defined and accepted by employees as fair.
Equitable share between management and employees, including provisions for emergency
reserves to cover lean production periods.
Scope of the formula to ensure reasonably broad types of productivity and ensuring that
counterproductive behaviors are not encouraged.
Perceived fairness that includes all reasonably involved contributors.
Ease of administration to preclude communication difficulties.
Production variability measures that account for production volatility.
Another approach to the problem is the Scanlon Plan. This approach is designed to lower labor
costs without lowering the level of activity (Milkovich, 2002, pp. 313-314). Incentives are a
function of payroll costs divided by net sales. The resulting figures are adjusted to provide a split
between team members and the company, with provisions to provide some emergency reserves to
compensate for periods of low productivity.
Similar to the Scanlon Plan is the Rucker Plan, which uses a more complex calculation to determine
group productivity. In this plan, production bonuses are determined by the ratio between the total
wage bill and the value of the total production. Bonuses are tied to the amounts over projected
value of production that can be directly tied to the contribution of labor.
Improshare ( improved productivity through sharing) is a newer gain-share plan that Milkovitch
says is easy to administer. Plan developers find a standard of production that reliably predicts the
expected number of hours required to produce a predetermined output. Employees are rewarded
for besting that standard in a 50/50 split with management.
Earnings-at-risk plans are still another approach to group incentives. Milkovich (2002, pp. 317318) cautions against separating this approach from the others because, in a sense, all incentive
plans are based on the risk that production will fail to meet expectations, with an accompanying
drop in wage levels. However, it is also important to remark that there are a large variety of ways
to tie performance gains to group activities that cannot be neatly categorized in one of the gainshare plans mentioned above.
From the above examples, it is easy to understand how complex the team compensation equation
can be. For HR managers it is imperative to align all of the various components of a team-based
structure to ensure that the essential elements of efficiency, equity and compliance are included in
compensation development.
Examples of Previously Successful Team Compensation Programs
By now, it should be evident that there is tremendous variety in the way team-based
compensation programs are structured and implemented. It is even possible to say that each
company devising such a team-based plan is unique. Nevertheless, it is helpful to explore some
actual examples of how different companies have implemented these strategies.
Zenith Electronics Corporation developed a pilot program to test a new compensation program
based on project equity (The Management Roundtable, 1997). The initiative came as a result of a
billion-dollar contract Zenith won to develop a system of delivering digital technology to consumers
via a single in-home setup box. Devising a series of milestone-related incentives, each full- and
part-time team member was given a specific number of shares that would eventually convert into
substantial bonuses, providing the team reached each of its predetermined milestones. In addition,
about 30 percent of the total available shares were reserved to reward particularly outstanding
individual performance in meeting team goals. The company was careful to build flexibility in the
pilot program to ensure that the incentive plan succeeded in motivating employees to keep
performing at a high level, especially in light of the many changes that had to be made in response
to changing customer requirements. In the end, the company met all of its objectives and is
currently planning to expand on this initial success in future endeavors.
General Motors (GM) created a new set of team incentive programs in its Saturn Corporation
subsidiary (Overman, 1995). The first of GMs divisions organized completely along self-directed
work teams, the company had great leeway in developing an entirely new (for GM) compensation
program. The new plan was developed with base pay, risk pay and reward pay components. While
base pay lags the competitive market, overall compensation can be substantially above the
prevailing market rate. At its inception, risk pay was set at five percent of total compensation pay,
but subsequently was increased to 10 percent. The company credits an extensive team training
curriculum coupled with a general perception that the rewards system is fairly administered to the
success of the novel program.
Sales organizations present unique problems to HR managers charged with developing a teambased compensation system. By long-standing tradition, most sales-oriented units are very closely
aligned with an individual incentive plan. Wally Wood (1994) outlines some successful strategies
sales forces have used to reengineer along team-based lines. Monroe Auto Equipment Co. in
Monroe, Michigan, effectively implemented a 100 percent team plan for its sales force. The
company decided that freeloaders was a sales-management problem, not a sales-compensation
issue and pays each team member equally based on team performance. At least at Monroe, this
approach has proven successful: the company regularly secures the highest market share and
margins within its territory. Another company, The Alexander Group, realized success by
reengineering its sales force along customer lines. By redefining the customer base, the company
was able to focus sales teams on the most likely targets for their medical products, with
accompanying increases in team success. Wood cites several other examples of successful
transitions of sales organization from individual to team-based compensation programs. He finds
that companies ranging from small furniture outlets to behemoths like Hewlett-Packard can
successfully make this transition, provided top management clearly explains the importance of the
change and consistently applies the team-based formula.
So Now What?
Developing a team-based compensation plan is inherently difficult for many reasons. Foremost
among these are overcoming traditional reliance on individual-based pay and the difficulties in
devising formulas that accurately reflect individual contribution in a team environment. As with all
compensation issues, it is critically important to meet the standards of efficiency, equity and
compliance in establishing group performance plans. While this paper cannot claim to encompass
all of the critical issues involved, it can serve to help HR professionals begin the arduous process of
developing a team-based approach. Some common elements recur throughout the existing
research material on this subject.
Team compensation must reinforce appropriate behaviors.
Team objectives must be unambiguously aligned with overall strategic goals.
Development of team compensation plans should coincide with other internal reengineering efforts
that together reinforce the new team-based organizational structure.
There is no single best way to implement team plans. Each must account for a wide difference in
corporate goals, ability to pay, environmental variables and more.
The organization leaders must have a strong conviction that these changes are necessary to
achieve long-term organizational needs.
Lastly, and probably most importantly, the redesigned plan must be accurately communicated to
all affected employees to ensure commitment and acceptance of the plan.
Bibliography
Cauldron, S. (1994, October). Tie individual pay to team success. Personnel Journal, 73(10), pp.
40-46.
Fairfield-Sonn, J. (Date undetermined). Moving toward a team-based organization: linking strategy
and structure. Retrieved from http://blue.temple.edu/~eastern/fairnet.html .
Milkovich, G. T., & Newman, J. M. (2002). Pay for performance plans. In Compensation (7
pp. 307-351. Boston: Irwin McGraw-Hill.
th
ed.),
Overman, Stephanie. (1995, March). Saturn teams working and profiting. HR Magazine, 40(3),
p.73.
Shonk, J. H. (1992). Team-based organizations. Homewood, Il: Business One Irwin.
The Management Roundtable. (1997). Zenith rewards key project team with project-based shares.
Retrieved from http://navibar.mapnavibar.map.html
Wood, W. (1994, April). Reinventing the sales force. Across the board 31(4) , p. 24.
SHRM wishes to thank Larry S. Carlton, DBA, SPHR for contributing this paper. This paper is
intended to provide general information and is not a substitute for legal or other professional
advice.
Larry Carlton is an Associate Professor with the Extended Campus of Embry-Riddle Aeronautical
University. He holds a B.S. and M.S. in Human Resources and a DBA. Mr. Carlton is Vice President
of HR for Bio Tech Services, Inc. and the 2003/2004 President of the Sumter HR Management
Association.
Fundamentals of Employee Recognition
SHRM White Paper
5/1/2005
By Teresa A. Daniel, J.D. and Gary S. Metcalf, Ph.D.
Introduction
Rewards Get Results
There are two things that people want more than sex and moneyand that is recognition and praise.
This observation is attributed to Mary Kay Ash, the successful founder of Mary Kay Cosmetics, but
could have been made by any number of HR professionals who know this statement to be true.
High-performance companies understand the importance of offering awards and incentives that
recognize, validate and value outstanding work. They keep employees motivated and are effective
methods of reinforcing company expectations and goals, especially in times when merit budgets are
low (or even frozen), promotions are rare, health care premiums are on the rise and overall job
satisfaction is low.
According to the latest research, nearly nine out of 10 companies offer some sort of recognition
programs for employees. From informal programs (a simple thank you) to formal programs (such
as service recognition or above-and-beyond performance programs), companies are using
everything from plaques to vacation packages, merchandise to spa certificates as a way to say,
Nice job!
For a program to be effective, however, it must create value. This means that any program must
have a performance componentor it will be meaningless. While many managers, including those in
HR, sometimes dismiss recognition and reward programs as feel-good activities, evidence suggests
that there is a strong link between noncash awards and incentives and improved job performance.
In fact, nearly all of the companies responding in the 2003 National Association for Employee
Recognition/WorldatWork study reported aligning recognition strategies directly to the overall
strategy of the organization. This indicates that companies are thinking very strategically about the
programs they implement and the impact those programs can have on the success of their
organizations.
Noncash awards and incentivesranging from a note to the employee that says, Good job to a gift
certificate for a nice dinnercan be a cost-effective and valuable tool that can help raise employee
morale, lower stress, absenteeism and turnover, and increase productivity, competitiveness,
revenue and profits. If you look at companies that people love to work for, you will find that these
are the companies that recognize their people and not only tell them that they are doing a great
job, but show their appreciation through tangible signals such as incentives, recognition and
rewards.
Rationale for Implementing a Recognition Program
In the 2003 National Recognition Survey, sponsored by WorldatWork and the National Association
for Employee Recognition (NAER), 87% of the 413 responding companies reported that they had
some form of an employee recognition program and 40% of the respondents indicated that they
were expanding their programs. Companies hope to achieve a number of results through their
recognition programs, but creating a positive work environment was the top reason cited in this
survey (80%). Other goals included creating a culture of recognition (76%), motivating high
performance (75%), reinforcing desired behaviors (75%), increasing employee morale (71%),
supporting the organizations mission and values (66%), increasing retention/decreasing turnover
(51%), encouraging loyalty (40%), supporting a culture change (24%) and other (5%).
Companies have also cited a number of additional reasons for adopting these types of programs,
including the following: reducing costs; attracting and retaining key employees; increasing
employee productivity, competitiveness, revenues and profitability; improving quality, safety and
customer service; and lowering stress, absenteeism and turnover.
While it is clear that employees benefit from these types of programs, it is the companies adopting
them that benefit the most. Findings from a recent Watson Wyatt Worldwide study indicate that
companies with an effective recognition program in place realized a median return to shareholders
that was almost double that of companies that did not have any such programs in place.
Keys to an Effective Program
Employees not only want good pay and benefits, they also want to be valued and appreciated for
their work, to be treated fairly, to do work that is important, and to have opportunities for
advancement and involvement in the company. Recognition and reward programs play an
important role in organizational success by helping attract and retain high-performing employees.
An effective recognition program should meet several essential criteria, as outlined below.
1. Management Commitment
Managers must commit credible and sufficient resources to any incentive program. The road to
results begins with resources. Simply put, management backing is the key ingredient. Managers
must dedicate the resources, including the time it takes to plan and execute a program. And
managers must provide something elsegive employees and supervisors the power to run the
program.
2. Link to Bottom-Line Results of the Company
To be effective, any program must connect with the needs and expectations of the workforce, as
well as the companys overall goals and strategies. If there is no direct link to the bottom-line
results of the company and no performance measures to establish this link, employees will be left
wondering why the company is offering a program that is so disconnected from their day-to-day
reality and the company will get no meaningful payback on its investment.
3. Recognized Value of Awards to Employees
Employees must understand the missionwhy the incentive program is being launched. They must
be convinced that the chosen recognition system is appropriate for the sacrifices that will be
expected in order to achieve the programs goals. The way to make this happen and get buy-in at
the same time is to give employees ownership of the program. Employees must have some
opportunity to make decisions and exert control over the programs direction. Any materialistic
awards and rewards must be valued by all participants and perceived as having value, dignity and
meaning. A recognition system begins to falter when employees start thinking that their actions are
being insulted by inconsequential incentives.
4. Fairness/Equity in Distribution of Awards
The participants in the program must believe that the system of recognition is just and objective.
To achieve this, all employees who meet the criteria outlined for receiving the award should be
included and recognized. Some companies even include employees in the selection of incentive
recipients and also in the determination of selection criteria.
5. Simplicity of Program
The entire incentive process should be thoroughly maintained with a minimum of administrative
effort. Keep it simple. Any system that requires either excessive management control, financial
calculations that require complex gyrations or sophisticated plans that require exceptional employee
understanding will not achieve desired results.
6. Continuous Evaluation/Improvement
Programs must be continuously monitored in order to keep them relevant and current. The
evaluative process should include a review of the following types of questions: Does the program
provide rewards that are adequate, fair, competitive and appropriate? Have the programs
objectives been met? Has it helped to change processes and/or did it support the companys other
performance initiatives? Are there appropriate levels of communication? Was there a celebration?
Do employees find the program to be meaningful? What would you do differently the next time?
This evaluative process should be completed at the conclusion of every award cycle so that
adjustments can be made to improve the system and also to update the program to retain
employee interest.
What Makes a Good Reward? Be SMART
Recognition can be delivered in a number of ways, but to be truly effective, it should be delivered in
a SSMART way (with credit to Jim Brintnall for this acronym):
1. Supports Organizational Goals and Values
Any incentives or recognition awards will be most successful when they are congruent with the
organizations stated mission, vision, values and goals. It is important that employees see a clear
connection between what management says is important and what is actually rewarded at work.
2. Sincere and Simple
Be sure that the awards are appropriate for your culture and that they are given in a sincere and
heartfelt manner. Managers and supervisors often fail to give recognition because they dont know
what to say. A simple recipe for recognition can work magic in your organization: thank the
employee by name; state what the employee did to earn the recognition; explain how you felt
about the employees behavior; state how the behavior added value to the company; and thank the
employee again by name. Calling the person by name and letting him or her know that you
personally value the effort can be as motivating as the actual reward.
3. Meaningful
An employee who completes a two-year project should be rewarded in a more substantial way than
an employee who simply does a favor for his or her manager. Beware of canned award or incentive
programs. Company cultures differ greatly, and what works in one environment may fail woefully in
another. The reward must be meaningful to the individual receiving it. Since all of us are different,
it is incumbent on the persons manager to learn enough about his or her subordinates to know
what types of things motivate them and what they would find important. Beware, though, of the
form letter. One quick thank you note on a managers personal stationery will have much more
impact than a cup with the companys logo and a form letter. The way the reward is delivered can
make or break the programpeople can be more motivated by a single act of personal consideration
by their manager than by a large cash bonus that is delivered poorly.
4. Adaptable
In addition, certain groups of employees may not be motivated by all of the companys incentives.
As a result, it is important to offer a variety of incentives and recognition opportunities in order to
meet the varying needs of the workforce. For example, Generation X employees (those born
between 1966 and 1978 and who have earned a reputation for their lack of commitment to
organizations in terms of time and loyalty) are more likely to be motivated by time off than money,
while older workers will likely find the bonus incentives more attractive.
5. Relevant
The things that get rewarded are the things that get done. It is critical to decide what behaviors to
reward and then to reward them consistently. Be specific as to why the reward is being givenwhat
behavior occurred that is being reinforced?
6. Timely
The reward or recognition should be made as close to the time of the desired behavior as humanly
possible in order to strengthen the link between the employees action and the result to the
company.
Conclusions
The most effective ways to motivate employees to achieve the desired goals of the organization
include creating an environment with strong, respectful and supportive relationships between the
organizations managers/supervisors and employees and a focus on genuine expressions of
appreciation for specific employee achievements, service milestones and a day-to-day
acknowledgement of performance excellence. In a nutshell, a positive employee reward and
recognition strategy can be summed up by the following: nothing is better than a sincere thank you
for a job well done.
Appendix: Climate Assessment for Your Current Recognition Program
While not all-inclusive, your answers to the following questions will provide you with a quick and
dirty overview of how well your organization is doing in terms of rewarding and recognizing
employees.
Rate yourself honestly on the True/False questions listed below by noting a T or F beside each
statement:
1. ___ We show some form of appreciation to our employees every week.
2. ___ We measure what we reward and we reward what we measure.
3. ___ We compete, between teams, for gifts and prizes.
4. ___ Employees get to choose at least some of their projects.
5. ___ We reward behaviors linked to only one or two key organizational values.
6. ___ Employees see the rewards we currently offer as valuable.
7. ___ Employees generally think that our reward programs are silly or demeaning.
8. ___ Our organizational, departmental and individual goals are clearly defined and understood.
9. ___ Peers recognize and reward each other.
10.___ We recognize small improvements as well as the major ones.
To score your answers:
Score one point for TRUE on questions 1, 6 and 10.
Score two points for TRUE on questions 2, 4, 8 and 9.
Score one point for FALSE on questions 3, 5 and 7.
Grand total of your points = ______
What Your Total Score Tells You:
13 14 points: EXCELLENT!! Youre doing a great job.
11 12 points: Job satisfaction among employees is likely to be fairly high. Keep working to improve
your retention rates.
7 10 points: Not bad, but you are still losing key people by missing essential components in your
recognition program.
1 6 points: It is time to rethink your recognition program. There are more strategies available to
you.