The 5 Job Evaluation Methods: Analyzing to Price Competitively

Job evaluation is a systematic method of determining a job’s relative worth within an organization. There are five commonly used approaches, says consultant Diana Neelman. Which is best for you?

Neelman is a principal and executive vice president with Compensation Resources, Inc. (CRI) in Upper Saddle River, New Jersey. She was joined in her presentation by Sara Schmidt, CCP, PHR, a consultant with the company. Their remarks came at a recent BLR-sponsored webinar.

Here are Neelman’s five common methods and the characteristics of each:

1. Ranking Method

This method ranks jobs in order based on each job’s perceived value in relation to the others, says Neelman.

• Does not consider market compensation rates.
• May work well for smaller companies. In a larger organization, it is more complex to use, but sometimes it can still work if jobs are grouped by job families—professional level, etc.

2. Classification/Grading Method

With this approach, generic job characteristics are grouped to reflect levels of skill/responsibility at a number of predetermined grade classifications, says Neelman.
This is another straightforward method that is not too time-consuming.

• Individual jobs are compared to groups of job characteristics, then matched to specific grade classification.
• Can be a challenge because one size does not fit all, so jobs may be forcefit into a grade.
• The system is subject to grade inflation as jobs get pushed to the next higher level.

3. Point–Factor Method

This approach identifies job factors that add value and worth to a position. The job factors are separated into groups (i.e., skill, responsibility, effort) and assigned a numerical or weighted point value. The points for individual factors are added up to get a point value for the whole job.

• May not reflect market values of jobs.
• Generates a hierarchy but does not have an external component.

4. Factor Comparison Method

With this method, job factors are identified under primary groups (i.e., skill, effort, responsibilities, working conditions) typically up to five groups. Each factor is assigned a dollar value (as opposed to point value).

• This is a complex system used only by a few organizations.
• It is hard to communicate to employees.
• There is an inherent degree of subjectivity.

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5. Competitive Market Analysis Method

This approach looks at external data, says Neelman. Job evaluation forms the basis for market pricing. You utilize job descriptions to compare jobs to like positions within the external marketplace. Pay data are collected from published sources and the value of the position within the competitive market is determined.

• Considers the organization’s compensation philosophy. (Where do we want to position ourselves vis-à-vis the market?)
• Examines internal value against market data.
• Requires an overlay to see how it fits with the internal hierarchy.

Goals of Market Pricing

Market pricing is used by many organizations, says Schmidt, to determine:

• The competitive value of individual positions
• The company’s overall positioning in the marketplace
• The company’s pay positioning against its compensation philosophy
• Whether pay programs achieve basic objectives of compensation
• Internal equity

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Whether your goal is to reward performance, time, knowledge or a combination of all three, establishing and solidifying your pay grades is the first step in building an equitable, competitive compensation structure. Join us for an in depth webinar on Assembling a Pay Grade System: A Step-by-step Guide to Getting It Right.

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Collecting Pay Data—Executives

Gathering pay data for executive positions is not the same as for lower positions. For publicly traded (for–profit) companies, you gather executive pay data from proxy statements of peer companies. The statements typically contain:

• Pay data on all compensation components (long-term component, stock options, etc.)
• A narrative that provides additional information on pay philosophy (compare to your company’s positioning)
• The emphasis on various components of the compensation package and, sometimes, information on variable pay plan designs.

For not–for–profit executive pay analysis, use Form 990 data, says Schmidt. You won’t get as extensive information as from a proxy statement, so utilize published surveys as an additional source.

In all cases of executive pay, it’s important to note organization size, industry, and geography, Schmidt says.

In tomorrow’s Advisor, aging data and arriving at a market consensus, plus notice of a timely webinar— Assembling a Pay Grade System: A Step-by-Step Guide to Getting It Right.