Job Evaluation: A Comprehensive Guide to Fair Compensation Strategies

Job evaluation is the process of comparing a job against other jobs within the organization to determine the appropriate pay rate.

This toolkit discusses the following topics:

• Internal job evaluation methods.
• External job evaluation methods.
• Conducting job evaluations.
• Auditing and maintaining job evaluations, including legal considerations.

Job evaluation takes place early in the process of creating a compensation system for the organization. The job evaluation process may contrast with or be used in conjunction with market pricing, which uses the labor market to set jobs' worth. This process, which may take several months, is usually completed by a team of knowledgeable senior employees who understand the functions of most of the organization's jobs. To maintain objectivity, employers sometimes hire consultants to complete this step in the compensation planning and design process.

Job evaluations are often confused with job analysis, but the two activities differ drastically. A job analysis is the systematic process of examining specific tasks and responsibilities related to a job, typically for writing a job description.

Job Evaluation Methods

Four primary methods of job evaluations used to set compensation levels are point factor, factor comparison, job ranking and job classification. Historically, job evaluations were internal comparisons of job worth; however, in recent years employers have begun to use a combination of internal comparisons and external market benchmarking.

Internal Job Evaluation Methods

Internal job evaluation methods are either quantitative or qualitative.

Quantitative methods use facts based on collected data to define a job.

Point factor. The point factor method is a commonly used quantitative technique. This approach breaks down jobs into compensable factors identified during a job analysis. Points are assigned to the factors, and a pay structure is established for the position.

Using a system for internal equity, such as the point factor system, forces an organization to quantify total points for each unique job, determining its true value to the company. This process often provides value beyond compensation, including benefits for recruitment, promotions and job design. However, designing a custom point-factor system may take additional time and resources and require assistance from senior management.

Factor comparison. The factor comparison method represents a combination of the ranking (explained later) and point methods. The first step is to identify benchmark jobs (i.e., jobs performed by several individuals with similar duties within the organization, such as administrative assistant, stock clerk, security guard, accountant, sales representative, supervisor and manager). In addition, the organization must select compensable factors and rank all benchmark jobs after completing factor analysis. Next, the employer must compare jobs to market rates for benchmarking, which results in the assignment of monetary values for each compensable factor. Finally, the organization should compare all of its jobs with respective benchmark jobs.

Custom factor comparison. The custom factor comparison method is specific to the organization, but it is time-consuming to establish and maintain. In addition, the organization must monitor market rates to maintain the system's integrity.

Qualitative approaches use observations or descriptions to define jobs.

Job ranking. Job ranking places jobs in a hierarchy of their value to the company. It is the simplest method but is not appropriate for every organization. This method is best suited to smaller organizations that can reduce the number of positions to be reviewed to no more than 100 specific jobs. Larger organizations should select another system.

Job ranking generates an estimate of the correct job hierarchy, not the exact hierarchy found in the point-factor system. Job ranking should be facilitated by a skilled compensation specialist who can address favoritism by managers and evaluate other subjective input.

Job classification. In the job classification method, the evaluator writes descriptions of each class of jobs and then puts them into the grade that best matches the class description. Because this process is subjective, with a wide variety of jobs and general job descriptions, positions could fall within more than one grade level. This method also relies on job titles and duties, assuming they are similar among organizations. These classifications are based on the job's skill and complexity. Organizations usually create grades along occupational lines.

External Job Evaluation Methods

For some organizations, internal job evaluations may be inappropriate. For example, jobs with a skills shortage may result in inflated prices. In addition, matrix organizations with little hierarchy would not benefit from job ranking or point-factor comparisons. Therefore, many employers are beginning to use market data to determine a job's worth. To stay competitive, organizations frequently review external pay rates and monitor current, accurate market data. See Building a Market-Based Pay Structure From Scratch.

Market-pricing. Market-pricing the external value of individual jobs enables employers to create effective competitive pay plans and allocate compensation costs wisely. The most common source for such market data is third-party compensation surveys.

Market pricing emphasizes external competitiveness; however, employers may have insufficient or unreliable market data for all the organization's jobs. Additionally, an internal job evaluation—even a simple approach, such as ranking—is required to maintain internal equity. Key benefits of job content evaluation include internal consistency and the ability to evaluate all jobs based on content. Organizations can use job evaluations to:

• Ensure compliance with federal laws and regulations on equal pay and state/provincial or local ordinances on comparable worth. See Equal Pay Act.
• Establish a rational, consistent job structure based on value to the organization in terms of each job's complexity and importance (with or without reference to market valuation).
• Help provide a basis for pay-for-performance. See Designing and Managing Incentive Compensation Programs.
• Assist in establishing competitive pay rates and structures. See How to Establish Salary Ranges.

How to Perform a Job Evaluation

Many job evaluation methods are subjective. Evaluators' decisions about which jobs are worth more can be personal and emotional. If the team members know the job incumbents, they may consider employees' personal qualities as job factors. Outside consultants can help the team have productive and objective discussions about job factors and their relative weights.

Base pay, which establishes the standard of living, is the foundation for total compensation. It also indicates the value the organization places on an employee's role and contributions.

A typical job evaluation project includes these common steps:

• Specify the project's parameters, and gain approvals and support from senior management.
• Select an appropriate evaluation method or system.
• Collect job data consistent with the method or system. This step includes specifying trustworthy data collection techniques.
• Analyze data, document job content and evaluate jobs.
• Use points to develop job worth hierarchy, and group jobs into grades based on appropriate breaks, or take another fair, understandable, defensible and practical approach.
• Allocate jobs to the existing pay structure or develop a new one.
• Document system development, and establish operating procedures, including policies for reconsidering decisions or a formal appeals procedure.
• Gain final approvals.
• Implement and administer system.

Finally, organizations should employ a robust management-employee communications program to help employees understand how the organization makes pay decisions. See WD-40 Goes with Salary Transparency.

Auditing and Maintaining Job Evaluations

Completing the job evaluation process may signal the organization to address the remainder of the organization's compensation planning and design project. Organizations should plan to conduct regular job reviews and develop a process to handle job changes and additions.

Organizations must acknowledge and address any deficiencies they find during audits and explain the need for any changes. HR may wish to have external evaluators complete periodic audits to dispel the suspicion that the program's designers will not acknowledge inadequacies. For example, a task force representing employees at all levels across the organization can lend credibility to the evaluation process.

Understanding when reevaluation is necessary

In smaller organizations or those in which pay increases or upward mobility are unlikely, managers may be tempted to request a reevaluation based on minor changes in responsibility. A best practice is to focus on major job changes outside the normal auditing cycle and to routinely reevaluate all jobs, such as every other year.

Jobs in a broadbanding system need to be classified, but with fewer groupings, job evaluation may not require complex systems, such as point factor plans. Instead, organizations may use a combination of ranking-to-market and whole-job slotting. Of course, employers using these methods should document job content, because job descriptions are useful and valuable management tools.

Legal considerations

The U.S. legal and regulatory environment is a major pay administration concern. From an equal pay perspective, if audits find that one class of employees occupies lower priority jobs, the organization may have to justify its job evaluation approach. Unexplained differences should be investigated, regardless of the probability of legal action. Employers should correlate pay to the value of the job or role, mastery level and performance. See Managing Pay Equity.

Maintaining the system

Once an organization completes its job evaluation process, it should document and periodically review the system, so it can evaluate new jobs or changed jobs using the same method. Items to document include:

• Selection of compensable factors.
• Definition of degrees for each factor.
• Determination of values (weights) for factors and degrees.
• Application of these criteria to derive points on each factor and a point total.
• Allocation of each job to a grade (range of points) or exact position in the hierarchy based on total points.

Typical system-specific steps for a nonquantitative approach to job evaluation (e.g., whole-job ranking methodology) are:

1. Identify and briefly describe the benchmarks (key jobs based on employee count, importance to the organization and other considerations).
2. Rank the benchmarks into a hierarchy through paired comparisons (e.g., identifying which job in each comparison is "better" than the other overall).
3. Slot the remaining jobs by comparing each with the ranked benchmarks.

Slotting new jobs then becomes the operational method for evaluating them. Organizations may also use slotting to supplement, or replace, an established quantitative approach by comparing critical job elements with those of jobs whose worth is already ranked.

No matter how the organization establishes its job worth hierarchy, job evaluators continue to use job content to value new and changed jobs. Some organizations use market pricing to check job evaluation. Pay rates in organizations using the job content evaluation approach are set by reference to the market, collective bargaining or other means.

Pay ranges and pay increase budgets are the most common control devices used for base pay administration. When discussing merit pay, employers must evaluate where pay rates fall within the ranges to determine whether the organization's pay policy is consistent. Pay rates that fall below or above the pay range minimums or maximums, respectively, can be a problem. "Red circle rates" are salaries above the maximum rate established for the position. "Green circle rates" are salaries below the minimum rate. Green circle rates are as problematic as red circle rates because they violate the organization's philosophy. Organizations should move employees with green circle rates up to at least the minimum in the range or give them an opportunity to move to a job in the next grade above them.