Friday, October 28, 2005

Compensation Structure Decision

Objective : To understand elements that determine overall compensation structure . This is crtical as often organisation has different departments & sales compensations has to be aligned with overall compensation structure

"How many different jobs do we have?"

"How can they decide to pay that job over there more than our job?"

"What criteria should we use to decide what different jobs are worth to us?"

"How do we decide what to pay this job when there is no market rate?"

"How many and what kinds of pay grades should we have, considering the kind of organization this is?"

"I have a lot more responsibility than she does. Why aren't I making as much as she is?"

The wage structure decision has to do with determining the wage rates for jobs. It combines the external marketplace considered in the pay level decision with the relative value that different jobs have to the organization. The organizational value of a job is determined through job evaluation, which in turn relies on job analysis to provide the information required for the evaluation. The organizational and market values of jobs are integrated through the development of a wage structure, which defines job levels or grades, and assigns wage rates to those grades by reference to market rates.

The concepts of the wage structure decision are covered in this chapter. Chapter 14 covers job analysis and job evaluation. Chapter 15 describes how all the information and decisions collected thus far are combined into a wage structure that sets the wage rate or range for each organizational job.

Wage Structure Concepts

In most organizations wage and salary rates are still assigned to jobs. The relationships between the pay for jobs involve pay structure decisions. Although organizations often make pay level decisions (how much to pay) and pay structure decisions (pay relationship) at the same time, these decisions and the process by which they are reached require separate treatment.

Actually, wage structures represent wage relationships of all kinds. Analysis of wage differentials of any kind (geographic, industry, community, or occupation) deals with wage structure issues. But because our primary focus is on pay decisions in organizations, our concern is with pay differences between jobs. In fact, determining the pay structure of an organization may be usefully described as putting dollar signs on jobs. Decisions on wage relationships among jobs within an organization are largely within the control of its decision makers. Wage level decisions are usually influenced more by forces external to the organization than are wage structure decisions.

Some organizations pay for skills possessed by employees rather than for the jobs employees hold. The rationale is usually serious and continual skill shortages experienced by the organization. But most organizations measure employee contributions first in terms of the jobs employees hold. One interesting analysis of organizational compensation decisions is that pay structure decisions are intended to achieve retention of employees through prevention of dissatisfaction and encouragement of employee cooperation.1 Pay level decisions, in this analysis, are intended to attract employees. To this analysis could be added the statement that wage structure decisions are intended to encourage employees to make a career with the organization and to accept training in preparation for higher-level jobs.


Chapter 3 (economic theories of wages) contained a number of explanations of occupational differentials. Chapter 4 (behavioral theories of compensation) used a number of suggestions from psychologists and sociologists to explain occupational pay differences. This section of the chapter focuses on these factors in wage structure decisions.

Economic Determinants

Adam Smith explains occupational wage differentials in terms of (1) hardship, (2) difficulty of learning the job, (3) stability of employment, (4) responsibility of the job, and (5) chance for success or failure in the work. This is a theory of wage structure.2 But his standards of worth are equally useful in explaining the complexity of wage structure decisions. The market value of an item is the price it brings in a market where demand and supply are equal. Use value is the value an individual buyer or seller anticipates through use of the item. Use value obviously varies among individuals and over time.

Job worth
These two concepts of worth and the concept of internal labor markets combine to explain important differences among employers in wage structure decisions. Organizations with relatively open internal labor markets (organizations in which most jobs are filled from outside) make much use of market value. They also make much use of wage and salary surveys in wage structure decisions.

Conversely, organizations with relatively closed internal labor markets (most jobs are filled from inside) emphasize use value. Their analysis of job worth relies more heavily on perceptions of organization members of the relative value of jobs.

Some other wage structure determinants derived from economic analysis may be noted. Training requirements of jobs in terms of length, difficulty, and whether the training is provided by society, employers, or individuals constitute a primary factor in human-capital analysis and thus job worth. The interaction of ability requirements with training requirements can yield different job values depending on the scarcity of the ability required and the number of people who try to make it in the occupation and fail.

Employee tastes
Employee tastes and preferences are another economic factor. People differ in the occupations they like and dislike. In like manner, occupations have non-monetary advantages and disadvantages of many kinds. Worker expectations of future earnings strongly influence occupational choice and thus labor supplies. Unfortunately, labor-market information is far from perfect, and responses to labor-market shortages are likely to be more prompt than responses to oversupplies.

Industrial as opposed to craft unionism has also been shown by economic analysis to affect wage structures. Industrial unions, with their heavy proportions of semiskilled members, are more likely to favor absolute increases. Although large organizations where employees are represented by industrial unions may have a highly differentiated wage structure, they pay less attention to percentage differentials than they would in the presence of craft unions.

Another economic determinant is discrimination. Although wage differentials based on sex or race are unlawful, they still exist. The extent to which such differences are based on productivity differences or represent discrimination is very much a wage structure issue.

Industrial Relations Explanations

Industrial relations scholars' explanations of wage structures tend to be different from those of labor economists. For instance, an employer concerned with the status of his or her organization as a dependable supplier, a considerate employer, or a wage leader is more likely to base wage structure decisions on organization criteria than on economic forces. A short list of non-economic considerations on wage structures emphasized by industrial relations scholars would include organization goals, the health of employee-management relations, employee attitudes, employee comparisons, communication of pay decisions, and seniority policy. Also emphasized by these analysts is the force of custom.

One powerful analysis of considerations in wage structure decisions argues that wage structures keyed solely to the labor market are likely to be few, to result from very tight labor markets, and to be characteristic of organizations well insulated from product-market competition, unions, and technological change. One author classified organizations as having wage structures that are primarily oriented toward unions, markets, internally, or union-and-product. Union-oriented organizations basically have craft unions, and union-and-product oriented organizations basically have industrial unions. This classification suggests that in only one of the four market-oriented organizations, does the labor market drive the wage structure.3

Social Determinants

In chapter 3, we saw that the just-price theory advocated setting wages in accordance with the pre-established status distribution: wages were to be systematically regulated to keep each class in its customary place in society. The theory emphasized equity, the tying of wages to status, and the preservation of customary relationships.

Although we have described the just-price theory as historical, an eminent contemporary labor economist, E. H. Phelps-Brown, has made a similar argument.4 Brown argues further that one determinant of the fair rate is the requirements of the work. He interprets job evaluation as a painstaking application of the way in which people continually think and argue about relative pay.

Another sociological view of wage structure is that different jobs have different statuses to which the structure of pay should conform. Generally a group is ranked according to the difficulty of attaining proficiency in the job. By this reasoning the criterion of a fair wage is that it shall enable the recipient to keep up a position in the class to which the job assigns him or her.

Since both the assessments of the requirements of a job and the esteem due incumbents can only be subjective, in practice they lean much on custom. When rates of pay remain unchanged for a century and differentials between two jobs remain proportionately constant over even longer periods, the force of custom rather than supply and demand seems a better explanation.

In fact, to those involved in pay decisions, social forces may be more apparent than economic ones. The arguments used are mainly ethical. A wage is claimed because it is fair and just. A differential is justified because it is right and proper.

But whereas social forces generally operate to maintain what is customary and accepted, market forces have been operating to narrow differentials. Market forces usually operate through the shifting of labor supplies. One reason that social forces seem to predominate is the slow reaction of supply to price. Supply shortages are more effective in raising pay than supply surpluses are in lowering it.

Organizational Determinants

Organizations develop jobs to get their work done. Labor services acquire specific economic meaning only in relation to the particular jobs in which they are performed. In our economic system, the organization typically designs jobs and selects employees to fill them. The jobs the organization designs are the source of the contributions provided by employees and a primary determinant of their rewards. Through these jobs and pay decisions about them, the organization is structuring the market for labor services.5

Other organizations differing in technology, management competence, competitive economics, and collective bargaining are also designing jobs. As a consequence, it is quite unlikely that the jobs designed by one organization will be identical to those of other organizations. Furthermore, the decisions that go into job design are not made once and for all, but are subject to revision, as market conditions, technology, and institutional influences change.

One of the strongest influences on job design is technology. But technology seldom provides rigid job boundaries. Although it may be useful to assume that organizations in the same industry have designed jobs and job structures similarly, they have not necessarily done so. On the other hand, if two quite similar jobs are found in different industries, it would be safe to assume that they hold different significance or value to their respective organizations. In one industry, it may represent an organization's most essential task. In another, the job may be peripheral.

One study queried compensation practitioners in 37 organizations on what information they used to design or adjust wage structures in their organization.6 Thirty-one kinds of information were reported, some by all 37 firms, some by only 1. Although the most-used information involved wage surveys and job evaluation data, the balance was almost too varied to classify.

Employee Acceptance

The discussion in chapter 4 of the employment exchange and of equity theory suggests that a primary criterion of organization wage structures is employee acceptance. Both the employment exchange and equity theory strongly suggest that employees' decisions to acquire and retain organization membership are based on their perception of a favorable ratio of rewards to contributions. The most visible employee contribution is the job to which he or she is assigned.

Most organizations base wage structures primarily on the work content of jobs and the value of that work to the organization. Work content is determined by job analysis. Relative value of work is determined by job evaluation. Equity theory postulates that employees must accept both processes as fair if the system is to achieve its purpose.

There is some tendency to equate pay fairness or equity with pay satisfaction. This is unfortunate because, although related, they are quite different concepts. It has been shown that people can believe that their pay is fair but not be satisfied with it. Also, people can be satisfied with their pay but believe it to be unfair.7 Pay satisfaction has been shown to be a multidimensional concept in which satisfaction with pay level is independent of satisfaction with benefits. Satisfaction with pay structure, although apparently another dimension, is not independent of administration of compensation.8


From the last section, it is clear that organizations determine the pay for jobs by taking a number of considerations into account. Furthermore, they have considerable choice as to how much emphasis to place on various determinants. These choices lead in turn to variations in the wage structures that organizations create. But organizations do not have total freedom in the design of wage structures. Besides the determinants so far considered, there are a number of other influences on the design of wage structures that will be considered in this section. These influences are often indirect in that they influence the design of jobs and therefore the way the organization is likely to evaluate it in relation to other organization jobs. These influences are society, the labor market, unions, and the organization structure.


People and institutions both have a hand in designing jobs and wage structures. Craft unions, for example, determine the kinds of work their members do and expect employing organizations to adjust to these decisions. Jobs for clerical workers are structured by the institutions that train them, with the result that clerical jobs are often quite similar in different organizations.

Professional employees and managers insist on having a say in the design of their jobs, and the result is influenced in part by the institutions that train them. At the other extreme are semiskilled factory employees. Organizations employing these workers are subject to little influence on job design by either employees or unions, except in job-redesign decisions. Unions of semiskilled factory workers typically insist, however, on participating in the latter decisions. This participation is guided by customary relationships among and within employee groups. Custom also operates in nonunion situations, causing resistance to change in job design.

A further societal influence on jobs and wage structures is the technology used by the organization and changes in that technology. But technology seldom provides rigid boundaries. It typically provides choices within which management, unions, and competitive pressures can operate in designing jobs and job relationships.

The Labor Market

The labor market influences the wage and salary structure through the supply of labor. But organizations differ greatly on how many of their jobs are highly market-oriented, particularly in those organizations in which the labor supply is mostly provided from within the organization. As discussed in chapter 10, most organizations replace the external labor market with an internal labor market that makes decisions by administrative means rather than according to supply and demand. These organizations have restricted ports of entry, which are highly sensitive to the labor market but rely on the organization's internal labor supply to fill most job openings.9 The exception occurs when there is an internal and external shortage of people to fill vacancies for specific skills. In fact, any job for which qualified people are in short supply becomes a market-sensitive job. But given relatively adequate labor supplies, the labor market determines wages only if the labor market: is structured by unions, is otherwise well organized, or is designed to fill openings from outside the organization.

Shortages in the labor market provide those who are qualified to fill the jobs an opportunity to negotiate better terms of employment. A part of this negotiation is for a relative increase in pay greater than other groups are obtaining. This, of course, runs into the problem of customary relationships already discussed. But another part of the negotiations is for a "better job." Workers in jobs where there is a shortage of qualified workers will demand changes in job content that will increase the job's value to the organization and in the eyes of other workers. Computer programmers are an example of a group of workers with a skill in short supply in a new and expanding industry. The independence of action and discretion allowed this group of employees is based, at least partially, on the continuing shortage of this skill.

The product market also affects wage structures through cost-oriented jobs. Such jobs exist where profit margins are sensitive to changes in unit labor cost. If the ratio of unit labor cost to price is critical, the jobs involved become cost-oriented jobs, and organizations will strongly resist changes in their wage rates, especially changes not made by other organizations. Organizations that compete in the same product market, those whose prices are interrelated, or those experiencing or anticipating increased competition or decreased demand may regard any increase in unit labor costs as a threat, especially when labor cost is a significant proportion of total costs. On the other hand, employees in these areas often recognize the advantageous position they are in and seek maximum advantage.


Unions affect wage structure, but the differential effects of craft and industrial unionism and the type of bargaining relationship are considerable. Craft unions tend to determine craft rates as well as the design of craft jobs for all organizations employing members of the craft. The limit of craft rates is the cost-price resistance of employers. Industrial unions, on the other hand, are more concerned than craft unions with employing organizations, but less concerned with product markets because they often bargain with organizations in many product markets. Thus, industrial unions may attempt to impose a common wage structure on organizations, even if the wage structure clashes with product-market realities.

Within organizations, industrial unions are concerned with equalities and differentials among particular groups of jobs. They often serve to reinforce custom and tradition in jobs and wage structures, while they resist changes that might decrease employee security. If the industrial union deals with organizations in a common product market, it may attempt to impose a common job design and wage structure by comparing rates of a number of reasonably comparable jobs. But even in such cases, the influence of industrial unions on wage structure is light compared with that of craft unions.

Unions also affect wage structures by resisting lower wage rates for jobs downgraded by technological change and by demanding that increased productivity arising from any source results in wage increases. Typically this means that wages of changed jobs are not cut but often increased when the changes result in increased productivity. Such job rates distort rational job and wage structures, and a series of them can so impair an organization's cost-profit position that management is forced to fight for a revised, rational wage structure.10 Union strategy, with respect to general increases, can also affect wage structures. Flat cents-per-hour or dollars-per-month increases maintain absolute differentials, but compress the structure in relative terms, whereas flat percentage increases maintain relative differentials and increase absolute differentials. Industrial unions especially may follow a policy of cents-per-hour increases because most of their members are in lower-paid groups. But unions cannot maintain this strategy in the face of opposition from higher-paid groups. In fact, worker preferences and resulting labor-supply shortages force restoration of relative differentials in both union and nonunion situations.

But probably the strongest influence of unions on wage structures is the quality of the union-management relationship. As mentioned, some unions take an active part in job evaluation, and their interest in a rational wage structure results in reduced grievances over wage inequities. Other unions, most of them craft unions, seek to preserve customary relationships and job security, resist changes in job content and structure, and are uninterested in the employer's problems of maintaining economic efficiency. Still other unions seem totally uninterested in job designs and the wage structure of the organization and (1) insist on no wage cuts when job content changes, (2) demand wage increases for all increases in job productivity, (3) strongly resist job-content and other changes calculated to increase productivity, and (4) encourage wage-inequity grievances. In such cases job, and wage structures become chaotic, and correcting the irrationalities may require long and bitter strikes, which are often prolonged by political struggles within the union resulting from the wage inequities. 11

The Organization

Organization decisions on job and wage structures represent a balancing of the aforementioned forces. But the strength of these forces varies by organization type and within organizations by job clusters. Organizations made up largely of members of craft unions have wage structures almost completely determined by the union. Organizations in construction, printing and publishing, the railroads, longshoring and maritime work, and entertainment offer examples of union-oriented wage structures.

Organizations whose members come largely from a well-organized and competitive labor market but are not unionized have what might be called market-oriented wage structures. Organizations of this type have only limited choices, because jobs are easily identified and are quite uniform throughout the market. Banks, insurance companies, department stores, and restaurants are organizations with primarily market-oriented wage structures. Professionals are groups of employees whose jobs have been designed largely by the educational process they have been through. This makes for a commonality between organizations in the design of professional jobs.

Organizations having many specialized jobs, dealing in labor markets too disorganized to provide adequate grading and pricing, and lacking unionization have primarily internally determined wage structures. Such wage structures may be influenced by product markets, but only if labor cost is high relative to total cost. Internally determined wage structures result from management decisions and may range from highly rational structures flowing from job evaluation to a system of personal rates. Organizations in small towns, isolated locations, or nonunion communities provide examples, as do unique organizations in larger communities, and government employment.

Most large, unionized organizations have what might be called union-and-product-oriented wage structures. In these organizations, wage structures represent management decisions shaped and restrained by technology, unions, and cost-price relationships, and the product market. Technology provides some uniformity in job structures in organizations engaged in common lines of production. Unions, through their insistence on traditional relationships, establish some key jobs and job clusters and provide an upward thrust to the entire structure. Cost-price relationships and the product market compel the organization to resist this upward push and to make changes in jobs and job relationships in line with such resistance. Low ratios of labor cost to total cost and inelastic product demand, however, reduce competitive pressures on organizations. Organizations in many branches of manufacturing, in mining, and in some service industries are examples of organizations with union-and-product-oriented wage structures. Organizations with this kind of wage structure can eventually get into a competitive bind.12

Organizations with internally determined or union-and-product-market-determined wage structures leave large portions of wage structure decisions to management. Wage structure determination in these organizations follows closely Dunlop's theory of key jobs, job clusters, and wage contours (see chapter 3). Key jobs acquire their status from labor markets, product markets, and comparisons with other organizations, often fostered by unions. Job clusters come from technologies and employee skill groupings. Wage contours originate in customary comparisons with other organizations, again often fostered by unions. Custom strongly influences all three. 13

But although organizations can be classified as having wage structures that are oriented primarily in one of the four ways just outlined, organizations of any considerable size have job clusters that fall more comfortably into one or more of the other categories. Organizations employing artisans, unless they are members of an industrial union, are usually forced to develop a union-oriented wage structure for this job cluster. All organizations employ clerical workers, and the wage structure of the clerical job cluster is largely market-oriented. Professional employees (such as engineers and scientists) have salary structures that combine market orientation and internal determination, regardless of the major activity of the organization. Managerial salary structures are primarily internally determined except in very tight labor markets, without regard to organization type.

Thus the typical organization develops and administers at least four or five of the following separate wage structures: shop, clerical, craftsmen and technicians, administrators, engineers and scientists, sales, supervision, and executives. Although, obviously, there will be relationships among these separate wage structures, the strength of these relationships varies by organization and over time.


Organizations usually begin the process of designing a wave structure by determining their job structure. Two often-cited principles of compensation are (1) equal pay for equal work and (2) more pay for more important work. Both imply that organizations pay employees for contributions required by jobs.

Most organizations utilize job assignment as a major determinant of employee contributions. A formal wage structure, defined as a rate or range of rates established for job classifications, seems to be standard organization practice, except in very small organizations. Formal job evaluation or informal comparison of job content is the almost universal base of pay rates.

Job evaluation is the process of methodically establishing a structure of jobs within an organization based on a systematic consideration of job content and requirements. The purpose of the job structure or hierarchy is to provide a basis for the pay structure. The job structure, as seen in previous sections of this chapter, is only one of the determinants of the wage structure. But it is an important one, often used.

Job evaluation is concerned with jobs, not people. A job is a grouping of work tasks. It is an arbitrary concept requiring careful definition in the organization. Job evaluation determines the relative position of the job in the organization hierarchy. It is assumed that as long as job content remains unchanged, it may be performed by individuals of varying ability and proficiency.

The Job Evaluation Process

Although the next chapter (14) spells out the process and procedures involved in job evaluation, it is useful at this point to understand the steps in the process. The first step is a study of the jobs in the organization. Through job analysis, information on job content is obtained, together with an appreciation of worker requirements for successful performance of the job. This information is recorded in the precise, consistent language of a job description.

The next step is deciding what the organization "is paying for" -- that is, what factor or factors place one job at a higher level in the job hierarchy than another. These compensable factors are the yardsticks used to determine the relative position of jobs. In a sense, choosing compensable factors is the heart of job evaluation. Not only do these factors place jobs in the organization's job hierarchy, but they also serve to inform job incumbents which contributions are rewarded.

The third step in job evaluation is to select a method of appraising the organization's jobs according to the factor(s) chosen. The method should permit consistent placement of jobs containing more of the factors higher in the job hierarchy than jobs involving lesser amounts.

The fourth step is comparing jobs to develop a job structure. This involves choosing and assigning decision makers, reaching and recording decisions, and setting up the job hierarchy.

The final step is pricing the job structure to arrive at a wage structure. Strictly speaking, this step is not part of job evaluation. As seen earlier in this chapter, many wage structure determinants are used by organizations. The job structure is only one of these.

This view of job evaluation implies that its major purpose is to classify jobs and establish a job hierarchy based on job content. Other perspectives are that job evaluation (1) links external and internal markets, and (2) is a process used to gain consensus and acceptance of a pay structure.14 Perhaps these views could all be accommodated by the recognition that job structures and wage structures are separate concepts and that the relationship between them is a decision that varies among organizations.

Objectives of Job Evaluation

The general purpose of job evaluation may include a number of more specific goals, including to provide a/an:

  1. basis for a simpler, more rational wage structure

  2. agreed-upon means of classifying new or changed jobs

  3. means of comparing jobs and pay rates with those of other organizations

  4. base for individual performance measurements

  5. way to reduce pay grievances by reducing their scope and providing an agreed-upon means of resolving disputes

  6. incentive for employees to strive for higher-level jobs

  7. source of information for wage negotiations

  8. data source on job relationships for use in internal and external selection, personnel planning, career management, and other personnel functions

Background of Job Evaluation

Job evaluation developed out of civil service classification practices. Job analysis applied to time study and selection, and some early employer job and pay classification systems. Whether formal job evaluation began with the United States Civil Service Commission in 187115 or with Frederick W. Taylor in 1881,16 it is about 100 years old. The first point system was developed in the 1920s. Employer associations have contributed greatly to the adoption of certain plans. The spread of unionism has influenced the installation of job evaluation in that employers gave more attention to rationalized wage structures as unionism advanced. The War Labor Board during World War II encouraged the expansion of job evaluation as a method of reducing wage inequities.

Job evaluation has received a good deal of attention in recent years as a result of social concern regarding discrimination. A study of job evaluation as a potential source of and/or a potential solution to sex discrimination in pay was made by the National Research Council under a contract from the Equal Employment Opportunity Commission.17 The study suggested that jobs held predominantly by women and minorities may be undervalued. Such discrimination may result from the use of different plans for different employee groups, from the compensable factors employed, from the weights assigned to factors, and from the stereotypes associated with jobs. Although the preliminary report failed to take a position on job evaluation, the final report concluded that job evaluation holds some potential for solving problems of discrimination.18

Prevalence of Job Evaluation

Job evaluation is used throughout the world. Although recent evidence is not available, it appears that job evaluation is more prevalent in the United States than elsewhere. However, a 1982 International Labor Office publication states that in centrally controlled economies or in economies where wage or income controls exist, job evaluation is frequently used.19

Holland has had a national job evaluation plan since 1948 as a basis for its national wages and incomes policy. Sweden and Germany have a number of industry-wide plans. Great Britain, like the United States, usually employs job evaluation at the plant or company level. Australia and some Asian countries have installed some forms of job evaluation. Russia and some of the Eastern European countries make wide use of job classification.

The evidence on use of job evaluation in the United States shows that smaller companies are somewhat less likely to use job evaluation.21 Almost all government jurisdictions, however, employ some form of job evaluation.

In the past twenty years job evaluation has come under attack in the United States. This has come about from a change in the American economy and the type of organizations that dominate the new economy of today. Job evaluation works best in large bureaucratic organizations. In the past twenty years these behemoths of the American economy have faced increasing problems remaining competitive. The result is that they have downsized greatly and removed many layers of organization. Vertical movement within organizations has slowed down and employees increasingly move to jobs in other organizations rather than stay with their current employer. The new companies gaining a foothold in the economy are smaller and organizationally flexible. There has also been a demise of unions; individuals now bargain for their own wages. Lastly, organizations are putting more emphasis on employee skills and performance, as opposed to the job.

All this does not mean that organizations ignore the job as a determinant of wages. What has happened is that wage systems have become more flexible and weight skill and performance more heavily. The use of market wage data for more and more jobs is increasing and made more practical as data has become readily available on the Internet. A useful source is Within organizations, job evaluation systems have become simpler, less formal and have reduced their complexity.

A major trend in this direction has been broadbanding. In broadbanding, the number of levels in the job evaluation plan is reduced, and the width of the grade levels increased dramatically. This allows employees to receive wage increases without having to move up to a new grade level that is tied to a higher organizational level.

Responsibility for Job Evaluation

The installation and operation of job evaluation involves certain responsibilities. Several possibilities for implementing the process are apparent. One or more committees may be selected, a department may be set up or an existing one assigned, or a consulting organization may be brought in. These possibilities are not mutually exclusive.

Support for the program is essential because installation of it involves commitments of time, effort, and money. Such support is usually obtained by securing top management approval and the collaboration of other managers and organization members. Often this approval is obtained through a committee set up for this purpose.

The Committee Approach

This committee is given an explanation of job evaluation, the purposes it is expected to accomplish, a rough time schedule, and perhaps an estimate of the cost of the program. The committee makes the decision to install job evaluation, decides on the scope of the project, and assigns responsibility for the work.

The actual work of job evaluation is usually done in committee in both large and small organizations, whether the task is accomplished by organization members alone or with the help of a consultant. Committees have the advantage of being able to pool the judgment of several individuals. The committee usually selects the compensable factors, determines weighting, chooses the method of comparing jobs, and evaluates jobs.

The chair of the committee is usually a compensation professional, although a consultant, if employed, may assume the chair for part of the work. Other members are typically other managers selected for their analytical ability, fairness, and commitment to the project. Representation of broad areas of the organization aids in communication and in gaining acceptance. But job evaluation committees should be kept small to facilitate decision making. Five members may be optimum, ten a maximum. A common procedure is to invite supervisors to committee meetings when jobs in their department are under study.

In union-management installations, union members are regular members of the committee. Where the union is not involved employee representation is often rotated. Employee representation in committees seems to aid in securing acceptance and in communication.

Committee job ratings are a result of pooled judgments. This usually means either that ratings made individually are averaged or a consensus is reached as a result of discussion.

Committee members must be trained. Much of this training involves following the steps in the process. But it is advisable to train committee members how to guard against personal bias and the common rating errors.


Consultants are sometimes employed to install job evaluation plans. Successful consultants are careful to ensure that organization members are deeply involved in installing the plan and are able to operate the plan on their own.

Consultants are most likely to be employed in small organizations where no member has the necessary expertise. They are also more likely to be employed when a complex rather than a simple plan is to be installed. Consultants often have their own ready-made plans. Sometimes consultants are brought in to insure objectivity in union-management installations. It is also common to hire consultants to evaluate management jobs, because the objectivity of committee members rating jobs at levels higher than their own may be questioned.

Compensation Department Involvement

It is quite possible for the organization to assign installation and operation of a job evaluation plan to the compensation department. Sometimes the compensation professional heading the unit and a number of job analysts carry out the task. Those who favor this last approach emphasize the technical nature of the task. They may also be reacting to the difficulty of getting operating managers to devote the time that the program requires. While they may recognize the education and communication advantages of committees, they believe these advantages can be provided in other ways. It is doubtful that this position can be justified, though. Input by operating managers and perhaps employees during job evaluation installation is probably essential to acceptance of the results. Once the program is installed, however, there seems to be no reason why a department cannot operate it with proper provision for settling grievances.

Union Involvement in Job Evaluation

Union involvement has the same rationale as that offered in our discussion of job evaluation committees. Acceptance and understanding are the expected results of involvement.

In practice, union participation in job evaluation has varied greatly. Some unions profess to formally evaluate an organization's jobs independently and then use the information as an aid in collective bargaining. Some job evaluation plans have been installed and maintained as a joint venture. A well-known union-management job evaluation plan exists in the steel industry. Less well-known is the joint plan in the West Coast paper industry. There is evidence that joint plans are more successful than unilateral plans. But this is not always the case.

Many unions in organizations with job evaluation plans review the findings after installation by management and either present grievances on individual jobs or insist on bargaining the wage structure. In the latter case, the bargained wage structure may follow the job structure resulting from job evaluation or represent a compromise.

Some unions have ignored job evaluation plans installed unilaterally by management. Some employers prefer this response, believing that job design and evaluation are management prerogatives. Other employers invite union participation in the hopes of obtaining understanding and acceptance of the plan.

If a union rejects an invitation to participate in job evaluation and ignores the plan, the employer installs the plan unilaterally, recognizing the need for a logical hierarchy of jobs. The findings are used in negotiating the wage structure.

Unions have criticized job evaluation on several grounds: (1) that it restricts collective bargaining on wages, (2) that wages shouldn't be based solely on job content, (3) that supervisors do not or cannot explain the plan to employees, (4) that management doesn't administer the plan the way it explained it, and (5) that it is subjective.

Employee Acceptance

Job evaluation is usually judged successful when employees, unions, and organizations report satisfaction with it. Most surveys report organization satisfaction levels at 90 percent or better. Employee acceptance is the primary criterion organizations use in determining the success of a job evaluation plan. This is reflected in the increasing use of employees on job evaluation committees and in the communication steps accompanying job evaluation installations.


The discussion in this chapter showed that the development of a wage structure is the result of a number of influences. These factors vary from ones over which management has a great deal of control to ones in which management must simply be responsive. Given the variety of influences, it is also not likely that organizations will always be able to develop optimum structures and that current structures will need adapting in the future.

While the economics of the labor market is a major consideration, it is not the only determinant to influence the design of wage structures. Most organizations also must consider labor-cost ratios, product market competition, and union demands, when determining their wage structure. Furthermore, many labor markets are abstractions that do not provide a close fit for an organization's jobs or wage-paying ability.

Wage structures have to do with the internal alignment of jobs in a wage hierarchy. To do this there must be a hierarchy or structure of jobs within the organization. Determining the internal job structure is the task of job evaluation. This process compares jobs, not people, in terms of a set of criteria, called compensable factors, to establish the job hierarchy. Job evaluation is a major tool that organizations use to make job comparisons when determining the relative equity of jobs within the organization. In job evaluation there is an interesting conflict. On one hand, like wage surveys, this process requires technical expertise of a compensation professional. On the other hand, acceptability of job evaluation results relies on the perceptions of management and workers so that their participation would seem to be a necessity in job evaluation.

1 T. A. Mahoney, "Compensating for Work," in Personnel Management, ed. K. M. Rowland and G. R. Ferris (Boston: Allyn & Bacon, 1982), p. 227-61.
2 See the discussion of Adam Smith in chapter 3.
3 G. H. Hildebrand, "External Influence and the Determination of the Internal Wage Structure," in Internal Wage Structure, ed. J. L. Meij (Amsterdam: North-Holland Publishing Company, 1963), pp. 260-99.
4 E. H. Phelps-Brown, The Economics of Labor (New Haven: Yale University Press, 1962), ch. 5.
5 See Hildebrand, "External Influences." op. cit.
6 D. W. Belcher, N. B. Ferris, and B. Dalton, "Building or Adjusting a Pay Structure" (working paper, San Diego State University, 1984).
7 D. W. Belcher, "Pay Equity or Pay Fairness?" Compensation Review, second quarter 1979, pp. 31-37.
8 H. G. Heneman III and D. P. Schwab, "Pay Satisfaction: Its Multidimensional Nature and Measurement," (working papers, University of Wisconsin, 1983).
9 O. E. Williamson, M. L. Wachter, and J. E. Harris, "Understanding the Employment Relation: The Analysis of Idiosyncratic Exchange," Bell Journal of Economics, Spring 1975, pp. 250-78.
10 A. Thomson, "The Structure of Collective Bargaining in Britain," in Handbook of Salary and Wage Systems, 2nd ed., ed. A. M. Bowey (Aldershot, England: Gower Pub. Co. 1982), pp. 37-54.
11 See Thomson, op. cit.
12 L. Iacocca, Iacocca (New York: Bantam, 1984).
13 J. T. Dunlop, "The Task of Contemporary Wage Theory," in New Concepts in Wage Determination, ed. G. W. Taylor and F. C. Pierson (New York: McGraw-Hill, 1957), pp. 117-39.
14 G. T. Milkovich and J. M. Newman, Compensation (Plano, Tex.: Business Publications, 1984), pp. 92-95.
15 J. A. Patton, C. L. Littlefield, and S. A. Self, Job Evaluation: Text and Cases, 3rd ed. (Homewood, Ill.: Richard D. Irwin, 1964).
16 A. M. Pasquale, A New Dimension to Job Evaluation (New York: American Management Association, 1969).
17 D. J. Treiman, Job Evaluation: An Analytical Review (Washington, D.C.: National Academy of Sciences, 1979, (mimeographed).
18 D. J. Treiman and H. I. Hartman, eds., Women, Work, and Wages: Equal Pay far Equal Jobs of Equal Value (Washington, D.C.: National Academy Press, 1981).
19 H. Pornschlegel, Job Evaluation and the Role of Trade Unions (Geneva: International Labour Office, 1982).
20 M. G. Miner, Job Evaluation Policies and Procedures, Survey No. 113 (Washington, D.C.: Bureau of National Affairs, 1976).
21 Personnel Management-Compensation, pp. 152, January 10, 1979 (Englewood Cliffs, N.J.: Prentice-Hall), p. 317.