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New Co.’s Job Evaluation and Pay System Recommendations

Terms of Reference/ Memo

This is a task to audit the job evaluation system for New Co., which started five years ago as a small family business manufacturing and distributing high-tech components. In the manufacturing section, this company has two thousand (2000) employees and about thirty (30) engineers in administration and sales, and a small research and development (R&D) component. This report would suggest a job evaluation plan for NewCo.

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Long, R. J., (2006) stated that job evaluations are systematic procedures for determining the relative worth of jobs. Although different approaches exist, each, considers the responsibilities, skills, efforts, and working conditions inherent in the job. It determines which jobs are worth more to the organization than others. Without jobs evaluations, the HR department would be unable to develop a rational approach to pay. (Long, R. J., 15)

Job evaluation

Since evaluation is subjective, it is conducted by specially trained personnel called job analysts is used for this purpose, the group of managers or specialists is used for this purpose, the group is called a job evaluation committee. The committee reviews job analysis information to learn about duties, responsibilities, and working conditions. With this knowledge, jobs are put in a hierarchy according to their relative worth using a job evaluation method. The most common methods are job ranking, job grading, factor comparison, and the point system.

Employees exchange their physical and mental efforts for compensation, but compensation means more than wages and salaries. It may include incentives that motive employees and relate labor costs to productivity. Usually, a wide range of benefits and services are part of the total compensation package each worker receives in developed nations. Financial and physical security also is provided to employees because of laws that impose social responsibilities on employers in a variety of areas. (DeConzo A. David & Robbins P. Stephen, 232)

Gomez-Mejia Luis, Balkin, David & Cardy, Robert, (2007) argued that Compensation is what employees receive in exchange for their contribution to the organization. When managed correctly, it helps the organization achieve its objectives and obtain, maintain, and retain a productive workforce. Without adequate compensation, current employees are likely to leave and replacements will be difficult to recruit. In severe cases, pay dissatisfaction may lower performance result in strikes, increase grievances, and lead to forms of physical or psychological withdrawal ranging from absenteeism and turnover to increased visits to the dispensary and poor mental health. Overpayment also can harm the organization and its people, reducing the firm’s competitiveness and causing anxiety, guilt, and discomfort to the employees. (Gomez-Mejia Luis, Balkin, David & Cardy, Robert, 453)

These concerns play an important role in any manager’s or HR department’s efforts to obtain, maintain, and retain an effective workforce. Understanding the role of compensation and protection is important for well-being as an employee and the well-being of current and future employees.

Required Types of Information

In deciding what to pay employees, and how to pay them, management must make some strategic decisions. Will the organization lead, match, or lag the market in pay? How will individual contributions be recognized? In this section, consider four major strategic rewards decisions that need to be made. They are-

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  1. What to pay employees (which are decided by establishing a pay structure)?
  2. How to pay individual employees (which is decided through variable pay plans and skill-based pay plans)?
  3. What benefits to offer, especially whether to offer employees choice in benefits (flexible benefits)?
  4. How to construct employee recognition programs?

A brief description of the above strategic reward decisions is expressed as bellow-

What to pay: Establish a pay structure

There are many ways to pay employees. The process of initially setting pay levels can be rather complex and entails balancing internal equity- the worth of the job to the organization (usually established through a technical process called evaluation). And external equity- the external competitiveness of an organization’s pay relative to pay elsewhere in its industry (usually established through pay surveys). The best pay system pays the job wants it is worth (internal equity) while also paying competitively relative to the labor market. (Long, Richard J., 246)

Nevertheless, some organizations prefer to be pay leaders by paying above the market, while some may lag the market because they cannot afford to pay market rates, or they are willing to bear the costs of paying below market (namely, higher turnover as people are lured to better-paying jobs. Pay more, and may get better-qualified, more highly motivated employees who will stay with the organization longer. But the pay is often the highest single operating cost for an organization, which means that paying too much can make the organization’s products or services too expensive. It’s a strategic decision an organization must make, with clear trade-offs. ( McShane, Steven, 305)

How to pay: Rewarding & variable-pay programs

Several organizations are moving away from paying people based solely on credentials or length of service and toward using variable-pay programs, piece-rate plans, merit-based pay, bonuses, profit-sharing, gainsharing, and employee stock ownership plans are all forms of variable-pay programs. (Robbins, Stephen P. & Judge, A. Timothy 265)

Instead of paying a person only for time on the job or seniority, a variable-pay program bases a portion of an employee’s pay on some individual and or organizational measure of performance. Earnings, therefore, fluctuate up and down with the measure of performance. Variable-pay plans have long been used for compensating salespeople and executives. The different types of variable-pay programs in more detail are as follow-

Piece-rate pay

Piece-rate wages have been popular for more than a century as a means of compensating production workers. In piece-rate pay plans, workers are paid a fixed sum, for each unit of production completed. When an employee gets no base salary and is paid only for what he or she produces, this is a pure piece-rate plan.

Merit-based pay

Merit-based pay plans also pay for individual performance. However, unlike piece-rate plans, which pay based on objective output, merit-based pay plans are based on performance appraisal ratings. The main advantage of merit pay plans are based is that they allow employers to differentiate pay based on performance so that those people thought to be high performers are given bigger raises. The plans can be motivating because, if they are designed correctly, individuals perceive a strong relationship between their performance and the reward they receive. The evidence supports the importance of this linkage. (Sniderman, R. Pat, et al, 87)

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Bonus plans are casting a larger net within organizations to include lower-ranking employees. Many companies now routinely reward production employees with bonuses in the thousands of dollars when company profits improve. One advantage of bonuses over merit pay is that bonuses reward employees for recent performance rather than historical performance.

Profit-sharing plans

Profit-sharing plans are organization-wide programs that distribute compensation based on some established formula designed around a company’s profitability. These can be direct cash outlays or, particularly in the case of top managers, allocations of stock options.


A variable-pay program that has gotten a great deal of attention in recent years is gainsharing. This is a formula-based group incentive plan. Improvements in group productivity-from one period to another-determine the total amount of money that is to be allocated. The division of productivity savings can be split between the company and employees in any number of ways, but 50-50 is typical. Gainsharing’s popularity seems to be narrowly focused among large manufacturing companies.

Employee stock ownership plans (ESOPs)

ESOPs can mean any number of things, from employees owning some stock in the company at which they work to their owning and personally operating the firm. Employee stock ownership plans are company-established benefit plans in which employees acquire stock, often at below-market prices, as part of their benefits.

How to pay: Rewarding individuals through skill-based pay plans

Organizations hire people for their skills, then typically put them in jobs and pay them based on their job title or rank. But if organizations hire people because of their competencies, why don’t they pay them for those same competencies? Some organizations do. Skill-based pay is an alternative to job-based pay. Rather than having an individual’s job title define his or her pay category, skill-based pay (also called competency-based pay) sets pay levels because of how many skills employees have or how many jobs they can do.

Werther, William B., and Jr. Ketth Davis (2004) argued- Skill-based pay plans are consistent with several motivation theories because they encourage employees to learn, expand their skills, and grow; they are consistent with ERG (Existence, Relatedness, and Growth) theory. Among employees who can be a motivator. Several studies have investigated the use and effectiveness of skill-based pay. The overall conclusion, based on these studies, is that skill-based pay is expanding and that it generally leads to higher employee performance, satisfaction, and perceptions of fairness in pay systems. Finally, skilled-based plans don’t address the level of performance. They deal only with the issue of whether or not someone can perform the skill. (Werther, William B., and Jr. Ketth Davis 339)

Flexible benefits: Developing a benefits package

Flexible benefits allow each employee to put together a benefits package individually tailored to his or her own needs and situation. It replaces the traditional “one-benefit-plan-fits-all” programs that dominated organizations for more than 50 years. Consistent with expectancy theory’s thesis that organizational rewards should be linked to each employee’s goals; flexible benefits individualize rewards by allowing each employee to choose the compensation package that best satisfies his or her current needs. (Long, Richard J., 229)

The average organization provides fringe benefits worth approximately 40 percent of an employee’s salary. Traditional benefit programs were designed for the typical employee of the 1950s-a male with a wife and two children at home. Less than 10 percent of employees now fit this stereotype. About 25 percent of today’s employees are single, and a third is part of two-income families with no children. Traditional programs don’t meet their diverse needs, but flexible benefits do. They can be uniquely tailored to accommodate differences in employee needs based on age, marital status, spouses’ benefit status, number and age of dependents, and the like.

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Ways to Gathering Information

Employee compensation, when properly administered, can further corporate strategy and be an effective tool to obtain, maintain, and retain a productive workforce. Since compensation can signal which behaviors are most valued, it has the potential to influence individual productivity strongly. If it is mismanaged, the results may be high turnover, increased absenteeism, more grievances, increased job dissatisfaction, poor productivity, and unfulfilled strategic plans. To gather information about job evaluation following steps might be followed-

Step-1: Conduct job analysis

Job analysis is the gathering and organization of information concerning the tasks, duties, and responsibilities of specific jobs. In the job evaluation process, information is gathered about the duties, tasks, and responsibilities of all jobs being evaluated. Job analysis may use personal interviews with workers, questionnaires completed by employees and or supervisors, and business records to study the what, how, and why of various tasks that make up the job. (Gomez-Mejia Luis, Balkin, David & Cardy, Robert, 467)

Step-2: Write job descriptions

The job analysis data are boiled down into a written document that identifies, defines, and describes each job in terms of its duties, responsibilities, working conditions, and specifications that are known as the job description.

Step-3: Determine job specifications

Job specifications consist of the worker characteristics that an employee must have to perform the job successfully. These prerequisites are drawn from the job analysis, although in some cases they are legally mandated. Job specifications are typically very concrete in terms of necessary years and type of prior work experience, level, and type of education, certificates, vocational training, and so forth. They are usually included in job descriptions.

Step-4: Rate worth of all jobs using a predetermined system

After job descriptions and job specifications are finalized, they are used to determine the relative value or contributions of different jobs to the organization. This job evaluation is normally done by a 3 to 7 person committee that may include supervisors, managers, HR department staff, and outside consultants.

Several well-known evaluation procedures have evolved over the years, but the “point factor system” is used by the vast majority of firms. The point factor system uses “compensable factors” which are work-related criteria that the organization considers most important in assessing the relative value of different jobs.

Step-5: Create a job hierarchy

The four steps described thus far produce a job hierarchy, a listing of jobs in terms of their relative assessed value from highest to lowest in a typical large organization.

Step-6: Classify jobs by grade levels

For the sake of simplicity, most large organizations classify jobs into grades as the last step in the job evaluation process. Typically, the job hierarchy is reduced to a manageable number of grade levels, with the points used to determine where to set up dividing lines between grades.

Used criteria to assess the job evaluation and pay system

According to job evaluation and its process to gather information and as well as for-pay system following are the criteria to assess the job evaluation and pay system.

  1. Recognize individual differences. This will allow a manager to individualize goals, levels of involvement, and rewards to align with individuals’ needs. Also, design jobs to align with individual needs and therefore maximize the motivation potential in jobs.
  2. Use goals and feedback because employees should have hard, specific goals, as well as feedback on how well they are faring in pursuit of those goals.
  3. Allow employees to participate in decisions that affect them setting work goals, choosing their own benefits packages, solving productivity and quality problems, and the like. This can increase employee productivity, commitment to work goals, motivation, and job satisfaction.
  4. Link rewards to performance because employees must perceive a clear linkage. Rewards should be contingent on performance. Regardless of how closely rewards are corrected to performance criteria, if individuals perceive this relationship to below, the results will be low performance.
  5. Rewards should also be perceived by employees as equating with the inputs they bring to the job. At a simplistic level, this should mean that experience, skills, abilities, effort, and other obvious inputs should explain differences in performance and, hence, pay, job assignments, and other obvious rewards that check the system for equity.


DeConzo A. David & Robbins P. Stephen, “Fundamentals of Human Resources Management”, 8th edition, John Wiley & Sons, Inc., ISBN: 9812-53-171-8, 2007.

Gomez-Mejia Luis, Balkin, David & Cardy, Robert, “Managing Human Resource”, 5th edition, Prentice Hall, ISBN: 978-0135032749, 2007.

Long, Richard J., “Strategic Compensation in Canada” Thomson/Nelson, ISBN: 978-0176416126, 2006.

McShane, Steven, “Canadian Organizational Behaviour”, 7th edition, McGraw-Hill, ISBN: 978-0070876941, 2006 Bottom of Form.

Robbins, Stephen P. & Judge, A. Timothy, “Organizational Behavior”, 13th edition, Prentice-Hall, ISBN: 81-203-3-90-0, 2008.

Sniderman, R. Pat, Bulmash, Julie & et al, “Managing Organizational Behaviour in Canada”, Nelson College Indigenous, ISBN: 978-0176169817, 2006.

Werther, William B., and Jr. Ketth Davis. Human Resources and Personnel Management, 5th ed., McGraw-Hill, New York, ISBN: 0-07-123218-4, 2004.

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