Job Evaluation: Internal versus external equity

Job evaluation is a systematic process of establishing the relative value of jobs within an organisation.

Job evaluation aims to establish a credible way of pricing jobs in an organisation.

Once an equitable pricing mechanism has been established, employers can attach salaries that should be paid for each job.

The ultimate goal of this process is to promote internal equity. This often culminates in the development of a pay structure.

A pay structure based on the job evaluation results emphasises the importance of a job within the organisation.

It does not consider the open market supply and demand issues for jobs.

The job evaluation results often do not reflect how jobs are valued on the open market as determined by the supply and demand of such skills.

How can organisations promote both internal and external equity?

As already outlined, job evaluation will allow your organisation to set salaries based on the internal relative value placed on each job.

The jobs are often grouped into grades after job evaluation. Job grades group jobs of equal value to the organisation.

You can develop a pay structure based on job evaluation without reference to the external market.

However, such an approach will not help you to set competitive salaries as it ignores the supply and demand of such skills on the open market.

While internally, employees could generally be happy with how they are paid compared to similar roles within the organisation, that may not be the case in the open market.

One approach is to use market pricing of jobs without going through job evaluation.

Market pricing is determining what to pay for specific jobs based on what the market pays.

Market pricing may work in certain situations, but it may create problems in the long term.

I will share these problems as we go through this article.

An employer intending to do market pricing will go on the open market and source salary survey data for the roles of interest.

The employer may target a specific sector or general market.

The employer may want to focus on the median salaries for these roles.

Once the market median for each role has been established, you can group the jobs by salary range.

For example, you may find that jobs are paid between US$1 200 and US$2,000.

Such jobs would be given a grade based on that salary range.

Unlike job evaluation, where the process starts with establishing the relative value of jobs, in market pricing, we start with establishing what the market pays for the jobs and work backwards to establish a grade (grouping jobs of equal value).

Establishing salary ranges based on market data can be done scientifically using statistical methods.

The challenge with using market pricing alone to establish salaries is that it ignores internal equity.

The value assigned from job evaluation is more stable than the value that comes through market pricing.

The supply and demand of jobs fluctuate more often to such an extent that it becomes an unreliable method for setting salaries.

My experience using job evaluation and market pricing shows that the best approach is to combine the two approaches. First, you carry out a job evaluation.

Use the results of job evaluation to check the distribution of salaries. The relationship between grade and salary should be strong enough for the system to have value.

Normally a coefficient of determination of around 70% and above shows a good relationship. Follow this up by carrying out a market survey for the jobs.

Again run the same analysis checking the relationship between grades and market salaries.

If your coefficient of determination is around 70% and above, you are good to go.

You can now use internal and market data distribution to develop a pay structure.

A pay structure developed through this process is more sustainable and will assist you in retaining and attracting the right talent.

In practice, most companies waste a lot of money on job evaluation and fail to develop a credible and sustainable pay structure.

Without a pay structure as the ultimate goal, job evaluation is useless. Job evaluation should lead to a sustainable and competitive pay structure.

A good pay structure should enhance the organisation’s capacity to retain and attract talent.

If you ignore the supply and demand of skills on the open market, you constrain the organisation’s capacity to attract the right skills.

If job evaluation is mishandled, it can create havoc internally as people are likely to perceive the pay system as unfair.

Memory Nguwi is an Occupational Psychologist, Data Scientist, Speaker, & Managing Consultant- Industrial Psychology Consultants (Pvt) Ltd, a management and human resources consulting firm.Email:mnguwi@