Deciding how much to pay each employee in a company is difficult. There are two approaches to this—internal and external—though they may be used together. An external approach involves finding out what other organizations pay for the same or similar jobs through available pay surveys, and it sets pay levels based on market pricing. The vast majority of firms use this external approach to identifying pay levels. In a recent survey, about 95% of companies said that they use at least one source of pay survey data or other external information to determine market pricing for their jobs.
On the other hand, an internal approach uses job evaluation. Job evaluation is the process of determining the worth of each position relative to the other positions within the organization. The most common form of internal job evaluation, the point-factor method, was used in only about one sixth of the companies surveyed. Organizations commonly group jobs into pay levels or grades, and the higher the grade of the job, the higher the pay.
How do we accomplish a job evaluation? There are several ways, but the methods usually involve assigning points to activities that occur within a job and totaling the points for the job. Once this is done, we can place the job in a hierarchy and create our pay grades.
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