Striking the Balance: Market-Based Compensation and Internal Job Evaluation for Competitive Pay
Market data has changed the way jobs are evaluated for compensation. In the past, organizations in the United States relied primarily on internal job evaluation methods to assess the value of a role based on its relative importance within the organization. Now with compensation data so much more readily available, most companies are looking beyond their walls to see how their pay practices compare to others in the market.
In this blog, we will explore both the external and internal job evaluation methods independently and discuss how you can strike a balanced approach.
Internal Job Evaluation: The Point Factor Method
There are many different ways to do an internal job evaluation. One of the most common techniques is the point factor method. At a very high-level, this involves identifying key compensable factors—such as skills, responsibilities, effort, and working conditions—and assigning each factor a weight and point value based on its importance to the company. The total points then determine the relative worth of a job within the organization.
One of the major benefits of the point factor method is the ability to promote internal equity. The point factor method is a clear, measurable way to evaluate each job, ensuring that roles with similar responsibilities and requirements are compensated equally. This fosters a sense of fairness across the organization.
However, relying solely on internal evaluations can be limiting. Maintaining internal equity is mission critical, but it’s not the only consideration in today’s market. That’s where market-based compensation comes into play.
External Job Evaluation: Market-Based Compensation
Market-based compensation is rooted in external job evaluation, which uses compensation data as a foundation to determine the market value of a job or group of jobs. With this approach, companies gather and analyze market data to assess how similar roles are being compensated and align employee salaries accordingly.
There are several advantages to this approach, a major one being market competitiveness. Regular assessment of the external labor market helps companies stay informed about salary trends and changes in demand, enabling them to make more timely adjustments that attract and retain talent.
However, a successful market-based approach depends on having access to relevant, reliable compensation data, as well as a process to manage, analyze, and update that data regularly. Without this in place, it can become easy to make misinformed or out-of-date compensation decisions.