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Job Pricing

Job pricing involves the establishment of wage rates for jobs within an organization, by using a job evaluation method. Job evaluation methods are described below.

Market Pricing

Market pricing is the most common method of valuing jobs. Over 80% of companies use market pricing as their primary job evaluation method. In this method, job rates are set based on the organization's best estimate of the typical wage rates in the external market place for that job. Information on wage rates from the external market place can be obtained by participating in salary surveys. Being aware of the prevailing wage rates in the external market place is critical to the success of an organization. If wage rates become too high relative to the market, the organization may become less cost competitive than its competitors. If wage rates become too low relative to the market, the company may experience the loss of employees to companies which pay a higher rate.

Internal Job Evaluation Methods

There are several internal job evaluation methods. These include the following:

  • Slotting - establishing a value for a job based on its similarity to another job or jobs.
  • Ranking - a job to job comparison resulting in an ordering of jobs from highest value to lowest value.
  • Paired Comparison - each job in an organization is compared to every other job and the job of most value in each pairing is noted. Jobs are then ranked based on the number of times they were found to be more valuable in the comparison.
  • Point Factor - involves three basic steps:
    1. Compensable factors are chosen by the organization based on what is valued for its jobs (such as education, experience, and responsibility requirements),
    2. Each compensable factor is weighted and scaled (e.g. no experience required, two years experience required, five years experience required, etc.),
    3. Each job is measured against each compensable factor and a total score is derived and compared with the scores of other jobs.

The value of internal job evaluation methods is limited. Even the most rigorous method is based on the subjective evaluation of the job by an individual or group. Relying too much on an internal job evaluation method to price the jobs risks divergence from the reality of the market place. Internal job evaluation methods are necessary to price jobs for which there is little reliable market data. Every organization has a few jobs which are unique to that organization, and therefore no comparable market data is available.

Pay Philosophy and Strategy

The classic pay philosophy is to provide wages that will attract and retain qualified employees. The strategy by which this is accomplished can include paying equal to the market or ahead of the market.

Many companies emphasize total compensation, stating that the total compensation paid by their company is equal to or better than other companies in the market (even though their salaries may not be). Emphasizing total compensation accentuates variable pay practices. Variable pay such as stock or incentive pay may comprise a large portion of employees' pay in some organizations. In particular, newly formed companies may offer generous stock options and relatively low salaries, since they have a lot of stock (which may or may not become valuable) and not much money.

Paying all employees higher than the market would seem to be a pay strategy that would attract the best employees. However, there are several drawbacks to this approach.

  • Employees who are paid high relative to the market, may be less willing to do the necessary, but more menial tasks of the job function.
  • If all employees are paid high relative to the market, then there's less room for salary differentiation between the best performers and the average performers.
  • If a highly paid employee performs poorly and termination becomes necessary, it can become a problem for the organization. Terminating highly paid employees is much more difficult than terminating employees who are not highly paid. It is harder for the employee to find another job with comparable pay and they may, therefore, resist termination.
  • Of course, labor costs will be higher than competitors.

Arguably, the best approach is paying equal to the market (on the average), allowing for a diversity of skills and styles, differentiating in pay between the best performers and less valued performers, and providing career advancement opportunities.

For this reason, the optimal choice is to work for a company that provides the best challenges in a field of interest to the candidate, with less regard for pay. Companies which provide greater advancement opportunities will, in the long run, provide higher compensation than companies that may pay well, but provide few advancement opportunities.

Reasonable Pay Levels

I worked at a company that several years ago conducted an opinion survey of all employees. One question asked if they thought they were paid high, low, or average. The results were amazing. The cumulative results correlated exactly with the salary survey results. In jobs where the salary surveys indicated that average salary was high relative to the market, the average employee responded that they were well paid. In jobs where the average salary was low relative to the market, employees responded that they were not paid well. My conclusion is that people have a pretty good sense of how well they are paid.

The labor market for some jobs, especially engineering, is very tight at the moment. Some candidates are asking for very aggressive salary increases. Matching excessive salary requests is a lose-lose deal. The company has a negative pay equity impact, and the new employee will generate resentment, from fellow employees, or a manager who has to hear the complaints about pay inequity.

Listed below are typical starting salaries of employees without work experience. All amounts are in US Dollars. The amounts vary based on region of the US. Engineers (as well as other highly paid positions) represent a national labor market and there is less regional variance in pay than less skilled jobs. Non-engineering starting pay rates in the San Francisco Bay Area (Silicon Valley) are generally 10% to 15% higher than other technology regions in the US.

  • Assemblers - $6.00 to $10.00 per hour
  • Clerical - $6.00 to $11.00 per hour
  • Technicians - $8.00 to $14.00 per hour
  • Engineers - $37,000 to $44,000 annually (BS Degree)
  • Business Professionals - $32,000 to $39,000 annually (BS Degree)

Engineers with a Masters degree generally start at a rate of pay that is 20% more than those with a BS degree. There are several sites on the internet that provide salary survey information. These can be located using one of the popular search engines (search on "salary survey").

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