2016 Resolution #3 – Increase Emphasis on Internal Equity

Resolution #3 – Reduce your reliance on market data in favor of an effective internal equity program.

Let’s face it.  The human resources and employee compensation profession has lost its focus, as well as much of its credibility, in favor of the lure of gimmicks and black box internet technologies.  Over the last two years, we have reviewed the web sites of several providers of online “market data,” testing their products, and looked closely at some studies of compensation practices published by World at Work (formerly the American Compensation Association).  Many of the sites and studies had serious professional problems, such as making absurd predictions of the market, using the wrong terminology, or incorrect definitions for common professional terms.

It may seem like nit-picking to some, but when the major compensation professional society mislabels market pricing as a form of job evaluation, it’s time for some serious questioning of what the profession is doing.

WHAT IS THE PROBLEM WITH MARKET PRICING?

So you might be thinking, oh, he’s just old school – market data is easy and really cool, all we have to do is go online to our favorite website and put in a job title and our zip code, and it’s all we need!  And besides, our recruiters tell us what we need to pay. Here’s the problem – in the same study that made a major mistake in confusing internal and external equity job evaluation methods – the same majority of survey participants that said they had a market-based pay program also said that the market data available to them was unreliable.

Conclusion — we don’t understand how to develop a complete compensation program, so we use one component that we don’t really understand, and that we acknowledge isn’t reliable.

  • Many popular sources of pay data may not be reflective of the market at all!
  • A higher and higher percentage of most organization’s jobs are no longer “benchmarks.” That means that market data may not even be available for half or more of the typical organization’s jobs.
  • Pay surveys do not provide a mechanism for determining what to do when organizational job titles do not match the one or two sentence survey capsule descriptions.

The bottom line is that survey data alone will never provide all of the information necessary to manage a compensation program, even if it was actually accurate.

USE INTERNAL EQUITY METHODS TO SOLVE THE MARKET DATA PROBLEMS

The most common internal equity technique, “point-factor job evaluation” is a simple solution to the problems presented by poor market.  Without going into graphic detail, the process is fully under the control of the employer.  Jobs are broken down into fundamental characteristics, measured objectively and added back together to determine how much a job contributes to the success of the organization.  Here’s how this solves the market data dilemmas:

  • You may not be able to use the market to determine the value of a job, but you can determine the value of the job to your organization – and ensure you pay that job consistent with that of other jobs of similar value.
  • You have an accurate way of accounting for differences between your jobs and the surveys. Whether it is more skill, less responsibility, or different levels of authority, your job evaluation plan will tell you exactly how much more or less your job is worth compared to the surveys.

Fundamentally, all the problems caused by unreliable market data are solved.  Of course you will still need some market data to anchor the structure to the market, but only for benchmark jobs.  No more tedious data analysis, expensive consulting assignments or the need to consult a survey every time a new job is created.  It is also true that occasionally internal value and external value will be so different that it will be necessary to rely on the market – however, those jobs are few and far between, and typically have the most accurate market data (e.g., doctors, lawyers, professional football players).

WHY DID THE PROFESSION GO ASTRAY?

Job evaluation and other internal equity techniques are perceived by some as complex, and subject to manipulation.  However, like any other management system, they are only as complex as you make them, and can only be manipulated if you allow it.  The number of larger organizations sold on the market data approach by vendors, and the lack of understanding of compensation techniques in many small organizations has led to a dramatic decrease in practitioners who truly understand how to develop a compensation program.

Organizations have supposedly defaulted to using labor market data because they feel that job evaluation techniques are too expensive.  Presumably, they believe this because the big compensation consulting firms charge hundreds of thousands of dollars to implement programs, and the small firms and independents don’t know how.  This false belief has caused employers to spend a lot MORE money to buy salary surveys – or hire consultants to gather market data – than if they had installed a fair and equitable compensation program in the first place.

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If you’re interested in improving the effectiveness or your compensation problem, saving significant time, effort and financial resources, look into the advantages of an internal-equity focused compensation program.  If not, well, have fun figuring out what to do next with your survey!

About Edmund B. Ura

Edmund B. Ura, MAIR, JD, works with governing boards, executives and human resources staff to develop methodologies for ensuring fair and equitable compensation programs that support achievement of organizations' missions. Contact Ed at ebura@mercesconsulting.com.

One Response to “2016 Resolution #3 – Increase Emphasis on Internal Equity”

  1. Reblogged this on Merces FQHC Human Resources Consulting and commented:

    As we tell our clients and colleagues, there is a big difference between a “tool” and a “program.”

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