Linking the Market and Internal Values of Jobs

Abstract

The point factor method of job evaluation is one of the most popular and enduring approaches to linking the market and internal value of jobs. Statistically, regression analysis is used to create a market line that allows the organization to predict the market value of its jobs using point scores that define the jobs’ internal values. While attention is given to the fact that the market line represents the statistically “best” option for predicting these market rates, overlooked is the fact that these predictions almost always differ from the jobs’ actual market rates. This article explores the impact of this prediction error in compensation planning. It uses data on 41 jobs to define a market line using simple regression and identify the errors associated with the line’s predicted market values. It provides methods for precisely defining the extent of this prediction error and for minimizing it. It also discusses the impact of this error on the interpretation of salary grades, and the need for policy on key compensation planning issues to minimize the negative impact of prediction error.

The Relative Impact of Market, Internal, and Overall Job Values on Pay Competitiveness

“…The resulting trendline formula for the 88 jobs in this analysis is: Since this regression analysis predicts the market values of jobs given their internal values to the organization, the trendline is similar to what Newman, Gerhart, & Milkovich (2017), and Martocchio (2011) refer to as a market pay line, and the overall values of jobs are equivalent to the market pay line's predicted market values. However, it is important to note that these predicted market values are seldom the same as the jobs' actual market values (Liccione, 2014). While, statistically, the differences reflect the regression model's prediction error, from a compensation perspective they also reflect the degree to which the jobs' internal values to the organization alter their labor market values.…”

“…However, both the partial F test and Extra Sum of Squares analysis done here indicate that overall job value, per se, explains a significant amount of the variance in employees' pay competitiveness in addition to the variance explained by the market and internal values of jobs. This additional significance reflects, not only the correlation, or agreement, between predicted and actual market rates, but also the degree to which these values differ (Liccione, 1992). Indeed, from an overall value perspective, the latter provides important information on the influence of jobs' internal values which may be taken into account when making pay decisions.…”

“…Essentially, factors were developed that applied to all of the organization's jobs and allowed it to define the internal value of each job in terms of points. The methodology used to develop this tailored point factor plan is described, in detail, by Liccione (2014). Following is a summary of the 6-step process used.…”