5.8 Determining base pay

By Cynthia V Fukami

Have you ever wondered how a company decides how much to pay for a particular job? Imagine that you have seen a job posted on the Internet. It reads, “Office Assistant Wanted. Will answer the phone and greet visitors. Some word processing duties. Other duties as assigned. Start at USD 8.00 an hour”. How did the manager decide to pay USD 8.00 per hour? Why did she decide that was fair? In this subchapter, we will cover the two types of “fairness” important in designing a base pay system.

Internal equity

The first consideration is that the base pay system needs to be internally equitable . This means that the pay differentials between jobs need to be appropriate. The amount of base pay assigned to jobs needs to reflect the relative contribution of each job to the company’s business objectives. In determining this, the manager should ask his or herself, “How does the work of the office assistant described above compare with the work of the office manager?” Another question to be asked is, “Does one contribute to solutions for customers more than another?” Internal equity implies that pay rates should be the same for jobs where the work is similar and different for jobs where the work is dissimilar. In addition, determining the appropriate differential in pay for people performing different work is a key challenge. Compensation specialists use two tools to help make these decisions: job analysis and job evaluation.

Job analysis is a systematic method to discover and describe the differences and similarities among jobs. A good job analysis collects sufficient information to adequately identify, define, and describe the content of a job. Since job titles may in and of themselves be misleading, for example, “systems analyst” does not reveal much about the job; the content of the job is more important to the analysis than the title. In general, a typical job analysis attempts to describe the skill, effort, responsibility, and working conditions of each job. Skill refers to the experience, training, education, and ability required by the job. Effort refers to the mental or physical degree of effort actually expended in the performance of the job. Responsibility refers to the degree of accountability required in the performance of a job. Working conditions refer to the physical surroundings and hazards of a job, including dimensions such as inside versus outside work, heat, cold, and poor ventilation. A job description summarizes the information collected in the job analysis. See (External Link) for more information about job analysis.