Page 134 - DMGT106_MANAGING_HUMAN_ELEMENTS_AT_WORK

Managing Human Element at Work

Notes 6.2.3 Equity in Compensation

Pay structure focuses on internal equity (through job evaluation), external equity (through
market surveying) and some reconciliation of the two to arrive at a final pay structure that
fits the organizational requirement and also enables the organization to attract and retain
qualified employees.
There are three requisites of a sound primary compensation structure. They are:

1. Internal Equity,
2. External Competitiveness, and
3. Performance-based payment.

Internal Equity
Internal equity means that there should be a proper relationship between the wages for the
various positions within the organization. Job evaluation is the cornerstone of a formal wage
and salary programme.
Job Evaluation and Merit Rating

Job Evaluation: Job evaluation or job rating is a systematic procedure for measuring the
basis of common factors such as skill, training, effort, responsibility and job conditions. The
relative job values are thus converted into definite wage rates by assigning the money rate
of pay to each job according to a definite system on scale.
According to Knowles and Thomson, job evaluation is useful in eliminating the following
discrepancies of a wage payment system:
(i) Payment of high wages and salaries to persons who hold jobs and positions not
requiring greater skill, effort and responsibility;

(ii) Paying beginners less than they are entitled to receive in terms of what is required
of them;
(iii) Giving a raise to persons whose performance does not justify the raise;

(iv) Deciding rates of pay on the basis of seniority rather than ability;
(v) Payment of widely varied wages for the same or closely related jobs and positions;
and

(vi) Payment of unequal wages and salaries on the basis of race, sex, religion or political
differences.

External Competitiveness
Once the internal equity has been established through evaluation, the next step is to make
a comparison with other firms in the industry. To achieve external alignment, the management
must first know the average rates of wages for the jobs. Here, it should be noted that it is
not always easy to compare the wage rates of two firms because of some significant
difficulties. They are:
(i) The content of the jobs that have the same title may differ considerably.
(ii) The wage payment methods may differ.

(iii) Employees with the same jobs may have different degrees of regularity of employment,
so that even if wage rates are identical, annual earnings are not.
(iv) The costs of living in different geographic locations may be different.

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