Pay policies and programs are one of the most important human resource tools for encouraging desired employee behaviors and discouraging undesired behaviors. Therefore, they must be evaluated, not just in terms of costs, but in terms of the returns they generate  how they attract, retain, and motivate a high-quality work force. For example, if the average revenue per employee in Company A is 20 percent higher than in Company B, it may not be important that the average pay in Company A is 10 percent higher than in Company B.

Also organizations face important external labor- and product-market pressures in setting their pay levels, a range of discretion remains. Where the range is broad, an important strategic decision is whether to pay above, at, or below the market average. The advantage of paying above the market average is the ability to attract and retain the top talent available, which can translate into a highly effective and productive work force. The disadvantage, however, is the added cost.

One typical way of measuring job worth is to perform an administrative procedure called job evaluation. A job-evaluation system is composed of compensable factor to the organization. Simply stated, compensable factors are the characteristics include job complexity, working conditions, required education, required experience, responsibility, and so on. Most job evaluation systems use several compensable factors. Job analysis provides basic descriptive information on job attributes, and the job evaluation process assigns a value to these compensable factors.

Example of a Three-Factor Job-Evaluation System

Compensable factors

Job Title