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Compensation Literature with Questionable Logic

Compensation Literature with Questionable Logic

Like any other field of study, the conclusions drawn by authors suggesting courses of action to be taken by their readers require that the underlying facts and logic be sound.  It is clear from reading a number of recent articles that the authors either do not completely grasp underlying compensation theory, or that they have chosen to ignore it in an effort to either gain publicity or convince potential clients that their services are “the best.”

I read an article recently in a highly read professional journal that is representative of much recent compensation “thought.”  While there was much to question and critique, two points stand out as major errors — one relates to the reason why certain approaches are taken, and the other to a fundamental logic flaw.

The authors first allege that the reason for adopting internal equity approaches in the past was because of a lack of market data — essentially, “back when companies only had access to market data on 5 to 10% of jobs” they were forced to use internal equity models.  I personally don’t know where these folks studied, but in 25 years of working with clients of all sizes in virtually every major industry, I have never had a case where I could not find reliable market data for at least 75% of the jobs.  But more than that — the amount of “reliable” market data is actually decreasing despite the plethora of new survey providers, because fewer and fewer jobs are really “benchmarks.”  Forgetting that error, the fact of the matter is that organizations adopted internal equity approaches because of a desire to properly measure the value of jobs to them, to reflect their unique differences, rather than to rely on a market that frequently has little to do with how they run their business.

The logic flaw is more problematic.  The authors identify a situation where the labor market medians fall outside of the ranges for the internal equity driven pay grades — arguing therefore that the grade assignments are “wrong” because the values of the internal equity system are not the same as the market.  Well that misses the point, doesn’t it?  The whole point of an internal equity system is to identify the differences between the value of jobs to the market and the value of jobs inside the organization.  If the correlation was 1.0, there wouldn’t be any point, would there?

The reality is that, except in situations where survey jobs match up exactly to all of the jobs in your organization (which, to be honest, isn’t likely), a market driven structure will never allow an organization to reflect its own values in its pay system.  Market driven pay systems exacerbate and validate labor market gender based discrimination.

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