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Combining internal and external equity

4 May, 2016 - 17:20

A company that has performed appropriate research has two sets of data. The first is pay structure, the output from the job evaluation. The second is market data, the output from the market survey. The next step will be to combine these two sets of data, to create a pay policy line. The pay policy line can be drawn freehand, by graphing actual salaries and connecting the dots. Alternatively, statistical techniques such as regression analysis are used to create a pay policy line. Regression generates a straight line that best fits the data by minimizing the variance around the line. In other words, the straight line generated by the regression analysis will be the line that best combines the internal value of a job (from job evaluation points) and the external value of a job (from the market survey). You can also enact a policy of “leading” the market by raising the line, and the policy of “lagging” the market by lowering the line.

How do companies decide the pay associated with each job? First, they analyze the content of each job. Second, they assess the value each job contributes to the company. Third, they price each job in the market. Finally, they look at the relationship between what they value internally and what the market values externally. By following each of these steps, a company will have a fair base pay system, which will lead to attracting and retaining the best employees.