Linking the Market and Internal Values of Jobs

Abstract

The point factor method of job evaluation is one of the most popular and enduring approaches to linking the market and internal value of jobs. Statistically, regression analysis is used to create a market line that allows the organization to predict the market value of its jobs using point scores that define the jobs’ internal values. While attention is given to the fact that the market line represents the statistically “best” option for predicting these market rates, overlooked is the fact that these predictions almost always differ from the jobs’ actual market rates. This article explores the impact of this prediction error in compensation planning. It uses data on 41 jobs to define a market line using simple regression and identify the errors associated with the line’s predicted market values. It provides methods for precisely defining the extent of this prediction error and for minimizing it. It also discusses the impact of this error on the interpretation of salary grades, and the need for policy on key compensation planning issues to minimize the negative impact of prediction error.