A systematic consideration of labor market dynamics in the development of compensation systems

Abstract

Johnson and Ash (1986) proposed a new model for developing compensation systems which is designed to systematically and simultaneously reconcile differences between internal and external pay equity criteria without necessarily including market based gender biases. Central to their model is the development of a labor market variable (LMV) which is designed to be sensitive to the dynamic affects of supply and demand on occupational wages over time, and which is to be used as a compensible factor in the Position Analysis Questionnaire (PAQ) based job component/policy capturing approach to job evaluation. The present research is designed to examine three issues regarding Johnson and Ash's (1986) model and research: (1) determine if their results can be replicated using actual organizational data regarding relatively heterogeneous sets of jobs; (2) examine the operational adequacy of their LMV; and (3) examine possible differences in outcomes between the application of their method and the more traditional PAQ points driven method. In order to investigate these issues, PAQ based job evaluation data and archival labor market data were obtained for jobs from two organizations (Organizations A and B). The results regarding Organization A tended to support the viability of Johnson and Ash's (1986) model. Regardless, of how the LMV was operationalized, its inclusion in the policy capturing equation caused a significant reduction in the discrepancies between the internal and external equity criteria. Also, the LMV was not related to a measure of the gender dominance of these jobs and the measure of gender dominance did not add, incrementally to the prediction of organizational wages in the policy capturing equations. The results obtained using this method also compared quite favorably with those obtained using the traditional PAQ points method. The results regarding Organization B were less promising. Here, regardless of how it was operationalized, the LMV failed to significantly reduce the discrepancies between the internal and external equity criteria. Further, some evidence was found indicating that the LMV is related to the gender dominance of these jobs, and only minor differences were found between the outcomes of the new method and the traditional PAQ points method.