Market Analysis and Job Evaluation Methods – A Comprehensive Guide for aPHR Exam Success
Introduction
Market analysis and job evaluation are two foundational pillars of compensation and benefits management. For anyone preparing for the aPHR (Associate Professional in Human Resources) certification exam, understanding these concepts is essential. They help organizations establish fair, competitive, and internally equitable pay structures. This guide will walk you through what market analysis and job evaluation methods are, why they matter, how they work, and how to confidently answer exam questions on these topics.
Why Market Analysis and Job Evaluation Are Important
Organizations must attract, retain, and motivate talented employees. Compensation plays a central role in achieving this goal. Without a structured approach to setting pay, companies risk:
• Paying too much – leading to unsustainable labor costs and reduced profitability.
• Paying too little – resulting in high turnover, difficulty attracting talent, and low morale.
• Internal pay inequities – creating perceptions of unfairness, potential legal liability (e.g., Equal Pay Act violations), and employee dissatisfaction.
• Compliance issues – failing to meet legal requirements related to minimum wage, overtime, and pay equity.
Market analysis ensures external competitiveness — that the organization's pay rates are aligned with what other employers in the relevant labor market are paying for similar work. Job evaluation ensures internal equity — that jobs within the organization are compensated fairly relative to one another based on their value to the organization.
Together, they form the backbone of a sound compensation strategy.
What Is Market Analysis?
Market analysis (also called market pricing or compensation benchmarking) is the process of comparing an organization's pay levels with those of other employers in the external labor market. The goal is to determine the going rate for jobs so that the organization can make informed decisions about its pay levels.
Key Components of Market Analysis:
1. Salary Surveys – These are the primary data source for market analysis. Salary surveys collect compensation data from multiple organizations and report statistical summaries (e.g., mean, median, percentiles) for specific jobs. Surveys can be:
- Published surveys – conducted by third-party organizations (e.g., Bureau of Labor Statistics, WorldatWork, Mercer, Towers Watson).
- Custom surveys – commissioned by an organization or group of organizations for specific needs.
- Free/online surveys – available through websites, though these may be less reliable.
2. Benchmark Jobs – These are well-defined, commonly found positions that are used as reference points for market comparisons. Benchmark jobs should be stable in content, found across many organizations, and represent a range of pay levels within the organization. Examples include Accountant, HR Generalist, and Administrative Assistant.
3. Labor Market Identification – The relevant labor market depends on the type of job. For entry-level positions, the local market may be most relevant. For executive or highly specialized roles, the national or even international market may apply.
4. Compensation Data Points – Market analysis typically examines base salary, total cash compensation (base + variable pay), and total remuneration (including benefits). Common statistics include the 25th percentile, 50th percentile (median), and 75th percentile.
5. Aging Data – Since survey data may be several months old when published, organizations often age (or trend) data forward using anticipated pay movement percentages to make the data current.
6. Market Pay Line – After collecting and analyzing data, organizations can plot a market pay line that shows the relationship between job value (or job evaluation points) and market pay rates. This line serves as a reference for setting the organization's pay structure.
What Is Job Evaluation?
Job evaluation is a systematic process for determining the relative worth of jobs within an organization. It focuses on the job, not the person performing it. The goal is to create a hierarchy of jobs based on their value to the organization, which then serves as a foundation for building an equitable pay structure.
Major Job Evaluation Methods:
Job evaluation methods are generally categorized as either non-quantitative (qualitative) or quantitative.
Non-Quantitative Methods:
1. Ranking Method
- What it is: The simplest method. Jobs are compared to each other and ranked from highest to lowest in terms of overall value to the organization.
- How it works: Evaluators review job descriptions and arrange all jobs in order of importance or difficulty. A variation is paired comparison, where each job is compared to every other job one at a time.
- Pros: Simple, fast, inexpensive, easy to understand.
- Cons: Subjective, does not measure the degree of difference between jobs, impractical for large organizations, difficult to defend legally.
2. Classification (Grading) Method
- What it is: Jobs are placed into pre-determined grades or classes based on written descriptions of each grade level.
- How it works: The organization first defines a series of job classes or grades (e.g., Grade 1 = routine tasks requiring minimal judgment; Grade 5 = complex managerial tasks). Then each job is matched to the grade that best describes it.
- Example: The U.S. federal government's General Schedule (GS) system is a classic example of the classification method.
- Pros: Easy to understand, accommodates a wide variety of jobs, widely used in public sector.
- Cons: Grade descriptions can be vague, difficult to classify jobs that span multiple grades, subjective judgment still involved.
Quantitative Methods:
3. Point-Factor Method
- What it is: The most widely used job evaluation method. Jobs are evaluated based on specific compensable factors (e.g., skill, effort, responsibility, working conditions). Each factor is assigned a weight and a point value.
- How it works: Compensable factors are identified and defined. Degrees (or levels) are established for each factor. Points are assigned to each degree. Each job is then evaluated on each factor, and the total points determine the job's relative worth.
- Example: A job might receive 200 points for skill, 150 for responsibility, 100 for effort, and 50 for working conditions, totaling 500 points. This total is used to place the job in the pay structure.
- Pros: Systematic, consistent, defensible, provides a clear rationale for pay differences, accommodates a wide range of jobs.
- Cons: Time-consuming and costly to develop and maintain, can become complex, requires ongoing calibration.
4. Factor Comparison Method
- What it is: A hybrid method that combines elements of ranking and the point-factor approach. Jobs are compared to benchmark jobs across specific compensable factors, and monetary values (rather than points) are assigned to each factor.
- How it works: Benchmark jobs are selected and their current pay is allocated across compensable factors. Other jobs are then compared factor by factor to the benchmark jobs and assigned monetary values accordingly.
- Pros: Tailored to the organization, systematic.
- Cons: Very complex, difficult to explain to employees, rarely used today due to its complexity.
Summary Comparison Table of Job Evaluation Methods:
Ranking – Non-quantitative, compares whole jobs, simplest method, best for small organizations.
Classification – Non-quantitative, matches jobs to grade descriptions, used in government (GS system).
Point-Factor – Quantitative, uses compensable factors and points, most widely used, most defensible.
Factor Comparison – Quantitative, assigns dollar values to factors, complex, rarely used today.
How Market Analysis and Job Evaluation Work Together
In practice, organizations use both market analysis and job evaluation to build a comprehensive pay structure:
1. Conduct job evaluation to determine the internal hierarchy of jobs (internal equity).
2. Conduct market analysis using salary surveys and benchmark jobs (external competitiveness).
3. Combine the results to develop pay grades, pay ranges, and a pay structure that balances internal equity with market competitiveness.
4. Develop pay policies such as whether to lead, match, or lag the market.
For example, an organization might use the point-factor method to assign point values to all its jobs, then use market data to assign dollar values to those point totals. The result is a pay structure with defined grades and ranges that reflects both the relative internal worth of each job and its external market value.
Key Terminology You Must Know for the aPHR Exam
• Compensable Factors – Job characteristics used to determine a job's relative worth (e.g., skill, effort, responsibility, working conditions). These are central to the point-factor and factor comparison methods.
• Benchmark Jobs – Standard, well-recognized jobs used for market comparisons and as reference points in job evaluation.
• Pay Grade – A grouping of jobs of similar value for pay purposes.
• Pay Range – The minimum, midpoint, and maximum pay rate for a given pay grade.
• Compa-Ratio – An employee's actual pay divided by the midpoint of their pay range. A compa-ratio of 1.0 means the employee is paid at the midpoint.
• Market Pricing – The process of setting pay based primarily on external market data.
• Internal Equity – Fairness of pay among jobs within the same organization.
• External Competitiveness – How an organization's pay compares to the external labor market.
• Lead, Match, Lag Strategy – An organization's decision to pay above (lead), at (match), or below (lag) the market rate.
• Salary Compression – When there is little difference in pay between employees regardless of experience, skill, or seniority. Often occurs when new hires are brought in at rates close to those of long-tenured employees.
• Green Circle Rate – An employee's pay rate that falls below the minimum of their pay range.
• Red Circle Rate – An employee's pay rate that falls above the maximum of their pay range.
Exam Tips: Answering Questions on Market Analysis and Job Evaluation Methods
The aPHR exam tests your understanding of foundational HR concepts. Here are strategies specifically for market analysis and job evaluation questions:
1. Know the Differences Between Methods
The exam may present a scenario and ask you to identify which job evaluation method is being used. Remember:
- If jobs are simply ordered from most to least important → Ranking
- If jobs are slotted into pre-defined grade levels → Classification
- If jobs are scored using compensable factors and points → Point-Factor
- If jobs are compared to benchmarks using dollar values for each factor → Factor Comparison
2. Remember That Job Evaluation Focuses on the Job, Not the Person
A common exam trap is to confuse job evaluation with performance appraisal. Job evaluation assesses the job's relative value. Performance appraisal assesses the individual's performance in the job.
3. Understand the Purpose of Salary Surveys
Salary surveys support external competitiveness. If a question asks about ensuring the organization's pay is competitive with other employers, the answer likely involves salary surveys and market analysis.
4. Distinguish Internal Equity from External Competitiveness
- Internal equity → achieved through job evaluation
- External competitiveness → achieved through market analysis/salary surveys
If the question focuses on fairness among jobs within the company, think job evaluation. If it focuses on competing with other employers, think market analysis.
5. Know the Most Commonly Used Methods
The point-factor method is the most widely used and most defensible job evaluation method. The classification method is commonly associated with government positions (GS system). These are frequently tested facts.
6. Watch for Keywords in Questions
- "Compensable factors" → Point-Factor or Factor Comparison
- "Predetermined grades" or "grade descriptions" → Classification
- "Simple ordering" or "paired comparison" → Ranking
- "Benchmark jobs" and "salary surveys" → Market Analysis
- "Going rate" or "prevailing wage" → Market Pricing
7. Understand Pay Structure Terminology
Questions may ask about compa-ratios, green and red circle rates, or pay compression. Make sure you can define and apply these terms. For example, if an employee earns $45,000 and the midpoint of their range is $50,000, the compa-ratio is 0.90 ($45,000 ÷ $50,000).
8. Use Process of Elimination
On multiple-choice questions, eliminate answers that clearly don't match the scenario. If a question describes a systematic, point-based system with defined compensable factors, you can immediately eliminate ranking and classification.
9. Apply Real-World Logic
Many exam questions are scenario-based. Think about what would make practical sense. If a small startup with 20 employees needs a quick, simple way to order its jobs, the ranking method is most appropriate. If a large corporation needs a defensible, systematic approach, the point-factor method is the best choice.
10. Review the Relationship Between Market Analysis and Pay Strategy
Understand that an organization's compensation philosophy (lead, match, or lag) drives how it uses market data. A company that wants to attract top talent may adopt a lead strategy (paying above the 50th percentile). A company focused on cost control may lag the market but offer strong benefits or other non-monetary incentives.
11. Don't Overthink the Questions
The aPHR exam tests foundational knowledge, not advanced compensation design. Focus on understanding the core concepts, definitions, and distinctions. If you know what each method is, when it's used, and its advantages and disadvantages, you'll be well-prepared.
12. Practice with Sample Questions
Create flashcards for each job evaluation method with its key characteristics. Practice identifying methods from short descriptions. Review how market data feeds into pay structure development.
Conclusion
Market analysis and job evaluation methods are essential tools in the HR professional's compensation toolkit. Market analysis ensures that an organization's pay is externally competitive, while job evaluation ensures that jobs are valued fairly within the organization. Together, they create the foundation for a balanced, equitable, and strategic pay structure. For the aPHR exam, focus on understanding the purpose, process, and distinguishing features of each method, as well as key compensation terminology. By mastering these concepts and applying the exam tips above, you will be well-positioned to answer questions on this topic with confidence and accuracy.
