Using the Point Factor Method to Establish Pay Rates

Are you taking the opportunity to review and reevaluate pay rates in the New Year but don’t know where to start? The point factor method is a quantitative technique to evaluate individual jobs and/or job groups based on elements that are essential to an organization’s operations and success and set appropriate pay rates. Compensable factors are identified in a job analysis, points are assigned to the factors, the factors are weighed based on the job requirements, and a pay structure is established for the position.

The basic steps in creating a pay rate based on point factors are:

  1. Identify compensable factors

  2. Assign points to factors

  3. Weigh factors or categories of factors

  4. Categorize jobs

Identify Compensable Factors

Compensable factors form a basis for judging job value and should represent elements common to the jobs you wish to evaluate. The compensable factors are generally grouped into a few major categories, such as:

  1. Skill

  2. Responsibilities

  3. Effort

  4. Working Conditions

These major categories can then be further subdivided and defined. We recommend using well-defined factors, such as:

  1. Skill

    1. Experience

    2. Knowledge/Education

    3. Ability

  2. Responsibilities

    1. Fiscal/Budget

    2. Confidential Information

    3. Safety

    4. Supervisory and Project Management

    5. Degree of Independent Work/Supervision Received

    6. Complexity of Duties

    7. Personal Contacts and Interactions

    8. Consequences of Error

  3. Effort/Demand

    1. Mental

    2. Physical

    3. Visual

  4. Working Conditions

    1. Location

    2. Hazards

    3. Extremes in Environment

Note that factors may vary from organization to organization, so this list is not necessarily exhaustive, nor will every element apply to every workplace. However, these factors represent elements commonly essential to the operation and success of many organizations.

Assign Points to Factors

Each factor should be divided into levels or degrees to which points are assigned. For example, you might define the “experience” factor into 5 levels with points distributed as follows: No experience (entry level) = 10 points; 1-3 years’ experience = 30 points; 4-6 years’ experience = 50 points; 7-10 years’ experience = 75 points; Over 10 years’ experience = 100 points. For the factor “education,” the difference in value between “some high school” and “some college” might be less than the difference in value between “some college” and an “undergraduate degree,” thus accounting for a wider jump in point spread. For example, some high school = 5 points; High school graduate = 15 points; Some college = 20 points; Undergraduate degree = 60 points; Graduate degree = 100 points.

This same process can be used to distribute points across the levels or degrees of each factor.  

Weigh Factors or Categories of Factors

Next, you should determine which factors or categories thereof are most important to particular jobs and assign respective weights to those factors or categories of factors. If all factors are equally valued for an individual position, the points for each factor can simply be summed to form a total point score for the job. If, however, experience is among the most important factors for a job, it might be weighted more than experience, fiscal responsibility, or physical demand, for example. In that case, experience may receive a weight of 1.5, as opposed to a weight of 1 for neutral factors, or 0.5 or 0.75 for less important factors.

Multiply the weight you have assigned each factor by the points assessed in the previous step. For example, a job that requires 4-6 years’ of experience is given a respective factor point value of 50 points. If experience is highly important to the position, you may opt to weigh it at 1.5, for a final value for the experience factor equaling 75 (50 points x 1.5 weight). Continue until each factor is rated for a specific job.

Categorize Job

Each job is rated using the point factor analysis. Jobs can then be grouped by total point score and assigned to wage/salary grades so that similarly rated jobs would be placed in the same wage/salary grade or assigned the same pay rate.

Throughout this process of evaluation, employers should be mindful and examine the factor points for inherent biases against females and minorities. Consider forming a diverse evaluation committee or consulting a number of members of management during the process to achieve the most objective system possible. Employers should also be prepared to put in significant work to set up this relatively complex analysis. This is effort is largely frontloaded, however, and updates to such a system are generally infrequent. Recognizing and proactively addressing hurdles will allow employers to reap the benefits of a point factor analysis, including its wide application to a wide range of jobs and ease of expressing the value of newly created jobs in monetary terms.  

This blog article is intended for general informational purposes only and should not be construed as legal advice or opinion. Contact myHRcounsel with questions concerning specific facts and circumstances.