The Disadvantages of Job-Based Pay

Businesses can use a variety of pay structures to compensate employees, including job-based and grade-based. The job-based pay structure has been widely used by businesses because it links the job position directly to pay. However, this structure has disadvantages because employers are limited in considering other factors that more accurately measures a worker's value.

Job-based pay has traditionally been the main structure companies have used in determining how much to pay workers. Employers that use this structure pay workers according to the employee's position and job duties. This means that two different candidates for the same job might be offered two different salaries based on one having more qualifications.

An employer may also consider the employee's work experience and seniority as part of the job evaluation. The implicit message to employers who use the job-based compensation structure conduct performance appraisals to measure the employee's contributions to the company.

Some business owners are finding that job-based pay structures do not suit their organizational strategies. This is true in industries where there is plenty of talent available to fill open positions. These companies are seeking pay structures that align with their work environments and help them forecast and budget their labor costs more accurately for an entire year.

As companies have changed their work environments, they are basing salaries on other structures that are more useful. For example, as more emphasis is placed on working as a team, companies are basing salaries of the efforts workers make as a member of a team. Due to a worker shorter caused by the COVID-19 pandemic, however, more and more employers are finding it necessary to offer higher salaries and better benefits to staff their businesses at all levels – from restaurants to Silicon Valley tech firms.

Job-based pay structures can increase a company's operating costs, which is another disadvantage. For example, the company may have to hire a consulting firm to conduct compensation audits. The business may also have to revise its pay grades every year, which requires more administrative staff.

If job-based pay does not reward the best employees for their work, this can affect how employees are evaluated. When evaluating employee performance, employers that have job-based pay structures are limited in giving pay raises that take the worker's skills and experience into account.

The fact that an employee's performance may be superb carries less weight in such structures. Employers can work around this by allowing employees to negotiate for better benefits, such as a new title, flex time or remote work.

Employees who are not rewarded for their job performance may quit because they feel that their contributions are not valuable to the company. For example, an employee whose contributions result in an increase in earnings or new clients will want to be rewarded. Employees can be rewarded with pay raises or bonuses. If the employee receives neither, he may seek employment with other companies.