Job grading – Adam Smith would have liked it

“Labour was the first price, the original purchase – money that was paid for all things. It was not by gold or by silver, but by labour, that all wealth of the world was originally purchased.” – Adam Smith 

Adam Smith is of the opinion that all advantages and disadvantages on the labor market within a region will be automatically neutralized when allocating labor and capital. If there are too many people occupying the same position in one region because the occupation has been very promising at one time, the advantage will soon be balanced out by the lack of demand which will follow when advantages are vanishing. A natural balance can only occur under the condition that there are no barriers to freedom and liberty. Everybody can choose the occupation s/he wants to occupy and can change it at any time. There still will be differences in remuneration even if there is no interference from the Government. Smith explains that the different remuneration levels are justified through hardship of labor, investment in knowledge which has to be obtained in order to accomplish the task, duration of work, responsibility and success (outcome). The definition of hardship is whether a task is easy or difficult to accomplish, whether it’s dirty or proper work, whether it’s well regarded or not. Knowledge is put in relation to the costs which has to be invested in order to obtain qualified work. Smith differentiates between qualified and unqualified work. In terms of duration Smith explains that laborers who depend on external influences which are not under their power, e.g. constructers cannot work when it’s freezing, when there is storm or heavy rain, have to gain enough in order to be able to cover their costs of living when deprived from work. From Smith’s point of view a higher salary is justified based on the trust one has to have in the worker, e.g. the trust one needs to have in a jeweler is higher than the trust one needs to have in a plumber. The same theory applies to doctors and attorneys. The remuneration they receive for their work justifies their rank in society and the investment they made to obtain education justifies a higher salary. In addition, Smith added the dimension of success since not every apprentice might be successful and succeed in covering the cost of living by his/her chosen profession. Smith referred to poets and philosophers who often achieve only average level in their performance. If one of them succeeds to get to the, top s/he will be rewarded with money and admiration by the public. Smith puts actors, opera singers and dancers into the same category of profession as poets and philosophes. From his point of view these artists possess talents which create admiration in the spectators but publicly their work is often perceived as immoral when they claim money for it.  People who occupy this kind of professions have not to be reimbursed for the time and effort they invest in order to promote their talents, they should rather be remunerated for the low status and contempt society reserves for them because as soon appreciation grows their pay will increase to a normal level. 

By categorizing jobs and job families Smith explains his logic of different remuneration levels. It is interesting to see that his theory is similar to grading systems which are applied in companies today in order to identify the importance of a position and its impact on a company’s success. 

Job grading is an analytical form of job evaluation. It combines criteria with a factor evaluation linking it to a predefined grade structure and, depending on the organization, a remuneration rank structure.

Job grading has become a synonym for analytical job evaluation. A system of graded factors expresses the relative value of a position which makes it comparable to other industries and countries. It analysis the requirements, responsibilities and main aspects of a job without evaluating the job holder as a person.

Criteria are evaluated exclusively on a functional level using standardized and generalizable factors. For comparability and delimitation of the positions, each factor has several levels that map the hierarchies of a career path.

Each level of the hierarchy is described in detail enabling a detailed assessment and precise position classification. A range of points is attributed to each factor. 

Job grading is the most important method of job evaluation

The requirements of a specific position will be compared with the definition of individual characteristics needed to fulfill its demands. The grade is determined by an accumulation of a number of points received from the value of each factor defining the position. The total value will be calculated into a final score which translates into a job grade. The job grade is linked to a grade structure matrix reflecting the grade map of an organization. Today within grading we differentiate between experts, professionals, skilled labor, un-skilled and semi-skilled labor in terms of “knowledge”. In regard to “responsibility” we define: General Management, Top Management, Middle Management, Supervisory Management and Team Leadership and in regard to “thinking” individual contributions, project management and overall management are taken into consideration.

Based on the grade of a position salary bands are identified and applied. Smith’ theory that different remuneration levels are justified based on educational background (knowledge), hardship of the position (responsibility) and the final outcome (to find a solution which have a positive impact on the company’s success - thinking) is still valid. 

Smith was of the opinion that artificial restriction of competition and artificial acceleration of competition as well as putting obstacles to the free choice of occupation and capital ventures lead to an imbalance within different industrial sectors of world’s economics. He criticized that politicians were manipulating economic actions. Smith believed in a free choice of occupancy because it allowed people to create their own existence: “Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not the one of society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society…He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention.”[1]

In Smith’s point of view it would be wrong to deprive people from choosing the way they want to apply their talents because it would result in a decrease of investments since people are not willing to invest in something which is regulated by the government and therefore outside of their control: “The interest of [businessmen] is always in some respects different from, and even opposite to, that of the public…The proposal of any new law or regulation of commerce which comes from this order…ought never to be adopted, till after having been long and carefully examined…with the most suspicious attention. It comes from an order of men … who have generally an interest to deceive and even oppress the public.”[2]

In consequence growth will not take place and the free circulation of capital will be inhibited, which results in a negative effect on prosperity. Company owners are not able to expand their businesses, they do not hire new employees any longer and the population’s well fare will descend. In Smith’s mind, only transparent and unlimited economic freedom will help to create equality and justice and will bring prosperity to the whole population. Job grading contributes to it.   

[1] Smith Adam, An Inquiry Into the Nature and Causes of the Wealth of Nations, Volume 1 of 2, 1974, page 91

[2] Smith Adam, An Inquiry Into the Nature and Causes of the Wealth of Nations, Volume 1 of 2, 1976, page 566