Milkovich/Newman: Compensation, Ninth Edition

Chapter 3

Defining Internal Alignment


Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Topics
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Compensation Strategy: Internal Alignment Structures Vary Among Organizations What Shapes Internal Structures? Strategic Choices in Designing Internal Structures

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Guidance from the Evidence
Consequences of Structures Your Turn: So You Want to Lead the Orchestra!


Compensation Strategy: Internal Alignment

Issues in a strategic approach to pay
– Setting objectives
– Internal alignment
 Addresses relationships inside the organization  The relationships form a pay structure that should:
– Support the organization strategy – Support the work flow

– Motivate behavior toward organization objectives


Internal alignment, often called internal equity, refers to the pay relationships among different jobs/skills/competencies within a single organization.


Exhibit 3.1: Engineering Structure at Lockheed Martin 3-5 .

Pay structure refers to the array of pay rates for different work or skills within a single organization. The number of levels. the differentials in pay between the levels. 3-6 . and the criteria used to determine those differences describe the structure.

Compensation Strategy: Internal Alignment (cont.)  Supports organization strategy  Supports work flow – Work flow – process by which goods and services are delivered to the customer  Motivates behavior – Line-of-sight – Structure must be fair to employees 3-7 .

Structures Vary Among Organizations  An internal pay structure can be defined by – Number of levels of work – Pay differentials between the levels – Criteria or basis used to determine those levels and differentials 3-8 .

Levels  Pay structure is hierarchical in nature. based on: – Number of levels – Reporting relationships 3-9 .

Exhibit 3.2: Managerial/Professional Levels At General Electric Plastics (GEP) 3-10 .

Differentials  The pay differences among levels  Pay is determined by: – Knowledge/ skills involved – Working conditions – Valued addition to the company  Intention of these differentials: – To motivate people to strive for promotion to a higher-paying level 3-11 .

3: Exploring Pay Structure at Lockheed Martin 3-12 .Exhibit 3.

tasks. and/or responsibility  Value – the worth of the work. complexity of tasks. its relative contribution to the organization objectives – Structure focuses on – relative contribution of these skills. and responsibilities to the organization's goals – Can include external market value 3-13 .Criteria: Content and Value  Content – the work performed in a job and how it gets done – Structure ranks jobs on – skills required. problem solving.

Use Value and Exchange Value   Use value – the value of goods or services an employee produces in a job Exchange value – whatever wage the employer and employee agrees on for a job Difference between exchange value and use value surfaces when one firm acquires another  3-14 .

responsibilities Person-based structure shifts the focus to the employee – Skills. or competencies the employee possesses – Whether or not they are used in the particular job  In reality. behaviors.and Person-Based Structures   Job-based structures relies on the work content – tasks. both job-and-person-based structures are included 3-15 . knowledge.Job.

4: What Shapes Internal Structures? 3-16 .Exhibit: 3.

What Shapes Internal Structures? External Factors  Economic pressures – Early advocates: Adam Smith. and regulations – Equal Pay Act and Civil Rights Act – Living wage 3-17 . Karl Marx – Marginal productivity – Supply and demand for labor and products  Government policies. laws.

What Shapes Internal Structures? External Factors (cont.)  External stakeholders – Have a stake in how internal pay structures are determined – Internal alignment focuses on pay differentials within an organization  Cultures and customs – Culture – the mental programming for processing information that people share in common – Global competition and an aging workforce has made age-based pay an expensive affair 3-18 .

yet adaptable pay structures may be required  Organization's human capital – – – – – Education Experience Knowledge Abilities Skills required to perform the work 3-19 .What Shapes Internal Structures? Organizational Factors  Organization strategy – Aligned.

)  Organization work design – Technology used in producing goods and services influences  Organizational design  Work to be performed  Skills/Knowledge required to perform work 3-20 .What Shapes Internal Structures? Organizational Factors (cont.

What Shapes Internal Structures? Organizational Factors (cont. changes the job‟s value and structure 3-21 . non-contributing work  Adds work to other jobs.) – Temporary work supplier – Outsourcing specialists  Pay for employees under both practices based on internal structure of home employer – Delayering  Cuts unnecessary.)  Organization work design (cont. enlarges them.

)  Overall HR policies – Feeling of „career progress‟ 3-22 .What Shapes Internal Structures? Organizational Factors (cont.

What Shapes Internal Structures? Combining External and Organization Factors  Internal labor markets – Rules and procedures that  Determine pay for different jobs within a single organization  Allocate employees among those different jobs  Employee acceptance – Sources of fairness: Procedural. and distributive justice  Pay structures change – „Change-and-congeal” process 3-23 .

Exhibit 3.5: Illustration of an Internal Labor Market 3-24 .

Strategic Choices in Designing Internal Structures  Fitting or tailoring the pay structure to be internally aligned involves two strategic choices – How tailored to organization design and work flow to make the structure – How to distribute pay throughout the levels in the structure 3-25 .

Strategic Choices in Designing Internal Structures (cont.)  Tailored versus loosely coupled – Tailored  Well designed jobs with detailed steps or tasks  Very small pay differentials among jobs – Loosely coupled  Requires constant innovation 3-26 .

)  Egalitarian versus hierarchical – Egalitarian structures send the message that all employees are valued equally – Advantages  Fewer levels and smaller differentials between adjacent levels and between highest.and lowest-paid workers – Disadvantages  „Averagism‟ brings to light that equal treatment can mean more knowledgeable employees feel underpaid 3-27 .Strategic Choices in Designing Internal Structures (cont.

Strategic Choices in Designing Internal Structures (cont. individual skills. and contributions to the organization  Multiple levels include detailed descriptions of work done at each level  Outlined responsibility for each 3-28 .)  Egalitarian versus hierarchical (cont.) – Hierarchical structures send the message that the organization values the differences in work content.

Exhibit 3.6: Strategic Choice: Hierarchical versus Egalitarian 3-29 .

7: Which Structure Has the Greatest Impact on Performance? on Fairness? 3-30 .Exhibit 3.

Guidance from the Evidence  Equity theory: Fairness – Research suggests that employees judge fairness by multiple comparisons  Comparing to jobs similar to their own  Comparing their job to others at the same employer  Comparing their jobs‟ pay against external pay levels 3-31 .

recognition.Equity Theory  Social comparisons SELF outcomes/inputs : OTHER(S) outcomes/inputs Outcomes = pay. performance. use abilities Inputs = education. effort 3-32 .

9% 14.8% 11.9%    3-33 .Equity and Pay Satisfaction  Market Comparison Economic Need Family/Social Comparisons Historical Pay 44.5% 20.

absenteeism   Decrease outcomes for others Modify comparison  Leave – find a more equitable job 3-34 . theft.Reactions to Inequity   Reduce inputs – less effort. absenteeism. play computer games Increase outcomes – ask for raise.

Reactions to Inequity Loss Through Theft Before During After Control 3% 3% 3% Explain Tell 3% 3% 5% 8% 3% 3% 3-35 .

3-36  . On each question. if you‟d like. You can. And you can use zeros if you like. Just be sure to allocate all 10 points per question between each pair of possible responses. 5 points to choice A and 5 points to choice B).Equity Sensitivity  The questions below ask what you‟d like for your relationship to be with any organization for which you might work. divide 10 points between the two choices (choice A and choice B) by giving the most points to the choice that is most like you and the fewest points to the choice that is least like you. give the same number of points to both choices (for example.

What I received from the organization __ B. I would be more concerned about:   __ A. Get from the organization  __ B.In any organization I might work for: 1. Give to the organization 2. Help others __ B. What I contributed to the organization 3-37 . It would be more important for me to:   __ A. It would be more important for me to:  __ A. Watch out for my own good 3.

Benefit me 5. My personal philosophy in dealing with the organization would be:  __ A. It‟s better for me to give than to receive 3-38  .In any organization I might work for: 4. nobody else will __ B. If I don‟t look out for myself. Benefit the organization __ B. The hard work I would do should:   __ A.

EQUITY SENSITIVITY  Equity Sensitives outcomes/inputs (self) = outcomes/inputs (other)   Consistent with original concept of equity Dissatisfied with under-reward and over-reward  3-39 .

security More sensitive to underpayment  3-40 . fringe benefits.ENTITLEDS  Prefer higher outcome to input ratio than others Place more importance on extrinsic outcomes   Emphasize pay.

BENEVOLENTS  Prefer higher ratio of inputs to outcomes than others Place more emphasis on intrinsic outcomes   Prefer meaningful work. achievement Willing to produce more at a lower salary  3-41 . challenge.

assertive. caring for others  Power Distance acceptance of power/status differences  Uncertainty Avoidance level of anxiety/ willingness to break rules 3-42 .CULTURAL VALUES FROM HOFSTEDE  Collectivism/Individualism “we” versus “I”  Masculinity/Femininity material success. ambitious vs. relationships.


Guidance from the Evidence (cont.)  Tournament theory: Motivation and performance – All players will play better in the first tournament. where the prize differentials are larger – Greater difference between an employee‟s salary and the boss‟s. harder he/she will work – Several studies have given rise to “winner-takes-all” – Does not directly address turnover  Institutional Model: Copy Others – Very few “first movers” 3-44 .

Exhibit 3.8: Some Consequences of an Internally Aligned Structure 3-45 .

(More) Guidance from the Evidence   Impact of internal structures depends on context in which they operate More hierarchical structures are related to greater performance when the work flow depends on individual contributors High performers quit less under more hierarchical systems when: – Pay is based on performance rather than seniority – When people have knowledge of the structure 3-46  .

(More) Guidance from the Evidence (cont.)  When close collaboration and sharing of knowledge are required. more egalitarian structures are related to greater performance  Impact of any internal structure on organization performance is affected by other dimensions of the pay model – Pay levels (competitiveness) – Employee performance (contributions) – Employee knowledge of the pay structure (management) 3-47 .

Consequences of Structures  Importance of internal alignment – Efficiency  Pay structures imply future returns – Fairness  For fair (sizable) differentials  Against fair (sizable) differentials – Compliance  Comply with regulations of the country 3-48 .

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