Milkovich/Newman: Compensation, Ninth Edition

Chapter 3

Defining Internal Alignment

Note: first of four chapters related to FastCat Phase I project

McGraw-Hill/Irwin

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

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

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

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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, and the criteria used to determine those differences describe the structure.
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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

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Differentials

The pay differences among levels

Pay is determined by:

Knowledge/ skills involved Working conditions Value added to the company

Intention of these differentials:

To motivate people to strive for promotion to a higher-paying level
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Criteria: Content and Value

Content the work performed in a job and how it gets done

Structure ranks jobs on skills required, complexity of tasks, problem solving, and/or responsibility

Value the worth of the work; its relative contribution to the organization objectives
Structure focuses on relative contribution of these skills, tasks, and responsibilities to the organization's goals Can include external market value

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Job- and Person-Based Structures

Job-based structure relies on the work content tasks, behaviors, responsibilities Person-based structure shifts the focus to the employee
Skills, knowledge, or competencies the employee possesses
Whether or not they are used in the particular job
Note the difference, in that both structures may incorporate skill
Job-based: skills required to perform job Person-based: skills possessed by person
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Exhibit 3.1: Engineering Structure at Lockheed Martin

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Exhibit 3.2: Managerial/Professional Levels At General Electric Plastics (GEP)

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Exhibit 3.3: Exploring Pay Structure at Lockheed Martin

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Exhibit: 3.4: What Shapes Internal Structures?

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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 External factors dominant influence on pay for entry-level; org factors for subsequent positions

Employee acceptance
Sources of fairness: Procedural, and distributive justice
Procedural justice involves process by which decision is reached Distributive justice involves outcomes of process

Pay procedures more likely to be viewed as fair if

They are consistently applied to all Ees Ee participation is provided Appeals procedure is available Data used are accurate

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Exhibit 3.5: Illustration of an Internal Labor Market

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Strategic Choices in Designing Internal Structures

Tailored versus loosely coupled

Tailored
Well designed jobs with detailed steps or tasks Very small pay differentials among jobs

Loosely coupled
Where business strategy requires constant innovation

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Strategic Choices in Designing Internal Structures (cont.)

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

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Strategic Choices in Designing Internal Structures (cont.)

Egalitarian versus hierarchical (cont.)

Hierarchical structures send the message that the organization values the differences in work content, individual skills, and contributions to the organization
Multiple levels include detailed descriptions of work done at each level Outlined responsibility for each

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Exhibit 3.6: Strategic Choice: Hierarchical versus Egalitarian

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Exhibit 3.7: Which Structure Has the Greatest Impact on Performance? on Fairness?

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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

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Guidance from the Evidence (cont.)

Tournament theory: Motivation and performance

Structures w/ greater differentials btwn lower levels and top levels have more positive effect on motivation and performance than smaller differentials Within limits, the bigger the prize for getting to next level the greater the motivational impact of structure Research supporting hierarchical structures typically involves situations where need for cooperation among individuals is low Does not directly address turnover
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Exhibit 3.8: Some Consequences of an Internally Aligned Structure

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(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
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(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)
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