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Defining Internal Alignment

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

Structure must be fair to employees

The pay differences among levels
Pay is determined by:
Knowledge/ skills involved
Working conditions

Value added to the company

Intention of these differentials:

Tomotivate people to strive for promotion to a higher-
paying level
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
Can include external market value
Job- and Person-Based Structures
Job-based structure relies on the work content
tasks, behaviors, responsibilities
Person-based structure shifts the focus to the
knowledge, or competencies the employee
Whether or not they are used in the particular job
Note the difference, in that both structures may incorporate
Job-based: skills required to perform job
Person-based: skills possessed by person
Exhibit 3.1: Engineering Structure at
Lockheed Martin
Exhibit 3.2: Managerial/Professional
Levels At General Electric Plastics (GEP)
Exhibit 3.3: Exploring Pay Structure at
Lockheed Martin
Exhibit: 3.4: What Shapes Internal Structures?
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 employees
Employees participation is provided
Appeals procedure is available
Data used are accurate
Exhibit 3.5: Illustration of an
Internal Labor Market
Strategic Choices in Designing
Internal Structures
Tailored versus loosely coupled
Well designed jobs with detailed steps or tasks
Very small pay differentials among jobs

Loosely coupled
Where business strategy requires constant innovation
Strategic Choices in Designing
Internal Structures (cont.)
Egalitarian versus hierarchical
structures send the message that all
employees are valued equally
Fewer levels and smaller differentials between adjacent
levels and between highest- and lowest-paid workers
Averagismbrings to light that equal treatment can mean
more knowledgeable employees feel underpaid
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
Multiplelevels include detailed descriptions of work done at
each level
Outlined responsibility for each
Exhibit 3.6: Strategic Choice:
Hierarchical versus Egalitarian
Exhibit 3.7: Which Structure Has the
Greatest Impact on Performance? on
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

Guidance from the Evidence (cont.)
Tournament theory: Motivation and performance
Structures w/ greater differentials between 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
Exhibit 3.8: Some Consequences of an
Internally Aligned Structure
(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:
Payis based on performance rather than seniority
When people have knowledge of the structure
(More) Guidance from the Evidence
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