Defining Internal Alignment Note: first of four chapters related to FastCat Phase I project Chapter 3

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 Line-of-sight Structure must be fair to employees

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

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

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

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 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

Exhibit 3.5: Illustration of an Internal Labor Market See Exhibit 3.3, text page 68

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

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

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

Exhibit 3.6: Strategic Choice: Hierarchical versus Egalitarian See Exhibit 3.7 on page 74 of text This slide clarifies the differences between egalitarian and hierarchical structures. The choice, however, is not either / or. Rather, the differences are a matter of degree. So levels can range from many to few, differentials can be large or small, and the criteria can be based on the job, the person, or some combination of the two. (text page 66)

Exhibit 3. 7: Which Structure Has the Greatest Impact on Performance Exhibit 3.7: Which Structure Has the Greatest Impact on Performance? on Fairness? See Exhibit 3.6, text page 73

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 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

Exhibit 3.8: Some Consequences of an Internally Aligned Structure Text, Exhibit 3.9 page 78

(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

(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)