Defining Internal Alignment Chapter 3

Compensation Strategy: First issue in strategic approach is establishing objectives Second issue is internal alignment, which addresses the relationships inside the organization The relationships form a pay structure that should: Support the organization strategy Support the work flow - the process by which goods and services are delivered to the customer (Merrill Lynch example) 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

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

Levels Pay structure is hierarchical in nature, based on: Number of levels Reporting relationships

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

Differentials The pay differences among levels Intention of these differentials: To motivate people to strive for promotion to a higher-paying level

Exhibit 3.3: Exploring Pay Structure at Lockheed Martin

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 - the process by which goods and services are delivered to the customer (Merrill Lynch example) 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

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

Job- and Person-Based Structures Job-based structures 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 In reality, both job-and-person-based structures are included

Exhibit: 3.4: What Shapes Internal Structures?

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

What Shapes Internal Structures? External Factors (cont.) External stakeholders Have a stake in how internal pay structures are determined e.g. unions, shareholders Cultures and customs Culture – the mental programming for processing information that people share in common

What Shapes Internal Structures? Organizational Factors Organization strategy Aligned, yet adaptable pay structures Organization's human capital Education Experience Knowledge Abilities Skills required to perform the work

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

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

Example of Organizational Layers Finance Ops Mktg HR Law IT CEO 2nd level 1 3rd level 5 8 6 4th level 15 21 45 36 24 42 5th level 46 89 60 31 425 6th level 86 52 122 12 17 7th level 120 146 250 25 8th level 440 9th level 48 10th level 3289 2

What Shapes Internal Structures? Organizational Factors (cont.) Overall HR policies Feeling of ‘career progress’

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 Allocate employees among those different jobs Employee acceptance Sources of fairness: Procedural, and distributive justice Pay structures change (e.g. y2k)

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

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

Internal Structures Variations Choice is rarely either/or - differences are a matter of degree: Levels can range from many to few Differentials can be small or large Criteria can be based on the job, the person, or some combination

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

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)

Multiple Pay Structures Factors to Consider Job Diversity Grading Procedure Internal Equity vs. External Competitiveness Company Culture – different pay targets based on type of work, clerical, managerial, executive Company Business Goals and Philosophy

Job Diversity Jobs can vary by Functional Area and extent to which one functional area has “hot skills” Jobs can vary by level GE’s managerial/Professional levels or Lockheed Martin’s engineering levels May have one structure for administrative support and another for supervisory/professional levels

Grading Procedure Examples of structure difference due to grading procedures: Union-negotiated production jobs may be in an automatic step-rate structure Hourly office jobs may be evaluated using a point-factor plan Management jobs may be evaluated using a market-driven approach

Multiple Pay Structures Executive Professional/ Management $ Clerical/Technical

Business Goals Compensation Philosophy Geography Business Units Career development and promotional opportunities

Class Discussion Break into groups of 6 – 7 and discuss Company has recently merged independent business units who operated in different geographic regions of the country. Past practice was to set salary levels and pay structure against regional market prices. Should the newly combined organization establish a national pay structure or continue regional differences? What are the pitfalls of each of these approaches?

Example of Structures Midwestern South Salary Band Minimum Midpoint Maximum 5 $43,200 $57,000 $72,000 6 $48,700 $65,000 $81,200 7 $55,000 $73,400 $91,700 Salary Band Minimum Midpoint Maximum 5 $40,600 $54,100 $67,600 6 $46,300 $61,700 $77,200 7 $52,300 $69,700 $87,100 California National Salary Band Minimum Midpoint Maximum 5 $46,200 $61,600 $77,000 6 $52,700 $70,200 $87,800 7 $59,500 $79,300 $99,100 Salary Band Minimum Midpoint Maximum 5 $43,200 $57,000 $72,000 6 $48,700 $65,000 $81,200 7 $55,000 $73,400 $91,700