McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 3-1 Defining Internal Alignment Chapter 3

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 3-2 Key Issues Two basic questions lie at the core of compensation management...  How is pay determined for the wide variety of work performed in organizations?  Does how much an organization pays for different work make a difference?

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 3-3 Often called internal equity, refers to the relationships between the jobs/skills/competencies within a single organization. The relationships form a pay structure that should support the organization strategy, support the workflow, be fair to employees, and motivate behavior toward organization objectives. What Is Internal Alignment?

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 3-4 Refers to the array of pay rates for different work or skills within a single organization. The number of levels, differentials in pay between the levels, and the criteria used to determine those differences create the structure. What Is Pay Structure?

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 3-5 Compensation strategy should... Support work flow Support fairness Motivate behavior Support organization strategy Compensation Strategy: Internal Alignment

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 3-6 Internal Alignment Fairness Issues  Procedural justice  Process by which a decision is reached  Distributive justice  Results/outcomes of the process  Pay procedures more likely to be viewed as fair if...  They are consistently applied to all employees  Employee participation/representation is allowed  An appeals procedure is available  Data used are accurate

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 3-7 Structures Vary  A internal pay structure is defined by  Number of levels of work  Pay differentials between levels  Criteria used to determine levels and differentials  Content - Work performed in a job and how it gets done  Value - Worth of the work: its relative contribution to objectives  Job- and person-based structures

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 3-8 Exhibit 3.1: Engineering Structure at Lockheed Entry Level Recognized Authority Engineer: Limited use of basic principles. Close supervision. Senior Engineer: Full use of standard principles and concepts. Under general supervision. Systems Engineer: Wide applications of principles and concepts, plus working knowledge of other related disciplines. Under very general direction. Lead Engineer: Applies extensive knowledge as a generalist or specialist. Exercises wide latitude. Advisor Engineer: Applies advanced principles, theories, and concepts. Assignments often self-initiated. Consultant Engineer: Exhibits an exceptional degree of ingenuity, creativity, and resourcefulness. Acts independently to uncover and resolve operational problems.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 3-9 Exhibit 3.2: Managerial/Professional Levels at General Electric Plastics (GEP)

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exhibit 3.3: Engineering Pay Structure at Lockheed Martin

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exhibit 3.4: What Shapes Internal Structures? EXTERNAL FACTORS: Economic pressures Government policies, laws, regulations Stakeholders Cultures and customs EXTERNAL FACTORS: Economic pressures Government policies, laws, regulations Stakeholders Cultures and customs ORGANIZATION FACTORS: StrategyHR policy TechnologyEmployee acceptance Human capitalCost implications INTERNAL STRUCTURE: Levels Differentials Criteria

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Exhibit 3.5: Illustration of an Internal Labor Market Consultant Engineer Consultant Engineer Advisor Engineer Advisor Engineer Lead Engineer Lead Engineer Systems Engineer Systems Engineer Senior Engineer Senior Engineer Hire Promote

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved Strategic Choices in Designing Internal Structures Tailored versus Loosely Coupled Egalitarian versus Hierarchical

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved  More hierarchical structures are related to greater performance when the work flow depends more on individual contributors  More egalitarian structures are related to greater performance when close collaboration and sharing of knowledge are required  Structures not aligned with the work flow appear to be related to greater turnover Which Structure Fits Best?