1. Chapter 3 Defining Internal Alignment
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter Topics Compensation Strategy: Internal Alignment
Structures Vary Among Organizations
What Shapes Internal Structures?
Strategic Choices in Designing Internal Structures

3. Chapter Topics (cont.) Guidance from the Evidence
Consequences of Structures

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

5. Compensation Strategy: Internal Alignment (cont.)
Supports organization strategy
Supports work flow
Work flow refers to the process by which goods and services are delivered to the customer
Motivates behavior
Line-of-sight
Structure must be fair to employees

6. Structures Vary Among Organizations
An internal pay structure can be defined by:
The number of levels of work
The pay differentials between the levels
The criteria or base used to determine those levels and differentials

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

8. Differentials
The pay differences among levels are referred to as differentials
Pay is determined by:
Knowledge/ skills involved
Working conditions
Valued addition to the company
The same basic structure of percent differentials can be paired with different pay level policies

9. Exhibit 3.3: Pay Structure at Lockheed Martin, Under Two Alternative Pay Level Policies

10. Criteria: Content and Value
Content refers to 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 refers to the worth of the work; its relative contribution to the organization objectives

11. Criteria: Content and Value (cont.)
Structure focuses on relative contribution of skills, tasks, and responsibilities to the organization's goals
Can include external market value

12. Use Value and Exchange Value
Use value reflects the value of goods or services an employee produces in a job
Exchange value refers to the wage the employer and employee agree on for a job
Difference between exchange value and use value surfaces when one firm acquires another

13. Job- and Person-Based Structures
Job-based structures rely on the work content – tasks, behaviors, responsibilities
Person-based structures shift the focus to the employee
Skills, knowledge, or competencies the employee possesses
Whether or not they are used in the particular job

14. Job- and Person-Based Structures (cont.)
In reality, both job- and-person-based structures are included

15. Exhibit: 3.4: What Shapes Internal Structures?

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

17. What Shapes Internal Structures? (cont.)
External stakeholders
Unions seek smaller pay differences among jobs and seniority-based promotions
Stockholders are interested in pay differences between executives and others in the organization
The AFL-CIO uses information on pay differences to rally support for unions and influence public opinion

18. What Shapes Internal Structures? (cont.)
Cultures and customs
Shared mind-sets may judge what size pay differential is fair
Global competition and an aging workforce has made age-based pay an expensive affair
Organization strategy
Aligned, yet adaptable pay structures may be required

19. What Shapes Internal Structures? (cont.)
Organization human capital
Education
Experience
Knowledge
Abilities
Skills
The greater the value added by the skills and experience, the more pay those skills will command

20. What Shapes Internal Structures? (cont.)
Organization work design
Technology used in producing goods and services influences:
Organizational design
The work to be performed
The skills/knowledge required to perform the work

21. What Shapes Internal Structures? (cont.)
Temporary work suppliers
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

22. What Shapes Internal Structures? (cont.)
Overall HR policies
If an organization has more levels, it can offer more promotions, but there may be smaller pay differences between levels
More frequent promotions (even without significant pay increases) offer a sense of “career progress” to employees

23. What Shapes Internal Structures? (cont.)
Internal labor markets: Combining external and organization Factors
Internal labor market refers to rules and procedures that:
Determine pay for different jobs within a single organization
Allocate employees among those different jobs

24. Exhibit 3.5: Illustration of an Internal Labor Market

25. What Shapes Internal Structures? (cont.)
Employee acceptance : A key factor
Procedural justice refers to the process by which a decision is reached
Distributive justice refers to the fairness of the decision

26. What Shapes Internal Structures? (cont.)
Pay procedures are more likely to be perceived as fair:
If they are consistently applied to all employees
If employees participated in the process
If appeals procedures are included
If the data used are accurate

27. What Shapes Internal Structures? (cont.)
Pay structures change
“Change-and-congeal” process
Pay structures established at an earlier time may be maintained for cultural or political reasons
May take an economic jolt to overcome the resistance
New norms form around the new structure

28. 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
Requires constant innovation
Pay structures are more loosely linked to the organization to provide flexibility

29. 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

30. Strategic Choices in Designing Internal Structures (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

31. Exhibit 3.6: Strategic Choice: Hierarchical versus Egalitarian

32. Exhibit 3. 7: Which Structure has the Greatest Impact on Performance
Exhibit 3.7: Which Structure has the Greatest Impact on Performance? On Fairness?

33. 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

34. Guidance from the Evidence (cont.)
Results from these comparisons depend in part on the accuracy of employee knowledge
Tournament theory: Motivation and performance
All players will play better in the first tournament, where the prize differentials are larger

35. Guidance from the Evidence (cont.)
Greater the difference between an employee’s salary and the boss’s salary, the harder he/she will work
Does not directly address turnover
Institutional model: Copy others
Very few “first movers”
Copiers have little concern for alignment and innovative pay practices

36. Exhibit 3.8: Some Consequences of an Internally Aligned Structure

37. Guidance from the Evidence (cont.)
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

38. Guidance from the Evidence (cont.)
High performers quit less under more hierarchical systems when:
Pay is based on performance rather than seniority
When people have knowledge of the structure

39. Guidance from the Evidence (cont.)
More egalitarian structures are related to greater performance when close collaboration and sharing of knowledge are required
Impact of any internal structure on organization performance is affected by other dimensions of the pay model:
Pay levels (competitiveness)

40. Guidance from the Evidence (cont.)
Employee performance (contributions)
Employee knowledge of the pay structure (management)

41. Consequences of Structures
Importance of internal alignment
Efficiency
Pay structures imply future returns
Fairness
For fair (sizable) differentials
Against fair (sizable) differentials
Compliance
Comply with regulation of the country