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

2. 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

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

4. 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.

5. 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

6. 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

7. 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

8. 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

9. Exhibit 3.1: Engineering Structure at Lockheed Martin

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

11. Exhibit 3.3: Exploring Pay Structure at Lockheed Martin

12. Exhibit: 3.4: What Shapes Internal Structures?

13. 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

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

15. 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

16. 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

17. 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

18. 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)

19. 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

20. 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

21. 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

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

23. (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

24. (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)