1. McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Milkovich/Newman: Compensation, Ninth Edition Chapter 3 Defining Internal Alignment

2. 3-2 Chapter Topics Compensation Strategy: Internal Alignment Compensation Strategy: Internal Alignment Structures Vary Among Organizations Structures Vary Among Organizations What Shapes Internal Structures? What Shapes Internal Structures? Strategic Choices in Designing Internal Structures Strategic Choices in Designing Internal Structures Guidance from the Evidence Guidance from the Evidence Consequences of Structures Consequences of Structures Your Turn: So You Want to Lead the Orchestra!

3. 3-3 Compensation Strategy: Internal Alignment Issues in a strategic approach to pay 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

4. 3-4 Internal alignment, often called internal equity, refers to the pay relationships among different jobs/skills/competencies within a single organization.

5. 3-5 Exhibit 3.1: Engineering Structure at Lockheed Martin

6. 3-6 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.

7. 3-7 Compensation Strategy: Internal Alignment (cont.) Supports organization strategy Supports organization strategy Supports work flow Supports work flow –Work flow – process by which goods and services are delivered to the customer Motivates behavior Motivates behavior –Line-of-sight –Structure must be fair to employees

8. 3-8 Structures Vary Among Organizations An internal pay structure can be defined by 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

9. 3-9 Levels Pay structure is hierarchical in nature, based on: Pay structure is hierarchical in nature, based on: –Number of levels –Reporting relationships

10. 3-10 Exhibit 3.2: Managerial/Professional Levels At General Electric Plastics (GEP)

11. 3-11 Differentials The pay differences among levels The pay differences among levels Pay is determined by: Pay is determined by: –Knowledge/ skills involved –Working conditions –Valued addition to the company Intention of these differentials: Intention of these differentials: –To motivate people to strive for promotion to a higher-paying level

12. 3-12 Exhibit 3.3: Exploring Pay Structure at Lockheed Martin

13. 3-13 Criteria: Content and Value Content – the work performed in a job and how it gets done 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 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

14. 3-14 Use Value and Exchange Value Use value – the value of goods or services an employee produces in a job 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 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 Difference between exchange value and use value surfaces when one firm acquires another

15. 3-15 Job- and Person-Based Structures Job-based structures relies on the work content – tasks, behaviors, responsibilities Job-based structures relies on the work content – tasks, behaviors, responsibilities Person-based structure shifts the focus to the employee 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 In reality, both job-and-person-based structures are included

16. 3-16 Exhibit: 3.4: What Shapes Internal Structures?

17. 3-17 What Shapes Internal Structures? External Factors Economic pressures Economic pressures –Early advocates: Adam Smith, Karl Marx –Marginal productivity –Supply and demand for labor and products Government policies, laws, and regulations Government policies, laws, and regulations –Equal Pay Act and Civil Rights Act –Living wage

18. 3-18 What Shapes Internal Structures? External Factors (cont.) External stakeholders External stakeholders –Have a stake in how internal pay structures are determined –Internal alignment focuses on pay differentials within an organization Cultures and customs Cultures and customs –Culture – the mental programming for processing information that people share in common –Global competition and an aging workforce has made age-based pay an expensive affair

19. 3-19 What Shapes Internal Structures? Organizational Factors Organization strategy Organization strategy –Aligned, yet adaptable pay structures may be required Organization's human capital Organization's human capital –Education –Experience –Knowledge –Abilities –Skills required to perform the work

20. 3-20 What Shapes Internal Structures? Organizational Factors (cont.) Organization work design Organization work design –Technology used in producing goods and services influences  Organizational design  Work to be performed  Skills/Knowledge required to perform work

21. 3-21 What Shapes Internal Structures? Organizational Factors (cont.) Organization work design (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

22. 3-22 What Shapes Internal Structures? Organizational Factors (cont.) Overall HR policies Overall HR policies –Feeling of ‘career progress’

23. 3-23 What Shapes Internal Structures? Combining External and Organization Factors Internal labor markets Internal labor markets –Rules and procedures that  Determine pay for different jobs within a single organization  Allocate employees among those different jobs Employee acceptance Employee acceptance –Sources of fairness: Procedural, and distributive justice Pay structures change Pay structures change –‘Change-and-congeal” process

24. 3-24 Exhibit 3.5: Illustration of an Internal Labor Market

25. 3-25 Strategic Choices in Designing Internal Structures Fitting or tailoring the pay structure to be internally aligned involves two strategic choices Fitting or tailoring the pay structure to be internally aligned involves two strategic choices –How tailored to organization design and work flow to make the structure –How to distribute pay throughout the levels in the structure

26. 3-26 Strategic Choices in Designing Internal Structures (cont.) Tailored versus loosely coupled Tailored versus loosely coupled –Tailored  Well designed jobs with detailed steps or tasks  Very small pay differentials among jobs –Loosely coupled  Requires constant innovation

27. 3-27 Strategic Choices in Designing Internal Structures (cont.) Egalitarian versus hierarchical 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

28. 3-28 Strategic Choices in Designing Internal Structures (cont.) Egalitarian versus hierarchical (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

29. 3-29 Exhibit 3.6: Strategic Choice: Hierarchical versus Egalitarian

30. 3-30 Exhibit 3.7: Which Structure Has the Greatest Impact on Performance? on Fairness?

31. 3-31 Equity theory: Fairness 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

32. 3-32 Equity Theory Social comparisons Social comparisons SELF OTHER(S) SELF OTHER(S) outcomes/inputs : outcomes/inputs outcomes/inputs : outcomes/inputs Outcomes = pay, recognition, use abilities Inputs = education, performance, effort Social comparisons Social comparisons SELF OTHER(S) SELF OTHER(S) outcomes/inputs : outcomes/inputs outcomes/inputs : outcomes/inputs Outcomes = pay, recognition, use abilities Inputs = education, performance, effort

33. 3-33 Market Comparison44.5% Market Comparison44.5% Economic Need20.9% Economic Need20.9% Family/Social Comparisons14.8% Family/Social Comparisons14.8% Historical Pay11.9% Historical Pay11.9% Market Comparison44.5% Market Comparison44.5% Economic Need20.9% Economic Need20.9% Family/Social Comparisons14.8% Family/Social Comparisons14.8% Historical Pay11.9% Historical Pay11.9% Equity and Pay Satisfaction

34. 3-34 Reactions to Inequity Reduce inputs – less effort, absenteeism, play computer games Reduce inputs – less effort, absenteeism, play computer games Increase outcomes – ask for raise, theft, absenteeism Increase outcomes – ask for raise, theft, absenteeism Decrease outcomes for others Decrease outcomes for others Modify comparison Modify comparison Leave – find a more equitable job Leave – find a more equitable job Reduce inputs – less effort, absenteeism, play computer games Reduce inputs – less effort, absenteeism, play computer games Increase outcomes – ask for raise, theft, absenteeism Increase outcomes – ask for raise, theft, absenteeism Decrease outcomes for others Decrease outcomes for others Modify comparison Modify comparison Leave – find a more equitable job Leave – find a more equitable job

35. 3-35 Reactions to Inequity Loss Through Theft Loss Through Theft Before During After Before During After Control3%3%3% Control3%3%3% Explain3%5%3% Explain3%5%3% Tell3%8%3%

36. 3-36 Equity Sensitivity The questions below ask what you’d like for your relationship to be with any organization for which you might work. On each question, divide 10 points between the two choices (choice A and choice B) by giving the most points to the choice that is most like you and the fewest points to the choice that is least like you. You can, if you’d like, give the same number of points to both choices (for example, 5 points to choice A and 5 points to choice B). And you can use zeros if you like. The questions below ask what you’d like for your relationship to be with any organization for which you might work. On each question, divide 10 points between the two choices (choice A and choice B) by giving the most points to the choice that is most like you and the fewest points to the choice that is least like you. You can, if you’d like, give the same number of points to both choices (for example, 5 points to choice A and 5 points to choice B). And you can use zeros if you like. Just be sure to allocate all 10 points per question between each pair of possible responses. Just be sure to allocate all 10 points per question between each pair of possible responses.

37. 3-37 1. It would be more important for me to: 1. It would be more important for me to: __ A. Get from the organization __ A. Get from the organization __ B. Give to the organization __ B. Give to the organization 2. It would be more important for me to: __ A. Help others __ A. Help others __ B. Watch out for my own good __ B. Watch out for my own good 3. I would be more concerned about: __ A. What I received from the organization __ A. What I received from the organization __ B. What I contributed to the organization __ B. What I contributed to the organization In any organization I might work for:

38. 3-38 4. The hard work I would do should: __ A. Benefit the organization __ A. Benefit the organization __ B. Benefit me __ B. Benefit me 5. My personal philosophy in dealing with the organization would be: __ A. If I don’t look out for myself, nobody __ A. If I don’t look out for myself, nobody else will else will __ B. It’s better for me to give than to __ B. It’s better for me to give than to receive receive

39. 3-39 Equity Sensitives Equity Sensitives outcomes/inputs (self) = outcomes/inputs (other) outcomes/inputs (self) = outcomes/inputs (other) Consistent with original concept of equity Consistent with original concept of equity Dissatisfied with under-reward and over-reward Dissatisfied with under-reward and over-reward Equity Sensitives Equity Sensitives outcomes/inputs (self) = outcomes/inputs (other) outcomes/inputs (self) = outcomes/inputs (other) Consistent with original concept of equity Consistent with original concept of equity Dissatisfied with under-reward and over-reward Dissatisfied with under-reward and over-reward EQUITY SENSITIVITY

40. 3-40 ENTITLEDSENTITLEDS Prefer higher outcome to input ratio than others Prefer higher outcome to input ratio than others Place more importance on extrinsic outcomes Place more importance on extrinsic outcomes Emphasize pay, fringe benefits, security Emphasize pay, fringe benefits, security More sensitive to underpayment More sensitive to underpayment Prefer higher outcome to input ratio than others Prefer higher outcome to input ratio than others Place more importance on extrinsic outcomes Place more importance on extrinsic outcomes Emphasize pay, fringe benefits, security Emphasize pay, fringe benefits, security More sensitive to underpayment More sensitive to underpayment

41. 3-41 BENEVOLENTSBENEVOLENTS Prefer higher ratio of inputs to outcomes than others Prefer higher ratio of inputs to outcomes than others Place more emphasis on intrinsic outcomes Place more emphasis on intrinsic outcomes Prefer meaningful work, challenge, achievement Prefer meaningful work, challenge, achievement Willing to produce more at a lower salary Willing to produce more at a lower salary Prefer higher ratio of inputs to outcomes than others Prefer higher ratio of inputs to outcomes than others Place more emphasis on intrinsic outcomes Place more emphasis on intrinsic outcomes Prefer meaningful work, challenge, achievement Prefer meaningful work, challenge, achievement Willing to produce more at a lower salary Willing to produce more at a lower salary

42. 3-42 CULTURAL VALUES FROM HOFSTEDE Collectivism/Individualism Collectivism/Individualism “we” versus “I” “we” versus “I” Masculinity/Femininity Masculinity/Femininity material success, assertive, ambitious vs. relationships, caring for others Power Distance Power Distance acceptance of power/status differences Uncertainty Avoidance Uncertainty Avoidance level of anxiety/ willingness to break rules

43. 3-43 CORRELATION COEFFICIENTS WITH EQUITY SENSITIVITY U.S. Taiwan COLLECTIVISM.36***.48*** FEMININITY.33***.46*** MASCULINITY.06 -.03 POWER DISTANCE.20**.15 UNCERTAINTY AVOIDANCE.14*.01 AVOIDANCE.14*.01 GENDER.18** -.22 U.S. Taiwan COLLECTIVISM.36***.48*** FEMININITY.33***.46*** MASCULINITY.06 -.03 POWER DISTANCE.20**.15 UNCERTAINTY AVOIDANCE.14*.01 AVOIDANCE.14*.01 GENDER.18** -.22

44. 3-44 Guidance from the Evidence (cont.) Tournament theory: Motivation and performance Tournament theory: Motivation and performance –All players will play better in the first tournament, where the prize differentials are larger –Greater difference between an employee’s salary and the boss’s, harder he/she will work –Several studies have given rise to “winner-takes-all” –Does not directly address turnover Institutional Model: Copy Others Institutional Model: Copy Others –Very few “first movers”

45. 3-45 Exhibit 3.8: Some Consequences of an Internally Aligned Structure

46. 3-46 (More) Guidance from the Evidence Impact of internal structures depends on context in which they operate 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 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: High performers quit less under more hierarchical systems when: –Pay is based on performance rather than seniority –When people have knowledge of the structure

47. 3-47 (More) Guidance from the Evidence (cont.) When close collaboration and sharing of knowledge are required, more egalitarian structures are related to greater performance 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 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)

48. 3-48 Consequences of Structures Importance of internal alignment 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