Milkovich/Newman: Compensation, Ninth EditionMilkovich/Newman: Compensation, Ninth Edition

McGraw-Hill/IrwinMcGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Defining Internal Defining Internal AlignmentAlignment

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Internal alignment, often called internal equity, refers to the pay

relationships among different jobs/skills/competencies within a

single organization.

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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.

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Compensation Strategy:Compensation Strategy:Internal AlignmentInternal Alignment

Supports organization strategySupports organization strategy Supports work flowSupports work flow

– Work flow – process by which goods and services Work flow – process by which goods and services are delivered to the customerare delivered to the customer

Support fairness Motivates behaviorMotivates behavior

– Line-of-sightLine-of-sight

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Structures vary among organizationStructures vary among organization

An internal pay structure can be defined by: Number of levels of work The pay differentials between the levels The criteria used to determine those levels and

differentials

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Exhibit 3.2: Managerial/Professional Exhibit 3.2: Managerial/Professional Levels At General Electric Plastics Levels At General Electric Plastics

(GEP)(GEP)

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Exhibit 3.1: Engineering Structure at Lockheed Martin

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Pay differentials among the levels is Pay differentials among the levels is determined by:determined by:– Knowledge/ skills involvedKnowledge/ skills involved

– Working conditionsWorking conditions

– Value added to the companyValue added to the company

Intention of these differentials:Intention of these differentials:– To motivate people to strive for promotion to a To motivate people to strive for promotion to a

higher-paying levelhigher-paying level

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Exhibit 3.3: Exploring Pay Structure at Exhibit 3.3: Exploring Pay Structure at Lockheed MartinLockheed Martin

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Criteria: Content and ValueCriteria: Content and Value ContentContent – the work performed in a job and how – the work performed in a job and how

it gets doneit gets done– Structure ranks jobs on – skills required, complexity Structure ranks jobs on – skills required, complexity

of tasks, problem solving, and/or responsibilityof tasks, problem solving, and/or responsibility ValueValue – the worth of the work; its relative – the worth of the work; its relative

contribution to the organization objectivescontribution to the organization objectives– Structure focuses on – Structure focuses on – relative contribution relative contribution of these of these

skills, tasks, and responsibilities to the organization's skills, tasks, and responsibilities to the organization's goalsgoals

– Can include external market valueCan include external market value

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Job- and Person-Based StructuresJob- and Person-Based Structures Job-basedJob-based structure relies on the work content – structure relies on the work content –

tasks, behaviors, responsibilitiestasks, behaviors, responsibilities Person-basedPerson-based structure shifts the focus to the structure shifts the focus to the

employeeemployee– Skills, knowledge, or competencies the employee Skills, knowledge, or competencies the employee

possessespossesses

– Whether or not they are used in the particular jobWhether or not they are used in the particular job Note the difference, in that both structures may incorporate Note the difference, in that both structures may incorporate

skillskill– Job-based: skills required to perform jobJob-based: skills required to perform job

– Person-based: skills possessed by personPerson-based: skills possessed by person

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Exhibit: 3.4: What Shapes Internal Structures?Exhibit: 3.4: What Shapes Internal Structures?

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What Shapes Internal Structures? What Shapes Internal Structures? Combining External and Organization FactorsCombining External and Organization Factors

Internal labor marketsInternal labor markets– Rules and procedures thatRules and procedures that

Determine pay for different jobs within a single organizationDetermine pay for different jobs within a single organization External factors dominant influence on pay for entry-level; org factors for External factors dominant influence on pay for entry-level; org factors for

subsequent positionssubsequent positions

Employee acceptanceEmployee acceptance– Sources of fairness: Procedural, and distributive justiceSources of fairness: Procedural, and distributive justice

Procedural justice involves process by which decision is reachedProcedural justice involves process by which decision is reached Distributive justice involves outcomes of processDistributive justice involves outcomes of process

– Pay procedures more likely to be viewed as fair ifPay procedures more likely to be viewed as fair if They are consistently applied to all EmployeesThey are consistently applied to all Employees Employee participation is providedEmployee participation is provided Appeals procedure is availableAppeals procedure is available Data used are accurateData used are accurate

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Exhibit 3.5: Illustration of an Exhibit 3.5: Illustration of an Internal Labor MarketInternal Labor Market

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Strategic Choices in DesigningStrategic Choices in DesigningInternal StructuresInternal Structures

Tailored versus loosely coupledTailored versus loosely coupled– Tailored Tailored

Well designed jobs with detailed steps or tasksWell designed jobs with detailed steps or tasks

Very small pay differentials among jobsVery small pay differentials among jobs

– Loosely coupledLoosely coupled Where business strategy requires constant innovationWhere business strategy requires constant innovation

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Strategic Choices in DesigningStrategic Choices in DesigningInternal Structures (cont.)Internal Structures (cont.)

Egalitarian versus hierarchicalEgalitarian versus hierarchical– Egalitarian structures send the message that all Egalitarian structures send the message that all

employees are valued equallyemployees are valued equally

– AdvantagesAdvantages Fewer levels and smaller differentials between adjacent Fewer levels and smaller differentials between adjacent

levels and between highest- and lowest-paid workerslevels and between highest- and lowest-paid workers

– DisadvantagesDisadvantages ‘‘Averagism’ brings to light that equal treatment can mean Averagism’ brings to light that equal treatment can mean

more knowledgeable employees feel underpaidmore knowledgeable employees feel underpaid

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Strategic Choices in DesigningStrategic Choices in DesigningInternal Structures (cont.)Internal Structures (cont.)

Egalitarian versus hierarchical (cont.)Egalitarian versus hierarchical (cont.)– Hierarchical structures send the message that the Hierarchical structures send the message that the

organization values the differences in work content, organization values the differences in work content, individual skills, and contributions to the individual skills, and contributions to the organizationorganization Multiple levels include detailed descriptions of work done Multiple levels include detailed descriptions of work done

at each levelat each level

Outlined responsibility for eachOutlined responsibility for each

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Exhibit 3.6: Strategic Choice:Exhibit 3.6: Strategic Choice:Hierarchical versus EgalitarianHierarchical versus Egalitarian

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Exhibit 3.7: Which Structure Has the Exhibit 3.7: Which Structure Has the Greatest Impact on Performance? on Greatest Impact on Performance? on

Fairness?Fairness?

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Equity theory: FairnessEquity theory: Fairness

– Research suggests that employees judge fairness by Research suggests that employees judge fairness by multiple comparisonsmultiple comparisons

Comparing to jobs similar to their ownComparing to jobs similar to their own

Comparing their job to others at the same employerComparing their job to others at the same employer

Comparing their jobs’ pay against external pay levelsComparing their jobs’ pay against external pay levels

Guidance from the EvidenceGuidance from the Evidence

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Guidance from the Evidence (cont.)Guidance from the Evidence (cont.) Tournament theory: Motivation and Tournament theory: Motivation and

performanceperformance

– Structures w/ greater differentials btwn lower levels Structures w/ greater differentials btwn lower levels and top levels have more positive effect on and top levels have more positive effect on motivation and performance than smaller motivation and performance than smaller differentialsdifferentials

– Within limits, the bigger the prize for getting to next Within limits, the bigger the prize for getting to next level the greater the motivational impact of structurelevel the greater the motivational impact of structure

– Research supporting hierarchical structures typically Research supporting hierarchical structures typically involves situations where need for cooperation involves situations where need for cooperation among individuals is lowamong individuals is low

– Does not directly address turnoverDoes not directly address turnover

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Exhibit 3.8: Some Consequences of anExhibit 3.8: Some Consequences of anInternally Aligned StructureInternally Aligned Structure

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(More) Guidance from the Evidence(More) Guidance from the Evidence Impact of internal structures depends on context Impact of internal structures depends on context

in which they operatein which they operate More hierarchical structures are related to More hierarchical structures are related to

greater performance when the work flow greater performance when the work flow depends on individual contributorsdepends on individual contributors

High performers quit less under more High performers quit less under more hierarchical systems when: hierarchical systems when: – Pay is based on performance rather than seniority Pay is based on performance rather than seniority

– When people have knowledge of the structureWhen people have knowledge of the structure

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(More) Guidance from the Evidence (More) Guidance from the Evidence (cont.)(cont.)

When close collaboration and sharing of When close collaboration and sharing of knowledge are required, more egalitarian knowledge are required, more egalitarian structures are related to greater performancestructures are related to greater performance

Impact of any internal structure on organization Impact of any internal structure on organization performance is affected by other dimensions of performance is affected by other dimensions of the pay modelthe pay model– Pay levels (competitiveness)Pay levels (competitiveness)– Employee performance (contributions)Employee performance (contributions)– Employee knowledge of the pay structure Employee knowledge of the pay structure

(management)(management)