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Milkovich/Newman: Compensation, Ninth Edition

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

Chapter 3Defining Internal

AlignmentNote: first of four chapters related

to FastCat Phase I project

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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

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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 skillswithin a single organization.

Thenumber of levels, the

differentialsin pay between the

levels, and thecriteriaused todetermine those differences describe

the structure.

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Compensation Strategy:Internal Alignment (cont.)

Supports organization strategy

Supports work flow

Work flowprocess by which goods and servicesare delivered to the customer

Motivates behavior

Line-of-sight

Structure must be fair to employees

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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

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Criteria: Content and Value

Content the work performed in a job and howit gets done

Structure ranks jobs on skills required, complexityof tasks, problem solving, and/or responsibility

Value the worth of the work; its relativecontribution to the organization objectives

Structure focuses on relative contribution of these

skills, tasks, and responsibilities to the organization'sgoals

Can include external market value

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Job- and Person-Based Structures

Job-basedstructure relies on the work contenttasks, behaviors, responsibilities

Person-basedstructure shifts the focus to the

employeeSkills, knowledge, or competencies the employee

possesses

Whether or not they are used in the particular jobNote the difference, in that both structures may

incorporate skill

Job-based: skills required to perform job

Person-based: skills possessed by person

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Exhibit 3.1: Engineering Structure atLockheed Martin

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Exhibit 3.2: Managerial/ProfessionalLevels At General Electric Plastics

(GEP)

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Exhibit 3.3: Exploring Pay Structure atLockheed Martin

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Exhibit: 3.4: What Shapes Internal Structures?

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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 forsubsequent 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

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Exhibit 3.5: Illustration of anInternal Labor Market

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Strategic Choices in DesigningInternal 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

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Strategic Choices in DesigningInternal Structures (cont.)

Egalitarian versus hierarchical

Egalitarian structures send the message that allemployees are valued equally

Advantages

Fewer levels and smaller differentials between adjacentlevels and between highest- and lowest-paid workers

Disadvantages

Averagism brings to light that equal treatment can meanmore knowledgeable employees feel underpaid

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Exhibit 3.6: Strategic Choice:Hierarchical versus Egalitarian

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Exhibit 3.7: Which Structure Has theGreatest Impact on Performance? on

Fairness?

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Equity theory: Fairness

Research suggests that employees judge fairness bymultiple 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

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Guidance from the Evidence (cont.)

Tournament theory: Motivation and performance

Structures w/ greater differentials btwn lower levelsand top levels have more positive effect on

motivation and performance than smallerdifferentials

Within limits, the bigger the prize for getting to nextlevel the greater the motivational impact of structure

Research supporting hierarchical structures typicallyinvolves situations where need for cooperationamong individuals is low

Does not directly address turnover

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Exhibit 3.8: Some Consequences of anInternally Aligned Structure

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(More) Guidance from the Evidence

Impact of internal structures depends on contextin which they operate

More hierarchical structures are related to

greater performance when the work flowdepends on individual contributors

High performers quit less under morehierarchical systems when:

Pay is based on performance rather than seniority

When people have knowledge of the structure

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(More) Guidance from the Evidence(cont.)

When close collaboration and sharing ofknowledge are required, more egalitarianstructures are related to greater performance

Impact of any internal structure on organizationperformance is affected by other dimensions ofthe pay model

Pay levels (competitiveness)

Employee performance (contributions)Employee knowledge of the pay structure

(management)