Milkovich/Newman: Compensation, Ninth Edition

Chapter 3

Defining Internal Alignment

McGrawMcGraw-Hill/Irwin

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

Chapter Topics
      

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

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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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Exhibit 3.1: Engineering Structure at Lockheed Martin

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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: 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 Line-of Structure must be fair to employees

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Structures Vary Among Organizations



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

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Levels


Pay structure is hierarchical in nature, based on:

Number of levels Reporting relationships

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

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Differentials
 

The pay differences among levels Pay is determined by:

Knowledge/ skills involved Working conditions Valued addition to the company

Intention of these differentials:

To motivate people to strive for promotion to a higherhigher-paying level
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Exhibit 3.3: Exploring Pay Structure at Lockheed Martin

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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

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Use Value and Exchange Value

 

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 Difference between exchange value and use value surfaces when one firm acquires another

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JobJob- and Person-Based Structures Person 

JobJob-based structures relies on the work content tasks, behaviors, responsibilities PersonPerson-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 job-and-personare included

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Exhibit: 3.4: What Shapes Internal Structures?

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What Shapes Internal Structures? External Factors



Economic pressures
Early advocates: Adam Smith, Karl Marx Marginal productivity Supply and demand for labor and products

Government policies, laws, and regulations

Equal Pay Act and Civil Rights Act Living wage

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What Shapes Internal Structures? External Factors (cont.)



External stakeholders
Have a stake in how internal pay structures are determined Internal alignment focuses on pay differentials within an organization

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 age3-18

What Shapes Internal Structures? Organizational Factors



Organization strategy
Aligned, yet adaptable pay structures may be required

Organization's human capital

Education Experience Knowledge Abilities Skills required to perform the work
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What Shapes Internal Structures? Organizational Factors (cont.)



Organization work design

Technology used in producing goods and services influences
 Organizational design  Work to be performed  Skills/Knowledge required to perform work

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What Shapes Internal Structures? Organizational Factors (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 non Adds work to other jobs, enlarges them, changes the jobs value and structure

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What Shapes Internal Structures? Organizational Factors (cont.)



Overall HR policies
Feeling of career progress

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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  Allocate employees among those different jobs

Employee acceptance
Sources of fairness: Procedural, and distributive justice

Pay structures change

Change-and-congeal process Change-and-

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Exhibit 3.5: Illustration of an Internal Labor Market

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Strategic Choices in Designing Internal Structures



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

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Strategic Choices in Designing Internal Structures (cont.)



Tailored versus loosely coupled

Tailored
 Well designed jobs with detailed steps or tasks  Very small pay differentials among jobs

Loosely coupled
 Requires constant innovation

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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 highestlowest-

Disadvantages
 Averagism brings to light that equal treatment can mean more knowledgeable employees feel underpaid

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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

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Exhibit 3.6: Strategic Choice: Hierarchical versus Egalitarian

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

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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

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Equity Theory


Social comparisons SELF outcomes/inputs OTHER(S) : outcomes/inputs

Outcomes = pay, recognition, use abilities Inputs = education, performance, effort

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Equity and Pay Satisfaction



Market Comparison Economic Need Family/Social Comparisons Historical Pay

44.5% 20.9% 14.8% 11.9%

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Reactions to Inequity
    

Reduce inputs less effort, absenteeism, play computer games Increase outcomes ask for raise, theft, absenteeism Decrease outcomes for others Modify comparison Leave find a more equitable job
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Reactions to Inequity
Loss Through Theft Before During After

Control Explain Tell

3% 3% 3%

3% 5% 8%

3% 3% 3%
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Equity Sensitivity


The questions below ask what youd 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 youd you. 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.
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In any organization I might work for: 1. It would be more important for me to:
 

__ A. Get from the organization __ B. Give to the organization

2. It would be more important for me to:

 

__ A. Help others __ B. Watch out for my own good

3. I would be more concerned about:

 

__ A. What I received from the organization __ B. What I contributed to the organization

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In any organization I might work for: 4. The hard work I would do should:
 

__ A. Benefit the organization __ B. Benefit me

5. My personal philosophy in dealing with the organization would be:



__ A. If I dont look out for myself, nobody else will __ B. Its better for me to give than to receive
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EQUITY SENSITIVITY


Equity Sensitives outcomes/inputs (self) = outcomes/inputs (other) Consistent with original concept of equity Dissatisfied with under-reward and over-reward underover-

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ENTITLEDS


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

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BENEVOLENTS


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

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CULTURAL VALUES FROM HOFSTEDE



Collectivism/Individualism we versus I Masculinity/Femininity material success, assertive, ambitious vs. relationships, caring for others

Power Distance acceptance of power/status differences Uncertainty Avoidance level of anxiety/ willingness to break rules
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CORRELATION COEFFICIENTS WITH EQUITY SENSITIVITY U.S.

COLLECTIVISM FEMININITY MASCULINITY POWER DISTANCE UNCERTAINTY AVOIDANCE GENDER .14* .18** .01 - .22
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Taiwan
.48*** .46*** - .03 .15

.36*** .33*** .06 .20**

Guidance from the Evidence (cont.)



Tournament theory: Motivation and performance

All players will play better in the first tournament, where the prize differentials are larger Greater difference between an employees salary and the bosss, harder he/she will work Several studies have given rise to winner-takes-all winner-takes Does not directly address turnover

Institutional Model: Copy Others

Very few first movers
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Exhibit 3.8: Some Consequences of an Internally Aligned Structure

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(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
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(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)
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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

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