Chapter 3
Defining Internal
Alignment
McGraw-Hill/Irwin
Copyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Chapter Topics
Compensation Strategy: Internal
Alignment
Structures Vary Among Organizations
What Shapes Internal Structures?
Strategic Choices in Designing Internal
Structures
3-2
Chapter Topics (cont.)
Guidance from the Evidence
Consequences of Structures
3-3
Internal Alignment
Internal alignment, often called
internal equity, refers to the pay
relationships among different
jobs/skills/competencies within a
single organization
3-4
Compensation Strategy:
Internal Alignment (cont.)
Supports organization strategy
Supports work flow
Work flow refers to the process by which
goods and services are delivered to the
customer
Motivates behavior
Line-of-sight
Structure must be fair to employees
3-5
Structures Vary Among
Organizations
An internal pay structure can be
defined by:
The number of levels of work
The pay differentials between the levels
The criteria or base used to determine
those levels and differentials
3-6
Number of Levels
Pay structure is hierarchical in nature,
based on:
Number of levels
Reporting relationships
3-7
Differentials
The pay differences among levels are
referred to as differentials
Pay is determined by:
Knowledge/ skills involved
Working conditions
Valued addition to the company
The same basic structure of percent
differentials can be paired with
different pay level policies
3-8
Exhibit 3.3: Pay Structure at Lockheed Martin,
Under Two Alternative Pay Level Policies
3-9
Criteria: Content and Value
Content refers to 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 refers to the worth of the work;
its relative contribution to the
organization objectives
3-10
Criteria: Content and Value (cont.)
Structure focuses on relative contribution
of skills, tasks, and responsibilities to the
organization's goals
Can include external market value
3-11
Use Value and Exchange Value
Use value reflects the value of goods
or services an employee produces in a
job
Exchange value refers to the wage the
employer and employee agree on for a
job
Difference between exchange value
and use value surfaces when one firm
acquires another
3-12
Job- and Person-Based Structures
Job-based structures rely on the work
content tasks, behaviors,
responsibilities
Person-based structures shift the
focus to the employee
Skills, knowledge, or competencies the
employee possesses
Whether or not they are used in the
particular job
3-13
Job- and Person-Based Structures
(cont.)
In reality, both job- and-person-based
structures are included
3-14
Exhibit: 3.4: What Shapes Internal
Structures?
3-15
What Shapes Internal Structures?
Economic pressures
Early advocates: Adam Smith, Karl Marx
Marginal productivity
Supply and demand for labor and
products and services
Government policies, laws, and
regulations
Equal Pay Act and Civil Rights Act
Living wage
3-16
What Shapes Internal Structures?
(cont.)
External stakeholders
Unions seek smaller pay differences
among jobs and seniority-based
promotions
Stockholders are interested in pay
differences between executives and
others in the organization
The AFL-CIO uses information on pay
differences to rally support for unions and
influence public opinion
3-17
What Shapes Internal Structures?
(cont.)
Cultures and customs
Shared mind-sets may judge what size
pay differential is fair
Global competition and an aging
workforce has made age-based pay an
expensive affair
Organization strategy
Aligned, yet adaptable pay structures may
be required
3-18
What Shapes Internal Structures?
(cont.)
Organization human capital
Education
Experience
Knowledge
Abilities
Skills
The greater the value added by the skills
and experience, the more pay those skills
will command
3-19
What Shapes Internal Structures?
(cont.)
Organization work design
Technology used in producing goods and
services influences:
Organizational design
The work to be performed
The skills/knowledge required to perform the
work
3-20
What Shapes Internal Structures?
(cont.)
Temporary work suppliers
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 jobs value and structure
3-21
What Shapes Internal Structures?
(cont.)
Overall HR policies
If an organization has more levels, it can
offer more promotions, but there may be
smaller pay differences between levels
More frequent promotions (even without
significant pay increases) offer a sense of
career progress to employees
3-22
What Shapes Internal Structures?
(cont.)
Internal labor markets: Combining
external and organization Factors
Internal labor market refers to rules and
procedures that:
Determine pay for different jobs within a
single organization
Allocate employees among those different
jobs
3-23
Exhibit 3.5: Illustration of an
Internal Labor Market
3-24
What Shapes Internal Structures?
(cont.)
Employee acceptance : A key factor
Procedural justice refers to the process
by which a decision is reached
Distributive justice refers to the fairness
of the decision
3-25
What Shapes Internal Structures?
(cont.)
Pay procedures are more likely to be
perceived as fair:
If they are consistently applied to all
employees
If employees participated in the process
If appeals procedures are included
If the data used are accurate
3-26
What Shapes Internal Structures?
(cont.)
Pay structures change
Change-and-congeal process
Pay structures established at an earlier time
may be maintained for cultural or political
reasons
May take an economic jolt to overcome the
resistance
New norms form around the new structure
3-27
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
Requires constant innovation
Pay structures are more loosely linked to the
organization to provide flexibility
3-28
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
3-29
Strategic Choices in Designing
Internal Structures (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
3-30
Exhibit 3.6: Strategic Choice:
Hierarchical versus Egalitarian
3-31
Exhibit 3.7: Which Structure has the Greatest
Impact on Performance? On Fairness?
3-32
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
3-33
Guidance from the Evidence (cont.)
Results from these comparisons
depend in part on the accuracy of
employee knowledge
Tournament theory: Motivation and
performance
All players will play better in the first
tournament, where the prize differentials
are larger
3-34
Guidance from the Evidence (cont.)
Greater the difference between an
employees salary and the bosss salary,
the harder he/she will work
Does not directly address turnover
Institutional model: Copy others
Very few first movers
Copiers have little concern for alignment
and innovative pay practices
3-35
Exhibit 3.8: Some Consequences of
an Internally Aligned Structure
3-36
Guidance from the Evidence (cont.)
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
3-37
Guidance from the Evidence (cont.)
High performers quit less under more
hierarchical systems when:
Pay is based on performance rather than
seniority
When people have knowledge of the
structure
3-38
Guidance from the Evidence (cont.)
More egalitarian structures are related
to greater performance when close
collaboration and sharing of
knowledge are required
Impact of any internal structure on
organization performance is affected
by other dimensions of the pay
model:
Pay levels (competitiveness)
3-39
Guidance from the Evidence (cont.)
Employee performance (contributions)
Employee knowledge of the pay
structure (management)
3-40
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
3-41
