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 job’s 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
employee’s salary and the boss’s 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