Internal Alignment
STRATEGIC
POLICIES
ALIGNMENT
COMPETITIVENESS
CONTRIBUTORS
TECHNIQUES
Work
Descriptions
Analysis
Market
Surveys
Definitions
Seniority
Based
STRATEGIC
OBJECTIVES
Evaluation/ INTERNAL
Certification STRUCTURE
Policy
Lines
Performance
Based
Merit
Guidelines
PAY
STRUCTURE
INCENTIVE
PROGRAMS
EFFICIENCY
 Performance
 Quality
 Customers

Stockholders
 Costs
FAIRNESS
ADMINISTRATION
Planning Budgeting Communication EVALUATION
(Milkovich, Newman, & Gerhart, 2011)
COMPLIANCE
Internal alignment, often called
internal equity, refers to the pay
relationships among different
jobs/skills/competencies within a
single organization.
(Milkovich, Newman, & Gerhart, 2011, p. 69)
Consequences of an Internally Aligned Structure
Undertake training
Increase experience
Pay structure
Reduce turnover
Facilitate career progression
Facilitate performance
Reduce pay-related
grievances
Reduce pay-related work
stoppages
(Milkovich, Newman, & Gerhart, 2011, p. 86)
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.
(Milkovich, Newman, & Gerhart, 2011, p. 69)
Levels

Pay structure is often hierarchical, based on:
– Number of levels
– Reporting relationships
(Milkovich, Newman, & Gerhart, 2011)
Differentials

The pay differences between 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
higher-paying level
(Milkovich, Newman, & Gerhart, 2011)
Pay Structure
180
Engineer
160
140
Senior
Engineer
Systems
Engineer
Lead Engineer
120
100
80
60
40
20
0
Compensation
(in thousands of $)
(Milkovich & Newman, 2008)
Advisor
Engineer
Consultant
Engineer
Guidance from the Evidence

Equity theory: Fairness
– Research suggests that employees judge fairness
by multiple comparisons
 Comparing to jobs similar to their own at same employer
 Comparing their job to other jobs at same employer
 Comparing their jobs’ pay against external pay levels
 Comparing their pay for similar work at different time
periods
(Milkovich, Newman, & Gerhart, 2011)
Equity Theory – Adams (1965)
“Person”
“Comparison Other”
“Inputs”
“Inputs”
compared to
“Outcomes”
“Outcomes”
A “social comparison” theory of motivation. Person compares his or her
ratio of Inputs to Outcomes with the Inputs to Outcomes ratio for a
Comparison Other. Ratios that are not “in balance” are perceived as
inequitable and may trigger actions to redress the imbalance
(Muchinsky, 2003)
Perceived Equity of a Pay Structure
MY PAY
My qualifications
My work performed
My product value
OTHERS’ PAY
Their qualifications
Their work performed
Their product value
(Milkovich & Newman, 2008)
Guidance from the Evidence (cont.)

Tournament theory: Motivation and
performance
– All players will play better in first tournament,
where prize differentials are larger
– Greater difference between an employee’s
salary and the boss’s, harder he/she will work
– Several studies have given rise to “winnertakes-all”
– Does not directly address turnover
(Milkovich, Newman, & Gerhart, 2011)
(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
(Milkovich, Newman, & Gerhart, 2011)
(More) Guidance from the Evidence (cont.)

When close collaboration and sharing of
knowledge are required, more egalitarian
structures are related to greater
performance
(Milkovich, Newman, & Gerhart, 2011)