Internal Equity
• Defining consistency
© Nancy Brown Johnson
2003
Elements of the Pay Structure
• Levels & Reporting
Relationships
• Differentials
1.
1. Which of the following jobs are the most
important?
2. Why?
3. Are there conditions under which this
would change the ordering?
4. How much more are they worth?
–
–
–
–
–
–
–
–
Clerk
Accountant
Lawyer
Production Supervisor
Production Manager
Operator
HR Manager
Information Systems Supervisor
Internal Equity is about the fairness
of the pay structure
• CEO Pay
• More CEO Pay
Internal Consistency
• Job’s worth to the employer
• Ranking of jobs in the organization
What is a job?
• A job is socially constructed
• Used to organize work
• Other ways of valuing work
– Pay based upon job
– Pay the individual
• Why don’t we do this?
– Opens opportunity for exploitation
– Discrimination
What are problems with jobs? What
is the alternative?
• Rigid, inflexible
• Change slowly
– To change you need to rewrite a person’s job description
• Alternative are flexible teams
– More focus on sharing work
– More focus on multiple skills
– Communication becomes more important
• Question: How do we select, pay & train people in
de-jobbed world? How do we organize work? How
is fairness insured?
From: Bridges, William, “The End of the Job” Fortune, 9/19/94.
Why might employers choose to
have a pay structure that differs from
the external market?
Internal Labor Markets
• Organizations have ports of entry
– these governed by external labor markets
• The pricing & allocation of labor is governed by the
organization’s internal procedures
• Once in organization then internal labor markets
governed by the organization’s rule
• The pay structure enforces the relationships among
workers and reinforces longer term relationships with
employees.
Egalitarian v. Hierarchical
Structure
• Egalitarian: flat structure little difference between the top and the
bottom
– more equal treatment
– employee satisfaction 
– teamwork 
• Hierarchical: explicitly recognizes differences in skills &
responsibilities
– motivation 
Pilot compensation
First
Officer
Year 1
First Officer
Year 5
Captain,
Captain,
Small
Max
Aircraft Year
10
Southwest
$36,132
$82,068
$140, 412
$143,508
American
25,524
67,092
132,276
185,004
Delta
33,396
95,040
112,308
209,388
United
29,808
95,100
128,124
200,796
Avg.(A,D, U)
29,576
85,744
124,236
198,396
Source: Gerhart & Rynes, Compensation, 2003.
Factors that influence internal wage
structures
• Society
– just price doctrine
• occupation’s station determines value
• social values determine wages
• Sociological
– Hierarchal level predicts job worth
– People believe pay level for one position should be 1.3 to
1.4 higher than next lower position
– Concludes: organizational level significant factor in
predicting the worth of positions
• Winner take all
– Best performance wins big (e.g., Michael Jordan, CEOs)
– Small differences in performance worth a great deal
Demand Side Models of Pay
Structures
• Marginal Productivity
• pay based on contributions to firm
productivity
• Time Span of Discretion
– How much time you work without review
Supply side models of internal
equity
• Human Capital
– pay based on investments in HC: education, skill, experience
– general human capital
• of value to many employers
– specific human capital
• training paid for by employer
• employer earns equity
• Labor’s Scarcity Model
– Factors that make labor scarce make it more valuable
• Institutional
– Pay based imitation of other employers
Organizational Factors
• Technology
– work performed
– skills to perform work
• HR Policies & Strategy
• Strategic skill
Relative Role of Internal v.
External Equity
• Do managers place more weight on external
or internal equity?
– Why?
• Would this change in a world with no jobs?
Employee Acceptance Key Test
• Beliefs about what are reasonable
differences
• Distributive justice: satisfaction with
outcomes
• Procedural justice: satisfaction with process
Internal Equity in Practice
• Job analysis
– Collecting data about jobs
• Job evaluation
– Valuing jobs
Job Analysis
• Gathering information about work
– Behaviors
– Tasks
– Critical Incidents
Job Analysis Result
• Job description:
– job based
– tasks
– work performed
• Job Specification
– employee based
– knowledge, skills & abilities
– experience
Evaluating Work: Job Evaluation
Determining a job’s worth to the
organization.
Internal equity.
Four Job Evaluation Methods
Whole
Job
Specific
Job Factors
Job v.
Job
Ranking
Factor
Comparison
Job v.
Standards
Classification
Point Factor
Ranking
• Rank Jobs highest to lowest
• Paired comparison
Shear
Operator
Electrician
Punch Press
Welder
Grinder
E
S
M
S
M
M
E
P
M
Electrician
E
Punch Press
Welder
Grinder
Receiving
Clerk
S
E
P
M
G
Classification
• Like library
Class I
classification system
Simple work, no supervisory
• Define categories and
responsibility, no public contact
then compare job
Class II
against categories
Simple work, no supervisory
responsibility, public contact
Class III
Medium work complexity, no
supervisory responsibility,
public contact
Point Factor Method
Steps:
1. Decide compensable factors: what the
organization wants to pay for
skill, effort responsibility & working conditions
2. Set scales for the factors
3. Weight the factors
4. Evaluate the jobs
Point Factor Method
Working Conditions
1. Hazardous work
deals with dangerous
materials or working
conditions
2. Uncomfortable work
loud, hot or cold, dirty
3. Good working
conditions
office environment, air
conditioned, good
lighting
Education
1. Job requires
graduate education
2. Job requires
bachelor degree
3. Job requires high
school education
Effect of Error
1. Major mistake-more
than $500,000
2. Major mistake-more
than $100,000
3. Major mistake-less
than $99,999
1=10 points, 2-8 points, 3=5 points
Job Evaluation
• Judgement involved
• Statistical weighting
• Employee Acceptance
Jobs v. Skills or Competencies
• Jobs
–
–
–
–
clear expectations
sense of progress
pay based on value of work
inflexible
• Skills or Competencies
– continuous learning
– flexibility
– lateral movement
Skill & Competency Analysis
• Skill Analysis: systematic process to identify skills to perform work:
– What you know.
– Skills: basic unit of knowledge
• Competency Analysis: systematic process to identify competencies
required to for success.
– What you can do.
– Competencies: basic units of knowledge & abilities
Skill or Competency Evaluation
• Person centered approach rather than job
centered
• Determine the skill blocks that are valued: skill
or skill units, rather than jobs are compensable.
– Quantify the value
– Develop certification procedures
– Mastery of skill units is measured and
certified.
• Pay changes do not necessarily accompany job
changes.
• There is little emphasis on seniority in pay
determination.
The Top Twenty Competencies
•
•
•
•
•
•
•
•
•
•
Achievement orientation
Concern of quality
Initiative
Interpersonal understanding
Customer-service orientation
Influence and impact
Organization awareness
Networking
Directiveness
Teamwork & cooperation
•
Developing others
•
Team leadership
•
Technical expertise
•
Information seeking
•
Analytical thinking
•
Conceptual thinking
•
Self-control
•
Self-confidence
•
Business orientation
•
Flexibility
Competency Analysis Criticisms
• Competencies sometimes vague: “Can do
attitude”
• Some competencies difficult to measure:
can’t give a test
• Difficult to relate to what people do
– Could expect a competency that they don’t
engage in
Alternative to Job Evaluation
• Market Pricing
• Assumes the firm’s values irrelevant
• Most likely done when employees only
hired externally and rarely promoted from
within
Summary
• Internal equity is job’s value (job
evaluation) or a person’s value
(competency analysis) to
organization
• Established through job evaluation or
competency analysis
• Alternative is to price jobs according
to market value