Chapter 3 Defining Internal Alignment PDF

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 Amo...

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