MilkovichNewman Compensation Ninth Edition Chapter 3 Defining Internal

Milkovich/Newman: Compensation, Ninth Edition Chapter 3 Defining Internal Alignment Note: first of four chapters related to Fast. Cat Phase I project Mc. Graw-Hill/Irwin Copyright © 2008 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Compensation Strategy: Internal Alignment n Issues in a strategic approach to pay – Setting objectives – Internal alignment § Addresses relationships inside the organization § The relationships form a pay structure that should: – Support the organization strategy – Support the work flow – Motivate behavior toward organization objectives 3 -2

Internal alignment, often called internal equity, refers to the pay relationships among different jobs/skills/competencies within a single organization. 3 -3

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. 3 -4

Compensation Strategy: Internal Alignment (cont. ) n Supports organization strategy n Supports work flow – Work flow – process by which goods and services are delivered to the customer n Motivates behavior – Line-of-sight – Structure must be fair to employees 3 -5

Differentials n The pay differences among levels n Pay is determined by: – Knowledge/ skills involved – Working conditions – Value added to the company n Intention of these differentials: – To motivate people to strive for promotion to a higher-paying level 3 -6

Criteria: Content and Value n Content – 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 n Value – the worth of the work; its relative contribution to the organization objectives – Structure focuses on – relative contribution of these skills, tasks, and responsibilities to the organization's goals – Can include external market value 3 -7

Job- and Person-Based Structures n Job-based structure relies on the work content – tasks, behaviors, responsibilities n Person-based structure shifts the focus to the employee – Skills, knowledge, or competencies the employee possesses – Whether or not they are used in the particular job § Note the difference, in that both structures may incorporate skill – Job-based: skills required to perform job – Person-based: skills possessed by person 3 -8

Exhibit 3. 1: Engineering Structure at Lockheed Martin 3 -9

Exhibit 3. 2: Managerial/Professional Levels At General Electric Plastics (GEP) 3 -10

Exhibit 3. 3: Exploring Pay Structure at Lockheed Martin 3 -11

Exhibit: 3. 4: What Shapes Internal Structures? 3 -12

What Shapes Internal Structures? Combining External and Organization Factors n Internal labor markets – Rules and procedures that § Determine pay for different jobs within a single organization § External factors dominant influence on pay for entry-level; org factors for subsequent positions n Employee acceptance – Sources of fairness: Procedural, and distributive justice § Procedural justice involves process by which decision is reached § Distributive justice involves outcomes of process – Pay procedures more likely to be viewed as fair if § § They are consistently applied to all Ees Ee participation is provided Appeals procedure is available Data used are accurate 3 -13

Exhibit 3. 5: Illustration of an Internal Labor Market 3 -14

Strategic Choices in Designing Internal Structures n Tailored versus loosely coupled – Tailored § Well designed jobs with detailed steps or tasks § Very small pay differentials among jobs – Loosely coupled § Where business strategy requires constant innovation 3 -15

Strategic Choices in Designing Internal Structures (cont. ) n 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 -16

Strategic Choices in Designing Internal Structures (cont. ) n Egalitarian versus hierarchical (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 -17

Exhibit 3. 6: Strategic Choice: Hierarchical versus Egalitarian 3 -18

Exhibit 3. 7: Which Structure Has the Greatest Impact on Performance? on Fairness? 3 -19

Guidance from the Evidence n 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 -20

Guidance from the Evidence (cont. ) n Tournament theory: Motivation and performance – Structures w/ greater differentials btwn lower levels and top levels have more positive effect on motivation and performance than smaller differentials – Within limits, the bigger the prize for getting to next level the greater the motivational impact of structure – Research supporting hierarchical structures typically involves situations where need for cooperation among individuals is low – Does not directly address turnover 3 -21

Exhibit 3. 8: Some Consequences of an Internally Aligned Structure 3 -22

(More) Guidance from the Evidence n Impact of internal structures depends on context in which they operate n More hierarchical structures are related to greater performance when the work flow depends on individual contributors n 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 -23

(More) Guidance from the Evidence (cont. ) n When close collaboration and sharing of knowledge are required, more egalitarian structures are related to greater performance n Impact of any internal structure on organization performance is affected by other dimensions of the pay model – Pay levels (competitiveness) – Employee performance (contributions) – Employee knowledge of the pay structure (management) 3 -24