MilkovichNewman Compensation Ninth Edition Chapter 3 Mc GrawHillIrwin

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Milkovich/Newman: Compensation, Ninth Edition Chapter 3 Mc. Graw-Hill/Irwin Defining Internal Alignment Copyright © 2008

Milkovich/Newman: Compensation, Ninth Edition Chapter 3 Mc. Graw-Hill/Irwin Defining Internal Alignment Copyright © 2008 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Chapter Topics n Compensation Strategy: Internal Alignment n Structures Vary Among Organizations n What

Chapter Topics n Compensation Strategy: Internal Alignment n Structures Vary Among Organizations n What Shapes Internal Structures? n Strategic Choices in Designing Internal Structures n Guidance from the Evidence n Consequences of Structures 3 -2

Compensation Strategy: Internal Alignment n Issues in a strategic approach to pay – Setting

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 -3

Internal alignment, often called internal equity, refers to the pay relationships among different jobs/skills/competencies

Internal alignment, often called internal equity, refers to the pay relationships among different jobs/skills/competencies within a single organization. 3 -4

Exhibit 3. 1: Engineering Structure at Lockheed Martin 3 -5

Exhibit 3. 1: Engineering Structure at Lockheed Martin 3 -5

Pay structure refers to the array of pay rates for different work or skills

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 -6

Compensation Strategy: Internal Alignment (cont. ) n Supports organization strategy n Supports work flow

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 -7

Structures Vary Among Organizations n An internal pay structure can be defined by –

Structures Vary Among Organizations n An internal pay structure can be defined by – Number of levels of work – Pay differentials between the levels – Criteria or basis used to determine those levels and differentials 3 -8

Levels n Pay structure is hierarchical in nature, based on: – Number of levels

Levels n Pay structure is hierarchical in nature, based on: – Number of levels – Reporting relationships 3 -9

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

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

Differentials n The pay differences among levels n Pay is determined by: – Knowledge/

Differentials n The pay differences among levels n Pay is determined by: – Knowledge/ skills involved – Working conditions – Valued addition to the company n Intention of these differentials: – To motivate people to strive for promotion to a higher-paying level 3 -11

Exhibit 3. 3: Exploring Pay Structure at Lockheed Martin 3 -12

Exhibit 3. 3: Exploring Pay Structure at Lockheed Martin 3 -12

Criteria: Content and Value n Content – the work performed in a job and

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 -13

Use Value and Exchange Value n Use value – the value of goods or

Use Value and Exchange Value n Use value – the value of goods or services an employee produces in a job n Exchange value – whatever wage the employer and employee agrees on for a job n Difference between exchange value and use value surfaces when one firm acquires another 3 -14

Job- and Person-Based Structures n Job-based structures relies on the work content – tasks,

Job- and Person-Based Structures n Job-based structures 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 n In reality, both job-and-person-based structures are included 3 -15

Exhibit: 3. 4: What Shapes Internal Structures? 3 -16

Exhibit: 3. 4: What Shapes Internal Structures? 3 -16

What Shapes Internal Structures? External Factors n Economic pressures – Early advocates: Adam Smith,

What Shapes Internal Structures? External Factors n Economic pressures – Early advocates: Adam Smith, Karl Marx – Marginal productivity – Supply and demand for labor and products n Government policies, laws, and regulations – Equal Pay Act and Civil Rights Act – Living wage 3 -17

What Shapes Internal Structures? External Factors (cont. ) n External stakeholders – Have a

What Shapes Internal Structures? External Factors (cont. ) n External stakeholders – Have a stake in how internal pay structures are determined – Internal alignment focuses on pay differentials within an organization n Cultures and customs – Culture – the mental programming for processing information that people share in common – Global competition and an aging workforce has made age-based pay an expensive affair 3 -18

What Shapes Internal Structures? Organizational Factors n Organization strategy – Aligned, yet adaptable pay

What Shapes Internal Structures? Organizational Factors n Organization strategy – Aligned, yet adaptable pay structures may be required n Organization's human capital – Education – Experience – Knowledge – Abilities – Skills required to perform the work 3 -19

What Shapes Internal Structures? Organizational Factors (cont. ) n Organization work design – Technology

What Shapes Internal Structures? Organizational Factors (cont. ) n Organization work design – Technology used in producing goods and services influences § Organizational design § Work to be performed § Skills/Knowledge required to perform work 3 -20

What Shapes Internal Structures? Organizational Factors (cont. ) n Organization work design (cont. )

What Shapes Internal Structures? Organizational Factors (cont. ) n Organization work design (cont. ) – Temporary work supplier – 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? Organizational Factors (cont. ) n Overall HR policies – Feeling

What Shapes Internal Structures? Organizational Factors (cont. ) n Overall HR policies – Feeling of ‘career progress’ 3 -22

What Shapes Internal Structures? Combining External and Organization Factors n Internal labor markets –

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 § Allocate employees among those different jobs n Employee acceptance – Sources of fairness: Procedural, and distributive justice n Pay structures change – ‘Change-and-congeal” process 3 -23

Exhibit 3. 5: Illustration of an Internal Labor Market 3 -24

Exhibit 3. 5: Illustration of an Internal Labor Market 3 -24

Strategic Choices in Designing Internal Structures n Fitting or tailoring the pay structure to

Strategic Choices in Designing Internal Structures n Fitting or tailoring the pay structure to be internally aligned involves two strategic choices – How tailored to organization design and work flow to make the structure – How to distribute pay throughout the levels in the structure 3 -25

Strategic Choices in Designing Internal Structures (cont. ) n Tailored versus loosely coupled –

Strategic Choices in Designing Internal Structures (cont. ) n Tailored versus loosely coupled – Tailored § Well designed jobs with detailed steps or tasks § Very small pay differentials among jobs – Loosely coupled § Requires constant innovation 3 -26

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

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 -27

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

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 -28

Exhibit 3. 6: Strategic Choice: Hierarchical versus Egalitarian 3 -29

Exhibit 3. 6: Strategic Choice: Hierarchical versus Egalitarian 3 -29

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

Exhibit 3. 7: Which Structure Has the Greatest Impact on Performance? on Fairness? 3 -30

Guidance from the Evidence n Equity theory: Fairness – Research suggests that employees judge

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 -31

Guidance from the Evidence (cont. ) n Tournament theory: Motivation and performance – All

Guidance from the Evidence (cont. ) n Tournament theory: Motivation and performance – All players will play better in the first tournament, where the 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 “winner-takes-all” – Does not directly address turnover n Institutional Model: Copy Others – Very few “first movers” 3 -32

Exhibit 3. 8: Some Consequences of an Internally Aligned Structure 3 -33

Exhibit 3. 8: Some Consequences of an Internally Aligned Structure 3 -33

(More) Guidance from the Evidence n Impact of internal structures depends on context in

(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 -34

(More) Guidance from the Evidence (cont. ) n When close collaboration and sharing of

(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 -35

Consequences of Structures n Importance of internal alignment – Efficiency § Pay structures imply

Consequences of Structures n 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 -36