HRDM 15

Part 2: Chapter 3: Internal Alignment

COMPENSATION STRATEGY-INTERNAL ALIGNMENT

 An internally consistent pay structure is one that supports the organization’s internal structure and
is perceived as equitable when pay rates for different jobs within the organization are compared
i.e. the array of wage rates for different jobs in the organization is deemed to be fair or
equitable.

Internal Alignment (Internal Equity) – refers to the pay relationships among different job, skills, and
competencies within single organization. It focuses attention on the importance of designing a pay
structure that supports the workflow, is fair to employees, and directs their behaviors toward
organizational objectives

SUPPORTS ORGANIZATION STRATEGY

The organization’s strategy tells us how it plans to achieve its purpose. "Internal structures that are
aligned with a strategy help achieve it.
SUPPORTS WORKFLOW
Supports workflow refers to the process by which goods and services are delivered to the customer. !he
challenge is to design a pay structure that supports the efficient flow of that work.
SUPPORT FAIRNESS
Two sources of fairness are important the procedures for determining the pay structure called procedural
justice; and the actual results of those procedures which is the pay structure itself is called distributive
justice.
MOTIVATES BEHAVIOR
Internal pay structures influence employees’ behavior. The challenge is to design the structures so they
direct people’s efforts toward organization objectives.
The criteria or rationale on which the structure is based should make clear the relationship between each
job and the organization’s objectives. This is an example of “line-of-sight”.
STRUCTURES VARY AMONG ORGANIZATIONS
Levels: can be defined
1. The numbers of work
2. The pay differentials between the level
3. Criteria or bases used to determine those levels and differentials

Differentials: Pay differences between the levels are called differentials. Differentials should be based on
some measure of the differences in the value of the work to the organization.
Criteria: Content and Value:
Content and Value: Content refers to the work performed in a job and how it gets done. Value refers to
the worth of the works its relative based on skills required complexity of task and/or responsibility.
Job-and Person-Based Structures: A job based structure looks at work content- tasks, behaviors,
responsibilities. A person-based structure shifts the focus to the employee: the skills, knowledge, or
competencies the employee possesses.
WHAT SHAPES INTERNAL STRUCTURE?

ECONOMIC PRESSURES: Early theorists concentrated on the supply of labor to explain pay
structures with the most famous being marginal productivity theory.

GOVERNMENT POLICIES, LAWS, AND REGULATIONS: In the United States, equal

employment, legislations, forbids pay systems that discriminate on the basis of gender, race, religion,
sexual orientation, national origin and many other grounds. Pay equity acts require "equal pay for work of
equal value", based on skill, effort, responsibility, and working conditions. Much pay-related legislation
attempts to regulate economic forces to achieve social welfare objects. The most obvious place to affect
an internal structure is at the minimums (minimum wage legislation) and maximums (special reporting
requirements for executive pay).
STAKEHOLDERS: Unions, Stakeholders, and political groups all have a stake in formulating internal
pay structures. Unions seek small pay differences among jobs and seniority- based promotions as a way to
promote solidarity among members.
CULTURES AND CUSTOMS: Culture is the mental programming for processing information that
people share in common. Such shared mindsets may form a judgement of what is "fair".
ORGANIZATION STRATEGY: The basic belief of a strategic perspective is that pay structures that
are not aligned with the organization strategy may become obstacles to the organization’s success.
ORGANIZATION HUMAN CAPITAL: Major influences on internal structures human
capital- are education, experience, knowledge, abilities and skills. The stronger the link between
skills, experience and an organization’s strategic objective, the more pay those skills will
command.
ORGANIZATION WORK DESIGN- Technology used to produce goods and services influences the
organization design, work to be performed and skills required performing it.
OVERALL HR POLICIES- The amount of pay tied to a promotion the nature of promotions (i.e. lateral
development and greater responsibilities) pay differences must be consistent with what the organization is
trying to accomplish.
INTERNAL LABOR MARKETS: COMBINING EXTERNAL AND ORGANIZATION
FACTORS: The notion of internal labor markets i.e. the policies and procedures that regulate internal
hiring and promotions form career paths, and pay is based on internal policy. This theory combines both
economic and organizational factors.

Employee Acceptance: A key Factor

Employee judge the fairness of their pay through comparisons with the compensation paid to
others for work related in some fashion to their own.

Two important source of fairness:

1. Procedural Justice – refers to the process by which a decision is reached.

2. Distributive Justice – refers to the fairness of the decision.

Research suggests fair pay procedures:

1. If they are consistently applied to all employees.

2. If employees participated in the process.
3. If appeals procedures are included.
4. If the data used are accurate.
Pay Structure Change

In response to external factors such as skills, overtime, distorted pay differences may become
accepted as equitable and customary.

STRATEGIC CHOICE IN DESIGNING INTERNAL STRUCTURES

Tailored vs. Loosely Coupled

Tailored Structure- It is a pay structure for well- defined jobs with relatively small differences in pay.
Loosely Coupled – It is a pay structure for jobs that are flexible, adaptable, and changing.

Hierarchical vs. Egalitarian

Hierarchical Structure - It would form the other extreme, with large pay differentials between
levels.
Egalitarian Structure- It operates on the belief that all employees should be treated equally.

GUIDANCE FROM THE EVIDENCE

Equity Theory: Fairness

Employee judge the equity of their pay by comparing the work, qualification, and pay for
jobs similar to others. However, very little research addresses the question of which specific
factors influence employees’ perception of the equity or fairness of the pay structure, as opposed
to the equity or fairness of the pay.

Tournament Theory: Motivation and Performance

Structures with greater differentials at the top have more positive effect on performance than
smaller differentials for people at all levels in the structure, according to tournament theory. The
main thing affected by individuals’ performance is whether or not they get promoted to the next
level. Pay has little motivational effect on people already in a job. Instead, the pay offered for
higher position motivates those at lower in the organization to come to work and do their best in
order to stay in contention for promotion.
Institutional Theory: Copy others

Institutional theory says that practices of other firms influence an organizations’ pay
structure decisions simply copy what others are doing.

Jeremie Quismundo
Marie Carmela G. Oclarit