Milkovich/Newman: Compensation, Ninth Edition

Chapter 3
Defining Internal
Alignment
Note: first of four chapters related
to FastCat Phase I project

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Compensation Strategy:
Internal Alignment
 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

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

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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.

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

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

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 Criteria: Content and Value
 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
 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

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 Job- and Person-Based Structures
 Job-based structure relies on the work content –
tasks, behaviors, responsibilities
 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

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Exhibit 3.1: Engineering Structure at
Lockheed Martin

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Exhibit 3.2: Managerial/Professional
Levels At General Electric Plastics
(GEP)

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Exhibit 3.3: Exploring Pay Structure at
Lockheed Martin

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Exhibit: 3.4: What Shapes Internal Structures?

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 What Shapes Internal Structures?
Combining External and Organization Factors
 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
 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

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Exhibit 3.5: Illustration of an
Internal Labor Market

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 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
 Where business strategy requires constant innovation

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 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

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 Strategic Choices in Designing
Internal Structures (cont.)
 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

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Exhibit 3.6: Strategic Choice:
Hierarchical versus Egalitarian

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Exhibit 3.7: Which Structure Has the
Greatest Impact on Performance? on
Fairness?

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 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

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 Guidance from the Evidence (cont.)
 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

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Exhibit 3.8: Some Consequences of an
Internally Aligned Structure

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 (More) Guidance from the Evidence
 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
 High performers quit less under more
hierarchical systems when:
– Pay is based on performance rather than seniority
– When people have knowledge of the structure

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 (More) Guidance from the Evidence
(cont.)
 When close collaboration and sharing of
knowledge are required, more egalitarian
structures are related to greater performance
 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)

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