Chapter 3

Defining Internal Alignment

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 Learning Objectives
• Compensation strategy - Internal alignment
• Structures vary among organizations
• What shapes internal structures?
• Strategic choices in designing internal
structures

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 Compensation Strategy:
Internal Alignment
• 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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 Structures Vary Among Organizations
• Internal pay structure can be defined by:
• Number of levels of work
• Pay differentials between the levels
• Criteria or base used to determine those levels
and differentials

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 Number of Levels
• Pay structure is hierarchical in nature, based
on:
• Number of levels
• Reporting relationships

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 Differentials
• Pay differences among levels
• Pay is determined by:
• Knowledge/ skills involved
• Working conditions
• Valued addition to the company
• Percent differentials can be paired with
different pay level policies

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 Use Value and Exchange Value
• Use value: Value of goods or services an
employee produces in a job
• Exchange value: Wage agreed upon by the
employer and the employee

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 Job and Person-Based Structures
• Job-based structures: Rely on the work
content
• Person-based structures: Shift the focus to
the employee:
• Skills, knowledge, or competencies and their
usage for particular job

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 Exhibit 3.4 - What Shapes Internal
Structures?

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 What Shapes Internal Structures?
• Economic pressures
• 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

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 What Shapes Internal Structures?
• External stakeholders
• Unions - To promote solidarity:
• Seek smaller pay differences among jobs and
seniority-based promotions
• Stockholders - Interested in pay differences
between executives and others

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 What Shapes Internal Structures?
• Cultures and customs
• Play an important role in shaping pay structures
• Judge what size of pay differential is fair
• Organization strategy
• Aligned, yet adaptable pay structures required

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 What Shapes Internal Structures?
• Organization human capital
• Constitutes:
• Education
• Experience
• Knowledge
• Abilities
• Skills
• Greater the value added by the skills and
experience, higher is the pay

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 What Shapes Internal Structures?
• 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
• Outsourcing specialists
• Pay for employees under both practices based on
internal structure of home employer

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 What Shapes Internal Structures?
• Delayering
• Cuts unnecessary, non-contributing work
• Adds work to other jobs, enlarges them, changes the
job’s value and structure

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 What Shapes Internal Structures?
• Overall HR policies
• More levels
• Organizations can offer more promotions
• There may be smaller pay differences between levels
• Frequent promotions (without significant pay
rise) offer a sense of career progress

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 What Shapes Internal Structures?
• Internal labor markets
• Rules and procedures that:
• Determine pay for different jobs within a single
organization
• Allocate employees among those different jobs

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 What Shapes Internal Structures?
• Employee acceptance - A key factor
• Employees judge the fairness of pay through
comparisons with others
• Sources of fairness
• Procedural justice: Process by which a decision is
reached
• Distributive justice: The fairness of the decision

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 What Shapes Internal Structures?
• Pay procedures are more likely to be perceived
as fair if:
• They are consistently applied to all employees
• Employees participated in the process
• Appeals procedures are included
• The data used are accurate
• Pay structures change
• In response to external factors such as skill
shortages

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 Strategic Choices in Designing
Internal Structures
• Tailored versus loosely coupled
• Tailored
• Adopted by organizations with low-cost, customer-
focused business strategy
• Has well designed jobs with detailed steps or tasks
• Very small pay differentials among jobs
• Loosely coupled
• Require constant innovation
• Pay structures are more loosely linked to the
organization to provide flexibility

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 Strategic Choices in Designing
Internal Structures
• Egalitarian versus hierarchical
• Egalitarian structures
• All employees are valued equally
• Advantages
• Fewer levels
• Smaller differentials
• Disadvantages
• Equal treatment can mean more knowledgeable
employees feel underpaid

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 Strategic Choices in Designing
Internal Structures
• Hierarchical structures
• Value the differences in work content, skills, and
contributions
• Include detailed descriptions of work done at each
level

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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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Exhibit 3.9 - Some Consequences of an
Internally Aligned Structure

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 Guidance from the Evidence
• Hierarchical structures result in:
• Greater performance when work flow depends
on individual contributors
• High performers quit less under hierarchical
systems when:
• Pay is based on performance rather than
seniority
• People have knowledge of the structure

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 Guidance from the Evidence
• Egalitarian structures are related to greater
performance when:
• Close collaboration and sharing of knowledge
are required
• Impact of internal structure on performance:
• Is affected by the pay model

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 Consequences of Structures
• Importance of internal alignment
• Efficiency
• Aligned structure lead to better performance
• Pay structures imply future returns
• Fairness
• For fair (sizable) differentials
• Against fair (sizable) differentials
• Compliance
• Comply with regulation of the country

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 • CONCLUSION

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