Chapter 3. Defining Internal Alignment

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Rudolf Stafford
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1 Chapter 3 Defining Internal Alignment

2 Learning Objectives Compensation strategy - Internal alignment Structures vary among organizations What shapes internal structures? Strategic choices in designing internal structures 3-2

3 Learning Objectives Guidance from the evidence Consequences of structures 3-3

4 Compensation Strategy: Internal Alignment Pay relationships among different jobs/skills/competencies within a single organization 3-4

5 Compensation Strategy: Pay Structure Array of pay rates for different works or skills within a single organization 3-5

6 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 3-6

7 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 3-7

8 Number of Levels Pay structure is hierarchical in nature, based on: Number of levels Reporting relationships 3-8

9 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 3-9

10 Criteria: Content and Value Content: Work performed in a job and how it gets done Structure- Ranks jobs on: Skills required Complexity of tasks Problem solving Responsibility Value: Worth of the work and its contribution to the organization 3-10

11 Criteria: Content and Value Structure - Focuses on relative contribution of skills, tasks, and responsibilities Can include external market value 3-11

12 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 3-12

13 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 3-13

14 Exhibit What Shapes Internal Structures? 3-14

15 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 3-15

16 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 3-16

17 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 3-17

18 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 3-18

19 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 3-19

20 What Shapes Internal Structures? Delayering Cuts unnecessary, non-contributing work Adds work to other jobs, enlarges them, changes the job s value and structure 3-20

21 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 3-21

22 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 3-22

23 Exhibit 3.5- Illustration of an Internal Labor Market 3-23

24 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 3-24

25 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 3-25

26 Strategic Choices in Designing Internal Structures Tailored versus loosely coupled Tailored Adopted by organizations with low-cost, customerfocused 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 3-26

27 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 3-27

28 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 3-28

29 Exhibit Strategic Choice: Hierarchical versus Egalitarian 3-29

30 Exhibit Which Structure has the Greatest Impact on Performance? On Fairness? 3-30

31 Guidance from the Evidence Equity theory: Fairness People compare the ratio of their own outcomes to inputs with that of others Employees judge fairness by comparing: To jobs similar to their own Their job to others at the same employer Their pay against external pay levels 3-31

32 Guidance from the Evidence Tournament theory: Motivation and performance Greater the differential between your and your boss s salary, harder you work Does not directly address turnover Institutional model: Copy others Responding/conforming to normative pressures in the external environment 3-32

33 Guidance from the Evidence Drawback What aligns with the strategy of one organization may not align with that of another organization 3-33

34 Exhibit Some Consequences of an Internally Aligned Structure 3-34

35 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 3-35

36 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 3-36

37 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 3-37

Compensation Strategy: Internal Alignment 1. Supports Organization Strategy 2. Supports Workflow 3 Motivates Behavior -

Chapter 3: Defining Internal Alignment Compensation Strategy: Internal Alignment Internal alignment (internal equity)- the pay relationships between the jobs/skills/competencies within a single organization