Lecture: Three
506: Compensation Management
Internal Alignment & Pay Structure
Course Instructor:
Nusrat Jahan Arefin
Assistant Professor
Department of Public Administration
Jahangirnagar University
Date: 29 January, 2020
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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
3-2
Key Issues
Two basic questions lie at the core of
compensation management . . .
How is pay determined for the wide variety
of work performed in organizations?
Does how much an organization pays for
different work make a difference?
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Internal Alignment
• Internal alignment, addresses relationships
inside the organization
• The relationships form a pay structure that
should support the organization strategy,
support the work flow, and motivate behavior
toward organization objectives .
• Thus, Internal alignment, often called internal
equity, refers to the pay relationships among
different jobs/skills/competencies within a
single organization
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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Pay Structure
• 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.
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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Areas/ Functions of Internal Alignment
• Supports Organization Strategy
• Plan to achieve the purpose
• Supports Work Flow
• Work flow: Process by which goods and services
are delivered to the customer
• Supports Fairness
• Procedural Justice & Actual Results
• 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 Career Brands at GE Healthcare
those levels and
differentials
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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Number of Levels
• Pay structure is hierarchical in nature, based
on:
• Number of levels
• Reporting relationships
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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Differentials
• The pay differences among levels are referred
to as differentials
• 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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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Criteria: Content and Value
• Content: Work performed in a job and how it
gets done
• A structure based on content typically ranks jobs
on :
• Skills required
• Complexity of tasks
• Problem solving
• Responsibility
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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Criteria: Content and Value
• Value: Worth of the work and its
contribution to the organization
• A structure based on the value of the work focuses
on:
• relative contribution of these skills, tasks, and
responsibilities to the organization’s goals.
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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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
• The difference between exchange value and use value
also surfaces when one firm acquires another.
• So, similar marketing jobs in two different companies
may be valued differently based on how they
contribute to organization objectives.
• Alternatively, the same work content in the same
company may have different exchange value based on
different geographies.
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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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
• In the real workplace, it is often hard to describe a
job without reference to the jobholder’s knowledge
and skills.
• Conversely, it is hard to define a person’s job-related
knowledge or competencies without referring to
work content.
• So rather than a job- or person-based structure,
reality includes both job and person
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3-13
Engineering Structure at Lockheed
Entry Level Engineer: Limited use of basic principles.
Close supervision.
Senior Engineer: Full use of standard principles
and concepts. Under general supervision.
Systems Engineer: Wide applications of principles and
concepts, plus working knowledge of other related
disciplines. Under very general direction.
Lead Engineer: Applies extensive knowledge as a
generalist or specialist. Exercises wide latitude.
Advisor Engineer: Applies advanced principles, theories,
and concepts. Assignments often self-initiated.
Consultant Engineer: Exhibits an exceptional degree
Recognized of ingenuity, creativity, and resourcefulness. Acts
Authority independently to uncover and resolve operational
problems.
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Engineering Pay Structure at Lockheed 3-14
Martin
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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’s 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
• 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
• 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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Illustration of an Internal Labor Market
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Internal Labor Markets: Combining
External and Organization Factors
• Combine both external and organizational factors
• Internal labor markets refer to the rules and procedures that
• determine the pay for the different jobs within a single
organization and
• allocate employees among those different jobs
• Exhibit individuals are recruited only for entry-level jobs
• They are later promoted or transferred to other jobs inside the
organization.
• Because the employer competes in the external market for people
to fill these entry jobs, their pay must be high enough to attract a
pool of qualified applicants.
• In contrast, pay for jobs filled via transfer and promotions is
connected to external market forces, but the connection is less
direct.
• External factors are dominant influences on pay for entry jobs, but
the differences for nonentry jobs tend to reflect internal factors
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Internal Labor Markets: Combining
External and Organization Factors
• 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
• 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
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Internal Labor Markets: Combining
External and Organization Factors
• Pay Structures Change
• In response to external factors such as skill shortages
• Overtime, distorted pay differences may become
accepted as equitable and customary; efforts to
change them are resisted.
• Thus, pay structures established for organizational and
economic reasons at an earlier time may be
maintained for cultural or political reasons.
• The new norms form around the new structure. This
“change-and-congeal” process does not yet support
the continuous changes occurring in today’s
economy..
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may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
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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Strategic Choice:
Hierarchical versus Egalitarian
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Which Structure has the Greatest Impact on
Performance? On Fairness?
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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
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Guidance from the Evidence
• 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
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Guidance from the Evidence
• Institutional Theory: Copy Others
• Sometimes internal pay structures are adopted because
they have been called a “best practice.”
• Organizations simply copy or imitate others
• the rush to outsource jobs,
• to emphasize teams,
• to de-emphasize individual contributions, and
• to shift to a competency-based pay system
• Institutional theory sees firms as responding/conforming
to normative pressures in their environments
• Institutional theory, predicts that very few firms are “first
movers”;
• Instead, they copy innovative practices after innovators
have learned how to make the practices work
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Some Consequences of an Internally
Aligned Structure
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Guidance from the Evidence
(Effects Attributed to Internally Aligned Structures )
• Impact of internal structures depends on
context in which they operate
• 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
(Effects Attributed to Internally Aligned Structures )
• 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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