1. COMPENSATION Third Canadian Edition Milkovich, Newman, Cole
Chapter 3
Defining Internal Alignment

2. THE PAY MODEL
TECHNIQUES
STRATEGIC
POLICIES
STRATEGIC
OBJECTIVES
EFFICIENCY  Performance  Quality  Customers & Stockholders  Costs
FAIRNESS
COMPLIANCE
INTERNAL STRUCTURE
ALIGNMENT
PAY
STRUCTURE
COMPETITIVENESS
See Exhibit 1.1.
INCENTIVE
PROGRAMS
CONTRIBUTORS
MANAGEMENT
EVALUATION

3. Compensation Strategy: Internal Alignment/Equity
Supports Organization Strategy
Supports Workflow
Supports Work Flow. Work flow refers to the process by which goods and services are delivered to the customer. The challenge is to design a pay structure that supports the efficient flow of that work. (Text page 53)
Supports Fairness. An internally consistent pay structure is more likely to be judged fair if it is based on the work and the skills required to perform the work and if people have an opportunity to be involved in some way in determining the pay structure. 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, called distributive justice. (Text page 55)
Directs Behavior Toward Organization Objectives.
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 ought to make clear the relationship between each job and the organization’s objectives. This is an example of line-of-sight. The more employees can “see” or understand links between their work and the organization’s objectives, the more likely the structure will direct their behavior toward those objectives. Internal consistency in pay structures help create that line-of-sight. (Text page 55)
Motivates Behaviour

4. Internal Alignment/Equity
the pay relationships between the jobs/skills/ competencies within a single organization
the relationships form a pay structure that:
supports organization strategy
supports the workflow
motivates behaviour of employees

5. Job Structure at an Engineering Company
Consultant Engineer: Exhibits an exceptional degree of ingenuity, creativity, and resourcefulness. Acts independently to uncover and resolve operational problems.
Advisor Engineer: Applies advanced principles, theories, and concepts. Assignments often self-initiated.
Lead Engineer: Applies extensive knowledge as a generalist or specialist. Exercises wide latitude.
Systems Engineer: Wide applications of principles and concepts, plus working knowledge of other related disciplines. Under very general direction.
Senior Engineer: Full use of standard principles and concepts. Under general supervision.
Engineer: Limited use of basic principles. Close supervision.
Recognized Authority
Entry Level

6. Pay Structure
refers to the array of pay rates for different work or skills within a single organization, created through the use of:
the number of levels
differentials in pay between the levels, and
the criteria used to determine those differences.
Pay structures change over time

7. Pay Structure at an Engineering Company
Consultant Engineer $162,000
Advisor Engineer $120,000
Lead Engineer $93,000
Systems Engineer $73,000
Senior Engineer $58,500
Engineer $48,000
Recognized Authority
Entry Level

8. What Shapes Internal Structures?
EXTERNAL FACTORS:
Economic Pressures
Government Policies, Laws, Regulations
Stakeholders
Cultures and Customs
ORGANIZATION FACTORS:
Strategy HR Policy
Technology Employee Acceptance
Human Capital Cost Implications
INTERNAL STRUCTURE:
Levels, Differentials, Criteria

9. Illustration of an Internal Labour Market*
Consultant
Engineer
Hire
*Internal labour
markets combine
both external and
organizational
factors
Advisor
Engineer
Lead
Engineer
Systems
Engineer
See Exhibit 3.3, text page 68
Senior
Engineer
Hire
Engineer
Hire

10. Strategic Choices Among Structure Options
Tailored (well-defined jobs; small differentials)
versus
Loosely Coupled (jobs flexible, adaptable, changing)
Egalitarian (few levels; small differentials)
versus
Hierarchical (many levels; large differentials)
See text page 64
The basic premise underlying the strategic approach is that fit matters. So the belief is that pay structures tailored to be consistent with the organization, to support the way the fork gets done, and to fit the organization’s business strategy will be more likely to lead to success. Misaligned structures become obstacles. They may motivate employee behavior that is inconsistent with the organization’s strategy.
Two strategic choices are involved: (1) how tailored to organization design and work flow to make the structure; and (2) how to distribute pay throughout the levels in the structure.
Tailored versus Loosely Coupled. A low-cost, customer-focused business strategy such as followed by McDonald’s or Wal-Mart may be supported by a closely tailored structure. Jobs are well defined with detailed tasks or steps to follow. You can go into a McDonald’s in Cleveland, Prague, or Shanghai and find they are all very similar. Their pay structures are too. In contrast to McDonald’s, Microsoft’s business strategy requires constant product innovation and short product design-to-market cycle times. Companies like Microsoft need to be very agile, constantly innovating and adapting. Hence, their pay structures need to be more loosely coupled to the organization in order to facilitate constant change.
Egalitarian versus Hierarchical. Pay structures can range from egalitarian at one extreme to hierarchical at the other. Egalitarian structures have fewer levels and smaller differentials between adjacent levels and between the highest and lowest paid workers.

11. Structures Vary in Number of Levels
Structure A
Layered
Chief Engineer
Engineering Manager
Consulting Engineer
Senior Lead Engineer
Lead Engineer
Senior Engineer
Engineer
Engineer Trainee
Structure B
De-layered
Chief Engineer
Consulting Engineer
Associate Engineer
See Exhibit 3.6, text page 73

12. Strategic Choice: Hierarchical vs. Egalitarian
Levels
Many
Fewer
Differentials
Large
Small
Criteria
Person or Job
Fit
Tailored
Loosely Coupled
Supports
Individual Performers
Teams
Fairness Criterion
Performance
Equal Treatment
Behaviour Rewarded
Opportunities for Promotion
Cooperation
See Exhibit 3.7 on page 74 of text
This slide clarifies the differences between egalitarian and hierarchical structures. The choice, however, is not either / or. Rather, the differences are a matter of degree. So levels can range from many to few, differentials can be large or small, and the criteria can be based on the job, the person, or some combination of the two. (text page 66)

13. What The Research Tells Us
Equity Theory: Fairness
my pay for my inputs vs. others’ pay for their inputs
MY PAY
My qualifications
My work performed
My product value
OTHERS’ PAY
Their qualifications
Their work performed
Their product value

14. What The Research Tells Us
Tournament Theory: Motivation and Performance
Players perform better where prize differentials are sizeable
works best in situations where individual performance matters most

15. What The Research Tells Us
Institutional Model: Copy others
Copy “best practices” of others
No analysis of whether the practice fits the organizational strategy

16. Organizational Outcomes of an Internally Aligned Structure
Undertake training
Increase experience
Reduce turnover
Facilitate career progression
Facilitate performance
Reduce pay-related grievances
Reduce pay-related work stoppages
Pay structure
Text, Exhibit 3.9 page 78

17. Consequences of Structures
Efficiency
Internal Structure
Fairness
Legal Compliance

18. Conclusion
Internal alignment refers to the pay relationships among jobs / skill / competencies within a single organization.
Pay structures – the array of pay rates for different jobs within an organization – are defined by levels, differentials, and the criteria for determining these.
Acceptance by employees of the pay differentials between jobs is a key test of an equitable pay structure.
The goals of the entire compensation system must be kept in mind when designing internal pay structures.