1. Defining Internal Alignment
Chapter 3

2. Compensation Strategy:
First issue in strategic approach is establishing objectives
Second issue is internal alignment, which addresses the relationships inside the organization
The relationships form a pay structure that should:
Support the organization strategy
Support the work flow - the process by which goods and services are delivered to the customer (Merrill Lynch example)
Motivate behavior toward organization objectives

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

4. Exhibit 3.1: Engineering Structure at Lockheed Martin

5. Structures Vary Among Organizations
An internal pay structure can be defined by
Number of levels of work
Pay differentials between the levels
Criteria or basis used to determine those levels and differentials

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

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

8. Differentials The pay differences among levels
Intention of these differentials:
To motivate people to strive for promotion to a higher-paying level

9. Exhibit 3.3: Exploring Pay Structure at Lockheed Martin

10. 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
- the process by which goods and services are delivered to the customer (Merrill Lynch example)
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

11. Use Value and Exchange Value
Use value – the value of goods or services an employee produces in a job
Exchange value – whatever wage the employer and employee agrees on for a job
Difference between exchange value and use value surfaces when one firm acquires another

12. Job- and Person-Based Structures
Job-based structures 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
In reality, both job-and-person-based structures are included

13. Exhibit: 3.4: What Shapes Internal Structures?

14. What Shapes Internal Structures? External Factors
Economic pressures
Early advocates: Adam Smith, Karl Marx
Marginal productivity
Supply and demand for labor and products
Government policies, laws, and regulations
Equal Pay Act and Civil Rights Act
Living wage

15. What Shapes Internal Structures? External Factors (cont.)
External stakeholders
Have a stake in how internal pay structures are determined e.g. unions, shareholders
Cultures and customs
Culture – the mental programming for processing information that people share in common

16. What Shapes Internal Structures? Organizational Factors
Organization strategy
Aligned, yet adaptable pay structures
Organization's human capital
Education
Experience
Knowledge
Abilities
Skills required to perform the work

17. What Shapes Internal Structures? Organizational Factors (cont.)
Organization work design
Technology used in producing goods and services influences
Organizational design
Work to be performed
Skills/Knowledge required to perform work

18. What Shapes Internal Structures? Organizational Factors (cont.)
Organization work design (cont.)
Temporary work supplier
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

19. Example of Organizational Layers
Finance
Ops
Mktg HR
Law IT
CEO
2nd level 1
3rd level 5 8 6
4th level 15 21 45 36 24 42
5th level 46 89 60 31
425
6th level 86 52
122 12 17
7th level
120
146
250 25
8th level
440
9th level 48
10th level
3289 2

20. What Shapes Internal Structures? Organizational Factors (cont.)
Overall HR policies
Feeling of ‘career progress’

21. What Shapes Internal Structures
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
Allocate employees among those different jobs
Employee acceptance
Sources of fairness: Procedural, and distributive justice
Pay structures change (e.g. y2k)

22. Exhibit 3.5: Illustration of an Internal Labor Market
See Exhibit 3.3, text page 68

23. 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

24. 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

25. Exhibit 3.6: Strategic Choice: Hierarchical versus Egalitarian
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)

26. Exhibit 3. 7: Which Structure Has the Greatest Impact on Performance
Exhibit 3.7: Which Structure Has the Greatest Impact on Performance? on Fairness?
See Exhibit 3.6, text page 73

27. Internal Structures Variations
Choice is rarely either/or - differences are a matter of degree:
Levels can range from many to few
Differentials can be small or large
Criteria can be based on the job, the person, or some combination

28. 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

29. Exhibit 3.8: Some Consequences of an Internally Aligned Structure
Text, Exhibit 3.9 page 78

30. (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

31. (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)

32. Multiple Pay Structures
Factors to Consider
Job Diversity
Grading Procedure
Internal Equity vs. External Competitiveness
Company Culture – different pay targets based on type of work, clerical, managerial, executive
Company Business Goals and Philosophy

33. Job Diversity
Jobs can vary by Functional Area and extent to which one functional area has “hot skills”
Jobs can vary by level GE’s managerial/Professional levels or Lockheed Martin’s engineering levels
May have one structure for administrative support and another for supervisory/professional levels

34. Grading Procedure
Examples of structure difference due to grading procedures:
Union-negotiated production jobs may be in an automatic step-rate structure
Hourly office jobs may be evaluated using a point-factor plan
Management jobs may be evaluated using a market-driven approach

35. Multiple Pay Structures
Executive
Professional/ Management $
Clerical/Technical

36. Business Goals Compensation Philosophy Geography Business Units
Career development and promotional opportunities

37. Class Discussion Break into groups of 6 – 7 and discuss
Company has recently merged independent business units who operated in different geographic regions of the country.
Past practice was to set salary levels and pay structure against regional market prices.
Should the newly combined organization establish a national pay structure or continue regional differences?
What are the pitfalls of each of these approaches?

38. Example of Structures Midwestern South Salary Band Minimum Midpoint
Maximum 5
$43,200
$57,000
$72,000 6
$48,700
$65,000
$81,200 7
$55,000
$73,400
$91,700
Salary Band
Minimum
Midpoint
Maximum 5
$40,600
$54,100
$67,600 6
$46,300
$61,700
$77,200 7
$52,300
$69,700
$87,100
California
National
Salary Band
Minimum
Midpoint
Maximum 5
$46,200
$61,600
$77,000 6
$52,700
$70,200
$87,800 7
$59,500
$79,300
$99,100
Salary Band
Minimum
Midpoint
Maximum 5
$43,200
$57,000
$72,000 6
$48,700
$65,000
$81,200 7
$55,000
$73,400
$91,700