CMS 2 Assignment 2: Establishing Internal Alignment
Three consequences of alignment are:
(1) Efficiency or competitive advantage - Pay differentials in internal pay structures ought to be able to create and sustain a competitive advantage because they will lead to better organization performance. They provide incentives for employees to remain with the organization and to increase their experience and training in order to advance to higher paying positions in the organization. Properly designed internal pay structures also induce cooperation with co-workers and a desire for greater responsibility. (2) Fairness - Several researchers believe that employee attitudes about the fairness of the pay structure influence their work behaviors. However, there is no agreement on whether an acceptable wage structure is one with sizable differentials among jobs or one with only small differentials. (3) Compliance - Structures must comply with all laws and regulations that apply to the organization.
Internal labor markets combine both external and organizational factors. Internal labor markets refer to the rules and procedures that
(1) determine the pay for the different jobs within a single organization and (2) allocate employees among those different jobs.
Research also suggests that pay procedures are more likely to be perceived as fair
(1) if they are consistently applied to all employees, (2) if employees participated in the process, (3) if appeals procedures are included, and (4) if the data used are accurate.
An important factor influencing the internal pay structure is its acceptability to the employees involved. Employees make multiple pay comparisons to assess the fairness of an internal pay structure. Two measures of fairness are concerned with:
(1) procedural justice - how design and administration decisions are made and whether procedures are applied in a consistent manner and; (2) distributive justice - whether the actual pay differences among employees are acceptable.
Research provides the following guidance in managing internal pay structures:
(a) More hierarchical structures are related to greater performance when the workflow depends more on individual contributors. (b) High performers quit less under hierarchical systems when pay is based on performance rather than seniority and when people have knowledge of the structure. (c) More egalitarian structures are related to greater performance when close collaboration and sharing of knowledge is required. The competition fostered in the "winner-take-all" tournament hierarchies appears to have negative effects on performance when the workflow and organization design require teamwork. (d) The impact of any internal structure on organization performance is affected by the other dimensions of the pay model: pay levels (competitiveness), employee performance (contributions) and employee knowledge of the pay structure (management).
Pay structure should:
(a) support workflow, (b) be fair to employees and (c) direct employee behavior toward the organization's business objectives.
External factors that influence internal structures:
1. Economic pressures - Early theorists concentrated on the supply of labor to explain pay structures, with the most famous being marginal productivity theory which states that unless an employee can product a value equal to the value received in wages, it will not be worthwhile for the employer to hire that worker. 2. Government policies, laws, and regulations - In the United States, pay structures cannot be based on gender, race, religion, or national origin. The Equal Pay Act and the Civil Rights Act require "equal pay for equal work". Work is considered equal if it requires equal skill, equal effort, equal responsibility, and is performed under equal working conditions. Pay-related legislation attempts to regulate economic forces to achieve social welfare objectives. Legislation is aimed at minimum wages and maximum compensation which includes special reporting requirements for executive pay. 3. External stakeholders - Unions, stockholders, and political groups all have a stake in formulating internal pay structures. Unions seek smaller pay differences among jobs and seniority-based promotions as a way to promote solidarity among members. Unions and stockholders pay close attention to executive pay, and research is beginning to document its effects on employees' behaviors and performance and, consequently, organization performance. 4. Cultures and customs - Culture is defined as the mental programming for processing information that people share in common. Shared mind-sets can form a judgement of what is fair in the way of pay differentials. Customs and cultures incorporate views from various disciplines, including sociology and philosophy, and ideas of fair wages have varied widely among cultures over time. Today advocates of the "living wage" are trying to change societal judgements about what wage is 'just'. These judgements do change in response to pressures.
The criteria used to determine the number of levels and size of the pay differentials can be categorized as:
1. Job based - looks at what tasks are done, what behaviors are expected, and what responsibilities are expected. 2. Person based - focus is on skills, knowledge or competencies the employee possesses, and whether or not they are used on the particular job the employee is doing.
Organizational factors that shape internal structures of organizations:
1. Organization strategy - Structures not aligned with the organization strategy can become obstacles to the organization's success. Aligned structures can possibly become obstacles tomorrow. Aligned, yet adaptable is the best fit. 2. Organization human capital - A major influence on internal structures is human capital. These are things such as education, experience, knowledge, abilities, and skills that people possess. The stronger the link of those skills and experience with the organization's strategic objective, the more pay they will command. 3. Organization work design - Technology is a critical factor that influences the design of pay structures. The technology used to produce goods and services influences an organization's design, work to be performed, and skills and knowledge required to perform the work. 4. Overall HR policies - HR policies also influence internal pay structures. The amount of pay to tie to a promotion, the nature of promotions, and pay differences must be consistent with what the organization is trying to accomplish.
Attributes of an internally aligned pay structure
1. Supports organization strategy - A pay structure is designed with the objective of supporting the organization strategy. 2. Supports workflow - Workflow refers to the process by which goods and services are created and delivered to the customer. A company's workflow reflects how it is organized/designed. The challenge is to design a pay structure that supports the efficient flow of work. 3. Motivates behavior - Internal pay structures influence employees' behavior. The challenge is to design the structures so that they direct efforts towards organizational objectives. The structure should make clear the relationship between each job and the organization's objectives as well as be fair to all employees. Employees who see or understand a link between their work and the organization;s objectives are more likely to work toward those objectives.
In terms of a strategic choice, how are internal structures designed to be either closely tailored or loosely coupled?
A closely tailored structure contains a high degree of specified detail in the tasks to be performed. This type of structure works well in businesses such as McDonald's and Walmart where jobs are well defined with detailed tasks or steps to follow. The loosely coupled approach is more appropriate in businesses such as 3M that require constant product innovation, short product-to-market cycle times, and that encourage constant innovation and agility. Pay structures tailored to be aligned must support the way work gets done, fit the organization's business, and be fair to employees.
Job- and Person-Based Structures
A job-based structure relies on the work content- tasks, behaviors, responsibilities. A person-based structure shifts the focus to the employee: the skills, knowledge, or competencies the employee possesses, whether or not they are used in the employee's particular job.
How does tournament theory relate to pay structure?
According to this theory, structures with greater differentials at the top have a more positive effect on performance than those with smaller differentials for people at all levels in the structure. The main thing affected by individuals' performance is whether or not they get promoted to the next level. Pay has little motivational effect on people already in a job. Instead, the pay offered for a higher position motivates those at lower levels in the organization to come to work and do their best in order to stay in contention for promotion. Pay should be set with its motivational effects on people at lower levels in mind. The bigger the prize for getting to the next level, the greater the motivational impact the structure will have. The tournament theory has limited applications. Research shows that the tournament theory (a hierarchical pay structure) works best in situations where individual performance matters most and where the demand for cooperation among a small group of individuals is relatively low. In organizations that rely heavily on cooperative efforts, research shows that egalitarian pay structures produce better results than hierarchical structures.
Discuss the debate of whether the concept of internal labor markets is still useful.
An internal labor market refers to the rules and procedures that determine the pay for different jobs within a single organization and allocate employees among those different jobs. For example, if an organization only recruits externally for entry-level jobs, external market factors only dominate the pay of specific entry-level jobs since the pay of nonentry jobs is influenced primarily by internal factors such as the organization's strategy, technology, human capital requirements, and other HR systems. Some argue that the model of an internal labor market is no longer useful because today's external market also dominates pay decisions of non-entry-level jobs for many organizations.
How is an internal pay structure defined?
An internal pay structure can be defined by (a) the number of levels of work, (b) the pay differentials between the levels and (c) the criteria or bases used to determine those levels and differentials. Pay structures are hierarchical in nature (the number of levels and reporting relationships). Pay differences among levels are referred to as differentials. Work that requires more knowledge or skills, is performed under unpleasant working conditions, or adds more value is usually paid more. One intention of differentials is to motivate people to strive for promotion to a higher paying level. Work content and its value are the most common bases for determining internal structures. Content refers to the work performed in a job and how it gets done (tasks, behaviors, knowledge required, etc.). Value refers to the worth of the work and its relative contribution to the organization objectives. A structure based on content ranks jobs by skills required, complexity of tasks, problem solving and/or responsibility. A structure based on the value of work focuses on the relative contribution of the skills, tasks, and responsibilities to the organization's goals.
What are the differences between egalitarian and hierarchical pay structures?
Egalitarian structures have fewer levels and smaller differentials (between both adjacent jobs/levels and the highest and lowest paid workers). Hierarchical structures have multiple levels that include detailed descriptions of work done at each level and delineate who is responsible for what. Hierarchical structures believe in the motivational effects of frequent promotions and value the differences in work content, individual employee skills, responsibilities, and contributions to the organization. In an egalitarian structure, levels of responsibility and supervision are removed so that all employees at all levels become responsible for a broader range of tasks and have greater freedom to determine how to best accomplish what is expected of them. An egalitarian structure believes that more equal treatment will improve employee satisfaction, support cooperation, and therefore affect workers' performance. When choosing a structure, the decision is not normally between one or the other. Instead differences are a matter of degree. 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.
How does equity theory relate to pay structures?
Equity theory suggests that employees judge fairness on the basis of comparisons: (1) between the work requirements and pay for their own job with the work requirements and pay for other jobs in the organization; and (2) their jobs' pay against external pay levels. These pay comparisons made by employees demand that organizations not only design a compensation system that supports its objectives but that the organization is able to explain to employees on a regular and ongoing basis the rationale for the compensation system choices.
marginal productivity theory (MPT)
In contrast to Marxist "surplus value" theory, a theory that focuses on labor demand rather than supply and argues that employers will pay a wage to a unit of labor that equals that unit's use (not exchange) value. That is, work is compensated in proportion to its contribution to the organization's production objectives.
What is the institutional theory as it relates to pay structures?
Institutional theory (copying others) says that practices of other firms influence an organization's pay structure decisions, and this extends itself to internal pay structures that may be adopted to mimic "best practices". It is common for managers to bring back "the answers" from the latest conference. Surveys that benchmark the practices of the best companies facilitate others copying those practices. Recent examples of such behaviors include the rush to outsource jobs, to emphasize teams, to de-emphasize individual contributions and to shift to a competency-based pay system (often with little regard to whether any of these practices make sense for the particular organization or its employees and add value).
____________ refers to the array of pay rates for different work or skills within a single organization.
Pay structure
What does it mean to fit or tailor the pay structure to be internally aligned?
Two strategic choices are involved: (1) how specifically tailored to the organization's design and work flow to make the structure and (2) how to distribute pay throughout the levels in the structure.
____________ reflects the value of goods or services an employee produces in a job. ___________ is whatever wage the employer and employee agree on for a job.
Use value Exchange value
Use Value and Exchange Value
Use value reflects the value of goods or services an employee produces in a job. Exchange value is whatever wage the employer and employee agree on for a job.
Content and Value
Work content and its value are the most common bases for determining internal structures. Content refers to the work performed in a job and how it gets done (tasks, behaviors, knowledge required, etc). Value refers to the worth of the work: its relative contribution to the organization objectives. A structure based on content typically ranks jobs on skills required, complexity of tasks, problem solving, and/or responsibility. A structure based on the value of the work focuses on the relative contribution of these skills, tasks, and responsibilities to the organization's goals.
surplus value
created by the difference between use and exchange value
Internal alignment, often called ______________, refers to the pay relationships among different jobs/skills/competencies within a single organization.
internal equity
The relationships among different jobs inside an organization make up its _________________. The relationships form a pay structure that should support the organization strategy, workflow, and motivate behavior toward organization objectives.
internal pay structure
The __________ of levels, _____________ in pay between the levels, and the ___________ used to determine those differences describe the pay structure.
number differentials criteria
egalitarian
of, relating to, or believing in the principle that all people are equal and deserve equal rights and opportunities
Two sources of fairness are important:
the procedures for determining the pay structure, called procedural justice; and the results of those procedures - the pay structure itself - called distributive justice.
