Mgmt4330 - Compensation Ch3 Defining Internal Alignment

Economic Pressures

- Marginal productivity says that employees pay use value. - Supply and demand for both labor and products or services affect internal pay structures.

Employee acceptance

Employees judge the fairness of pay through comparisons with others

2. Differentials

Pay differences between and among levels

Cost implications

Pay structures change in response to external factors, e.g., airport screeners

Job-based structures

Rely on the work content of the job

Exchange Value

The wage agreed upon by the employer and employee

Percent differentials

can be paired with different pay level policies such as Lead-the Market, Meet-the Market, or Lag-the-Market

Tailored Strategic Choices in Designing Internal structure

* Adapted by organizations with a low-cost, customer-focused strategy. * Has well-designed jobs with detailed steps or tasks. * Very small pay differentials among jobs. Examples: McDonald's, Wal-Mart

Organization Human Capital

* Constitutes KSAOs, including education, experience, judgment, Emotional Quotient (EQ) * The greater the value added by the KSAOs, the higher the pay

Cultures and Customs

* Cultural factors play a role in shaping pay structures. * Shared mind-sets may judge what size pay differential is fair.

Technology / Work Design

* Technology influences the organizational design of work to be performed, and the KSAOs required to perform the work * Technology intensive organizations will influence pay structures

Government Policies, Laws, and Regulations

* The Fair Labor Standards Act includes provisions for minimum wage, over time pay, etc. * The Equal Pay Act and the Civil Rights Act require "equal pay for equal work." * Some legislation aims at differentials with the "living wage."

Job Structure

* The relationship among jobs inside an organization, based on the work content and each job's relative contribution to achieving the organization's objectives * Grouping of jobs based on their job-related similarities and differences, and on their value to the organization's objectives * Creates a job hierarchy, i.e., job structure

External Stakeholders

* Unions, stockholders, and political groups have a stake in pay structure. * Unions seek smaller pay differences and seniority based promotions. * Another main focus is on the pay differences between executives and others.

Egalitarian Strategic Choices in Designing Internal structure

- All employees are valued equally, with fewer levels and smaller differentials. - However, equal treatment can mean more knowledgeable employees feel underpaid. - More delayered structure.

COMBINING EXTERNAL & ORGANIZATION FACTORS

- Employee Acceptance - Pay Structure Change

Research on Structures:

- Equity Theory - Tournament Theory - Institutional Theory - Correlations are a function of moderating factors Promotions and salary increases send a powerful message

Equity Theory: Fairness

- People compare the ratio of their own outcomes to inputs with the ratio of others - Employees judge fairness by comparing: To jobs similar to their own Their jobs to others at the same employer Their pay against external pay levels

Loosely Coupled Strategic Choices in Designing Internal structure

- Requires constant innovation. - Pay structures are more loosely linked to the organization to provide flexibility. Example: 3M

Some jobs may have the same use value, but different exchange value Examples:

- Similar marketing jobs in two different companies may be valued differently based on how they contribute to organizational objectives - Same work content in the same company may have different exchange value based on geographical location

Tournament Theory: Motivation and Performance

- The greater the differential between your salary and your boss's salary, the harder you work - Winner takes all - See sports examples, e.g., golf, baseball, hockey

Hierarchical Strategic Choices in Designing Internal structure

- Value the differences in work content, skills, and contribution. - Include detailed descriptions of work done at each level. - More layered structure.

WHAT SHAPES INTERNAL STRUCTURES?

1. External Factors 2. Organization Factors 3. Internal Structure

INTERNAL PAY STRUCTURES

1. Number of Levels 2. Differentials 3. Criteria: Content and Value

Sources of fairness

1. Procedural justice: The process by which a decision is reached is fair 2. Distributive justice: The decision and distribution of outcomes is fair

Opening Scenario: "Matthew's Parable" - raises questions about internal alignment and pay structures

1. The content of the work 2. The skills and knowledge required to perform it, and 3. its relative value for achieving the organization's objective - common bases for today's pay structure - This illustrated ignorance of the owner towards the content of the work

1. External Factors:

1.1 Economic Pressures 1.2 Government Policies 1.3 External Stakeholders 1.4 Cultures & Customs

2. Organization Factors

2.1 Organization Strategy 2.2 Technology / Work design 2.3 Organization Human Capital 2.4 Overall HR Policies 2.5 Employee acceptance 2.6 Cost implication

Consequences of Internally Aligned Structures: Pay Model Objectives Efficiency

Aligned structures lead to better performance Pay structures imply future returns

Organization Strategy

Aligned, yet adaptable pay structures required

Consequences of Internally Aligned Structures: Pay Model Objectives Compliance

Comply with regulation of the country

Lockheed Martin Engineering Structure

Different engineers have different - Content - KASOs - vALUE

Consequences of Internally Aligned Structures: Pay Model Objectives Fairness

For fair (sizable) differentials - reward for good work Against fair (sizable) differentials - maintain cooperation

Correlations are a function of moderating factors

Hierarchical structures are related to heightened performance when workflow depends on individuals Egalitarian structures are related to greater performance when close collaboration is required

Pay is determined by:

Knowledge/ skills involved Working conditions Valued addition to the company

Pay Structure

Pay Structure refers to the array of pay rates for different work or skills within a single organization - Decisions on how to pay each level

1. Number of Levels

Pay structure is hierarchical in nature, based on: - Number of levels: -- hierarchical with multiple levels, or -- more compressed or egalitarian organizations having fewer levels - Reporting relationships help determine the nature of the hierarchy

Institutional Theory: Copy Others

Respond/conform to normative pressures in the external environment - Org simply copy or imitate other, with little regard to fit own practices.

Person-based structures:

Shift the focus to the employee's skills, knowledge or competencies used for a job

STRATEGIC CHOICES IN DESIGNING INTERNAL STRUCTURES

Tailored vs Loosely Coupled Egalitarian vs Hierarchical

Use Value

The value of goods / services an employee produces in a job

3. Criteria: Content

The work performed in a job and how it gets done, e.g., skills required, complexity of tasks, degree of problem solving, extent of responsibility

Criteria: Value

The worth of the work and its contribution to the organization, i.e., focuses on the relative contribution of skills, tasks, and responsibilities to the organization's goals - Value may include external market value

Promotions and salary increases send a powerful message

Though no conclusive research on the optimal size of the promotional increase or its effects on behavior, performance, or satisfaction

Overall HR policies

Tie pay to promotions - If there are several levels, organizations can offer more promotions - With several levels, there may be smaller pay differences between levels - Frequent promotions (without significant pay rise) offer a sense of career progress

Indirectly, though, in job-based structures, included are

both job content and employee KSAOs

Internal alignment, often called internal equity,

refers to the pay relationships among different jobs, skills, competencies within a single organization; the focus is on Job Structure and Pay Structure

Some consequences 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