CMS 2 - Assignment 2
Briefly describe the following attributes of an internally aligned pay structure.
(a) supports organization strategy - a pay structure is designed with the objective of supporting the organization strategy. (b) 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. (c) motivates behavior - internal pay structures influence employees' behavior. The challenge is to design the structures so they direct people's effort toward organization objectives. The rationale on which the structure should be based ought to make clear the relationship between each job and the organization's objectives and the structure ought to be fair to employees. Employees who see or understand a link between their work and the organization's objectives are more likely to work toward those objectives.
Explain four 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. Unless an employee can produce 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 U.S. 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 to be equal if it requires equal skill, effort and responsibility and is performed under equal working conditions. Much of the pay-related legislation attempts to regulate economic forces to achieve social welfare objectives - most legislation is aimed at minimum wages and maximum compensation.
Explain three consequences of alignment.
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 responsibilities. 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.
Briefly describe four organization factors that shape internal structures of organizations.
1. organization strategy - structures that are not aligned with the organization strategy may become obstacles to the organization's success. However, aligned structures today may become obsolete tomorrow. So aligned, yet adaptable, may be required. 2. organization human capital - these are things such as education, experience, knowledge, abilities and skills that people possess. The stronger those skills and experience are linked with an organization's strategic objective, the more pay they will command. 3. organization work design - technology is another critical organization factor influencing the design of pay structures. The technology used to produce goods and services influences and organization's design, work to be performed and skills and knowledge required to perform the work. 4. overall HR policies - an organization's other human resources 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.
Explain four external factors that influence internal structures.
3. External Stakeholders - Unions, stockholders and political groups all have a stake in formulating internal pay structures. Generally, unions seek smaller pay differences among jobs and seniority-based promotions as a way to promote solidarity among members. Both 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 the mental programing for processing information that people share in common. Such shared mind-sets may 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 and over time. Today advocates of the "living wage" are trying to change societal judgements about what wage is just.
Explain what it means in terms of a strategic choice to design internal structures that are 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 business such as 3M that require constant product innovation and short-product-to-market cycle times and that encourage constant innovation and agility.
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.
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.
Discuss the debate over 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. Some argue that the model of an internal labor market is no longer useful, that today's external market also dominates pay decisions of non-entry-level jobs for many organizations.
How is 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. One feature of any pay structure is its hierarchical nature: the number of levels and reporting relationships. Some are more hierarchical, with multiple levels; others are compressed, with few levels. The 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 these differentials is to motivate people to strive for promoting 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. Value refers tot 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. In contrast, 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.
Compare and contrast the egalitarian and the hierarchical pay structures.
Egalitarian structures have fewer levels and smaller differentials between adjacent levels and between the highest and lowest paid workers. The multiple levels of hierarchical structures typically include detailed descriptions of work done at that level and delineate who is responsible for what. Hierarchical structures are consistent with a belief in the motivational effects of frequent promotions. 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 but also have a greater freedom to determine how best to accomplish what is expected of them. An egalitarian structure implies a belief that more equal treatment will improve employee satisfaction, support cooperation and therefore affect worker's performance. When choosing a structure, the difference is usually not between one and the other. Instead, the differences are a matter of degree.
What does research indicate about equity theory and tournament theory as they relate to pay structures?
Equity theory - suggests that employees judge equity (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. Organizations need to be able to explain to employees the rationale for the compensation system choices. Tournament 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. Pay has little motivational effect n people already in a job. Instead, the pay offered for a higher position motivates those at lower levels to come to work and do their best in order to stay in contention for promotion. So pay should be set with its motivational effects on people at lower levels in mind. This theory has limited applications. Research shows that the tournament theory 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.
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. Resent examples 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.
Internal alignment, often called internal equity, refers to the pay relationships among different jobs/skills/competencies within a single organization.
Internal alignment, often called internal equity, refers to the pay relationships among different jobs/skills/competencies within a single organization.
Pay structure refers to the array of pay rates for different work or skills within a single organization.
Pay structure refers to the array of pay rates for different work or skills within a single organization.
The criteria used to determine the number of levels and size of the pay differentials can be categorized as either job based or person based. A job-based structure looks at what tasks are done, what behaviors are expected and what responsibilities are expected. Person-based structures shift the focus on the skills, knowledge or competencies the employee posses, whether or not they are used on the particular job the employee is doing.
The criteria used to determine the number of levels and size of the pay differentials can be categorized as either job based or person based. A job-based structure looks at what tasks are done, what behaviors are expected and what responsibilities are expected. Person-based structures shift the focus on the skills, knowledge or competencies the employee posses, whether or not they are used on the particular job the employee is doing.
The number of levels, differentials in pay between the levels and the criteria used to determine those differences describe the structure.
The number of levels, differentials in pay between the levels and the criteria used to determine those differences describe the structure.
The relationships among different jobs inside an organization make up its internal pay structure. The relationships form a pay structure that should support the organization strategy, support the workflow, and motivate behavior toward organization objectives.
The relationships among different jobs inside an organization make up its internal pay structure. The relationships form a pay structure that should support the organization strategy, support the workflow, and motivate behavior toward organization objectives.
Use value reflects the value of goods or services an employee produces in a job. Exchange value is whatever wage the employee and employer agree on for a job.
Use value reflects the value of goods or services an employee produces in a job. Exchange value is whatever wage the employee and employer agree on for a job.
Describe the guidance that research is providing in managing internal pay structures.
a. more hierarchical structures are related to greater performance when the workflow depends more on individual contributions. 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 other dimensions of the pay model: pay level (competitiveness), employee performance (contributions) and employee knowledge of the pay structure (management).