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Chapter 3

Defining Internal Alignment. Chapter 3. 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:

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Chapter 3

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  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

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

  21. 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

  23. Strategic Choices in DesigningInternal 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 DesigningInternal 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

  26. Exhibit 3.7: Which Structure Has the Greatest Impact on Performance? on Fairness?

  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 anInternally Aligned Structure

  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 National California

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