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Internal Equity

Internal Equity. Defining consistency. © Nancy Brown Johnson 2003. Elements of the Pay Structure. Levels & Reporting Relationships Differentials.

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Internal Equity

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  1. Internal Equity • Defining consistency © Nancy Brown Johnson 2003

  2. Elements of the Pay Structure • Levels & Reporting Relationships • Differentials

  3. 1. Which of the following jobs are the most important? 2. Why?3. Are there conditions under which this would change the ordering?4. How much more are they worth? • Clerk • Accountant • Lawyer • Production Supervisor • Production Manager • Operator • HR Manager • Information Systems Supervisor

  4. Internal Equity is about the fairness of the pay structure • CEO Pay • More CEO Pay

  5. Internal Consistency • Job’s worth to the employer • Ranking of jobs in the organization

  6. What is a job? • A job is socially constructed • Used to organize work • Other ways of valuing work • Pay based upon job • Pay the individual • Why don’t we do this? • Opens opportunity for exploitation • Discrimination

  7. What are problems with jobs? What is the alternative? • Rigid, inflexible • Change slowly • To change you need to rewrite a person’s job description • Alternative are flexible teams • More focus on sharing work • More focus on multiple skills • Communication becomes more important • Question: How do we select, pay & train people in de-jobbed world? How do we organize work? How is fairness insured? From: Bridges, William, “The End of the Job” Fortune, 9/19/94.

  8. Why might employers choose to have a pay structure that differs from the external market?

  9. Internal Labor Markets • Organizations have ports of entry • these governed by external labor markets • The pricing & allocation of labor is governed by the organization’s internal procedures • Once in organization then internal labor markets governed by the organization’s rule • The pay structure enforces the relationships among workers and reinforces longer term relationships with employees.

  10. Egalitarian v. Hierarchical Structure • Egalitarian: flat structure little difference between the top and the bottom • more equal treatment • employee satisfaction  • teamwork  • Hierarchical: explicitly recognizes differences in skills & responsibilities • motivation 

  11. Pilot compensation Source: Gerhart & Rynes, Compensation, 2003.

  12. Factors that influence internal wage structures • Society • just price doctrine • occupation’s station determines value • social values determine wages • Sociological • Hierarchal level predicts job worth • People believe pay level for one position should be 1.3 to 1.4 higher than next lower position • Concludes: organizational level significant factor in predicting the worth of positions • Winner take all • Best performance wins big (e.g., Michael Jordan, CEOs) • Small differences in performance worth a great deal

  13. Demand Side Models of Pay Structures • Marginal Productivity • pay based on contributions to firm productivity • Time Span of Discretion • How much time you work without review

  14. Supply side models of internal equity • Human Capital • pay based on investments in HC: education, skill, experience • general human capital • of value to many employers • specific human capital • training paid for by employer • employer earns equity • Labor’s Scarcity Model • Factors that make labor scarce make it more valuable • Institutional • Pay based imitation of other employers

  15. Organizational Factors • Technology • work performed • skills to perform work • HR Policies & Strategy • Strategic skill

  16. Relative Role of Internal v. External Equity • Do managers place more weight on external or internal equity? • Why? • Would this change in a world with no jobs?

  17. Employee Acceptance Key Test • Beliefs about what are reasonable differences • Distributive justice: satisfaction with outcomes • Procedural justice: satisfaction with process

  18. Internal Equity in Practice • Job analysis • Collecting data about jobs • Job evaluation • Valuing jobs

  19. Job Analysis • Gathering information about work • Behaviors • Tasks • Critical Incidents

  20. Job Analysis Result • Job description: • job based • tasks • work performed • Job Specification • employee based • knowledge, skills & abilities • experience • Job description: • job based • tasks • work performed • Job Specification • employee based • knowledge, skills & abilities • experience

  21. Evaluating Work: Job Evaluation Determining a job’s worth to the organization. Internal equity.

  22. Four Job Evaluation Methods

  23. Ranking • Rank Jobs highest to lowest • Paired comparison

  24. Like library classification system Define categories and then compare job against categories Class I Simple work, no supervisory responsibility, no public contact Class II Simple work, no supervisory responsibility, public contact Class III Medium work complexity, no supervisory responsibility, public contact Classification

  25. Point Factor Method Steps: 1. Decide compensable factors: what the organization wants to pay for skill, effort responsibility & working conditions 2. Set scales for the factors 3. Weight the factors 4. Evaluate the jobs

  26. Point Factor Method Education 1. Job requires graduate education 2. Job requires bachelor degree 3. Job requires high school education Working Conditions 1. Hazardous work deals with dangerous materials or working conditions 2. Uncomfortable work loud, hot or cold, dirty 3. Good working conditions office environment, air conditioned, good lighting Effect of Error 1. Major mistake-more than $500,000 2. Major mistake-more than $100,000 3. Major mistake-less than $99,999 1=10 points, 2-8 points, 3=5 points

  27. Job Evaluation • Judgement involved • Statistical weighting • Employee Acceptance

  28. Jobs v. Skills or Competencies • Jobs • clear expectations • sense of progress • pay based on value of work • inflexible • Skills or Competencies • continuous learning • flexibility • lateral movement

  29. Skill & Competency Analysis • Skill Analysis: systematic process to identify skills to perform work: • What you know. • Skills: basic unit of knowledge • Competency Analysis: systematic process to identify competencies required to for success. • What you can do. • Competencies: basic units of knowledge & abilities

  30. Skill or Competency Evaluation • Person centered approach rather than job centered • Determine the skill blocks that are valued: skill or skill units, rather than jobs are compensable. • Quantify the value • Develop certification procedures • Mastery of skill units is measured and certified. • Pay changes do not necessarily accompany job changes. • There is little emphasis on seniority in pay determination.

  31. The Top Twenty Competencies • Developing others • Team leadership • Technical expertise • Information seeking • Analytical thinking • Conceptual thinking • Self-control • Self-confidence • Business orientation • Flexibility • Achievement orientation • Concern of quality • Initiative • Interpersonal understanding • Customer-service orientation • Influence and impact • Organization awareness • Networking • Directiveness • Teamwork & cooperation

  32. Competency Analysis Criticisms • Competencies sometimes vague: “Can do attitude” • Some competencies difficult to measure: can’t give a test • Difficult to relate to what people do • Could expect a competency that they don’t engage in

  33. Alternative to Job Evaluation • Market Pricing • Assumes the firm’s values irrelevant • Most likely done when employees only hired externally and rarely promoted from within

  34. Summary • Internal equity is job’s value (job evaluation) or a person’s value (competency analysis) to organization • Established through job evaluation or competency analysis • Alternative is to price jobs according to market value

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