Milkovich/Newman: Compensation, Ninth Edition

Defining Internal
Alignment

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Internal alignment, often called

internal equity, refers to the pay
relationships among different
jobs/skills/competencies within a
single organization.

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Pay structure refers to the array of

pay rates for different work or skills
within a single organization.
The number of levels, the
differentials in pay between the
levels, and the criteria used to
determine those differences describe
the structure.
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Compensation Strategy:
Internal Alignment
Supports organization strategy
Supports work flow

Work flow process by which goods and services

are delivered to the customer
Support

fairness

Motivates behavior

Line-of-sight

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Structures vary among organization

An internal pay structure can be defined by:
Number
The

of levels of work

pay differentials between the levels

The

criteria used to determine those levels and

differentials

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Exhibit 3.2: Managerial/Professional

Levels At General Electric Plastics
(GEP)

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Exhibit 3.1: Engineering Structure at

Lockheed Martin

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Pay differentials among the levels is

determined by:
Knowledge/ skills involved
Working conditions
Value added to the company
Intention of these differentials:

To motivate people to strive for promotion to a

higher-paying level
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Exhibit 3.3: Exploring Pay Structure at

Lockheed Martin

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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

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
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Job- and Person-Based Structures

Job-based structure 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
Note the difference, in that both structures may incorporate skill
Job-based: skills required to perform job
Person-based: skills possessed by person

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Exhibit: 3.4: What Shapes Internal Structures?

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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
External factors dominant influence on pay for entry-level; org factors for
subsequent positions

Employee acceptance
Sources of fairness: Procedural, and distributive justice
Procedural justice involves process by which decision is reached
Distributive justice involves outcomes of process

Pay procedures more likely to be viewed as fair if

They are consistently applied to all Employees

Employee participation is provided
Appeals procedure is available
Data used are accurate

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Exhibit 3.5: Illustration of an

Internal Labor Market

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Strategic Choices in Designing

Internal Structures
Tailored versus loosely coupled

Tailored
Well designed jobs with detailed steps or tasks
Very small pay differentials among jobs

Loosely coupled
Where business strategy requires constant innovation

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Strategic Choices in Designing

Internal 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

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Strategic Choices in Designing

Internal 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

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Exhibit 3.6: Strategic Choice:

Hierarchical versus Egalitarian

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Exhibit 3.7: Which Structure Has the

Greatest Impact on Performance? on
Fairness?

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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

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Guidance from the Evidence (cont.)

Tournament theory: Motivation and performance

Structures w/ greater differentials btwn lower levels

and top levels have more positive effect on
motivation and performance than smaller
differentials
Within limits, the bigger the prize for getting to next
level the greater the motivational impact of structure
Research supporting hierarchical structures typically
involves situations where need for cooperation
among individuals is low
Does not directly address turnover
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Exhibit 3.8: Some Consequences of an

Internally Aligned Structure

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(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
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(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)
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