Chapter 3: Defining Internal Alignment Flashcards
Define internal alignment (p.74).
- Often called internal equity, it refers to the pay relationship among different jobs/skills/competencies within a single org.
- Addresses relationships inside org
- Should support org strategy, support the workflow, and motivate behavior toward organization objectives.
Define pay structure (p.74).
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.
Internal alignment and pay structure should do what:
1) support organizational strategy, 2) support workflow, and 3) motivate behavior (pp.75-76).
Workflow refers to the process by which goods and services are delivered to the customer. The pay structure ought to support the efficient flow of that work and the design of the org.
Motivation – the challenge is the design structure that will engage people to achieve organizational objectives.
The structure ought to make clear the relationship between each job and the org’s objectives.
* Example of line of sight employees should be able to “see” the links between their work, the work of others, and the org’s objectives. It ought to be fair to employees as well.
List (and discuss) three ways to define internal pay structure (pp.76-79).
- Number of levels – hierarchical nature: the number of levels and reporting relationship. Some are more hierarchical with multiple levels and some are compressed with few levels
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Differentials – pay difference. Work that requires more knowledge/skill is performed under unpleasant working conditions or adds more value is usually paid more.
3 Criteria: Content and Value
* content refers to the work performed in a job and how it gets done (tasks, behaviors knowledge required etc.). A structure based on content typically ranks jobs on skills required, complexity of tasks, problem-solving, and/or responsibility.
* Value refers to the worth of the work its relative contribution to the organization’s objectives. A structure based on the value of work focuses on the relative contribution of these skills, tasks, and responsibilities to the organization’s goals. Use value reflects the value of goods and services and employee produces in a job. Exchange value is whatever wage the employer and employee agreed on for a job. Employee location can vary the rate of value because other places have a higher cost of living than others.
- A job-based structure relies on the work content - tasks, behaviors, and responsibilities.
- A person-based structure focuses on the employee: the skills, knowledge, or competencies the employee possesses, whether or not they are used in the employee’s job.
- The reality is in the workplace it typically includes both the job and the person hard to exclude one or the other.
List (and describe) the major factors that help shape internal structures (starting on p.80):
External Factors:
* Economic Pressures - Marginal productivity says that employees pay use value.
Supply and demand for both labor and products or services affect internal pay structures.
* Government Policies, Laws, and Regulations - The Equal Pay Act and the Civil Rights Act require “equal pay for equal work.”
Legislation aims at differentials with the “living wage.”
* External Stakeholders - Unions, stockholders, and political groups have a stake in pay structure.
Unions seek smaller pay differences and seniority based promotions.
A main focus is on the pay differences between executives and others.
* Cultures and Customs - Cultural factors play a role in shaping pay structures.
Shared mind-sets may judge what size pay differential is fair.
Organizational Factors
* An effective organization strategy may require an aligned, yet adaptable, structure.
* Human capital is:
1. the education, experience, knowledge, abilities, and skills required for the job, and
2. a major influence on internal structures.
3. The greater the added value, the higher the pay.
* Organization Work Design
- Producing the goods/services influences the organizational design, the work, and the skills/knowledge required to perform the work.
- The design of organizations is changing. Outsourcing specialists are paid based on the internal structure of their home employer. Delayering may cut an entire level of work. Delayering cuts unnecessary, noncontributing work and changes remaining jobs’ structure and value.
* Overall HR policies may influence design. Are promotions important for “career progress”?
* Internal labor markets refer to the rules and procedures that: 1. determine the pay for the different jobs within a single organization, and 2. allocate employees among those different jobs.
* A key factor of an internal pay structure is its acceptability by the employees involved.
Two sources of fairness are important:
Procedural justice refers to the process by which a decision was reached.
Distributive justice refers to the fairness of the decision.
* Research suggests pay procedures are more likely to be perceived as fair if:
1. They are consistently applied,
2. Employees participated in the process,
3. Appeals procedures are included, and
4. The data used are accurate.
* Pay structures change in response to external factors such as skill shortage.
How do internal labor markets combine external and organizational (i.e., internal) factors (p.84)?
- Internal labor markets: combining external and organizational factors - internal markets refer to rules and procedures that 1) determine the pay for the different jobs in a single organization and 2) allocate employees among those different jobs.
- External factors are dominant influences on pay for entry-level jobs but the difference for non-entry jobs tend to reflect on internal factors
Discuss the following strategic questions/choices that are important when designing internal structures (p.86): 1) how specifically tailored should the structure be to the organization’s design and workflow, and 2) how should pay be distributed throughout the levels within the structure (i.e., hierarchical versus egalitarian and layered versus de-layered structures).
- Aligned pay structures support the way work gets done, fit the organization’s business strategy, and are fair to employees.
- Two strategic choices are involved when considering how to “fit” or tailor the pay structure to be internally aligned:
1. How specifically tailored should the job structure(s) be to the organization’s design and workflow?
2. How should you distribute pay throughout the job structure(s). - To answer these questions, we will consider three sets of strategic alternatives:
1. Tailored versus Loosely Coupled structures
2. Hierarchical versus Egalitarian structures
3. Layered versus Delayered structures
Tailored (Ex. Mcdonalds)
* 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.
Loosely Coupled (Ex. 3M)
* Requires constant innovation.
* Pay structures are more loosely linked to the organization to provide flexibility.
Egalitarian
* All employees are valued equally.
* Advantages:
* Fewer levels and smaller differentials.
* Disadvantages:
* Equal treatment can mean more knowledgeable employees feel underpaid.
Hierarchical
* Values the differences in work content, skills, and contribution.
* Includes detailed descriptions of work done at each level.
How can Equity Theory be applied when designing internal structures (p.89)
- Employees judge fairness based on jobs similar to their own (internal equity), jobs to others at the same employer (internal equity), and jobs pay against external pay levels (external equity).
- When designing a pay structure company needs to be able to explain to employees on a regular and ongoing basis the rationale for the compensation system choices. A good explanation for a pay differential would be pay for performance differences.
- How can this be applied? Consider differentials and level of ranking for a job, can create motivation for the next promotion for example analyst versus senior analyst will have a pay differential. Companies should also research industry averages for jobs in their model and make a decision on where they want to land and the percentage of the market. Transparency and communication go a long way with employees company should consider the knowledge of the employee and how reliable it is. Fairness is subjective. Equality and equity are not the same thing.
How can Tournament Theory be applied when designing internal structures (p.90)
- The greater differential between your salary and your boss’s salary the harder you and everyone else with the boss will work. Bigger the prize of getting a promotion the more motivation. Larger raises with the promotion increase effort and reduce absenteeism. Performance improves with larger differentials at top levels of the structure.
- How can this be applied large differentials between one job and a higher ranking job can cause motivation.
How can Institutional Theory be applied when designing internal structures (p.92)
- IE copy others and conform, organization conforms to normative pressures in their environment so as to gain legitimacy and reduce risk. This theory predicts there very few firms as first movers instead they copy innovative practices after they see how the practice works. Risk is that you’re mimicking a behavior that aligns with a strategy but doesn’t necessarily align with your own organizational strategy. However learning from other organizations can be quite useful in achieving competitiveness.
- How can this be applied? A new company can copy another similar company to learn the ropes for their compensation plan however they should closely consider alignment so that they aren’t wasting time and resources on the wrong pay structure.
