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Chapter 3

Defining Internal Alignment Note: first of four chapters related to FastCat Phase I project. Chapter 3. Compensation Strategy: Internal Alignment. Issues in a strategic approach to pay Setting objectives Internal alignment Addresses relationships inside the organization

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Chapter 3

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  1. Defining Internal Alignment Note: first of four chapters related to FastCat Phase I project Chapter 3

  2. Compensation Strategy:Internal Alignment • Issues in a strategic approach to pay • Setting objectives • Internal alignment • Addresses relationships inside the organization • The relationships form a pay structure that should: • Support the organization strategy • Support the work flow • 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. Pay structure refers to the array of pay rates for different work or skills within a single organization. Thenumber of levels, the differentialsin pay between the levels, and thecriteriaused to determine those differences describe the structure.

  5. Compensation Strategy:Internal Alignment (cont.) • Supports organization strategy • Supports work flow • Work flow – process by which goods and services are delivered to the customer • Motivates behavior • Line-of-sight • Structure must be fair to employees

  6. Differentials • The pay differences among levels • Pay 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

  7. 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

  8. 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

  9. Exhibit 3.1: Engineering Structure at Lockheed Martin

  10. Exhibit 3.2: Managerial/Professional Levels At General Electric Plastics (GEP)

  11. Exhibit 3.3: Exploring Pay Structure at Lockheed Martin

  12. Exhibit: 3.4: What Shapes Internal Structures?

  13. 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 Ees • Ee participation is provided • Appeals procedure is available • Data used are accurate

  14. Exhibit 3.5: Illustration of an Internal Labor Market

  15. Strategic Choices in DesigningInternal 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

  16. 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

  17. 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

  18. Exhibit 3.6: Strategic Choice:Hierarchical versus Egalitarian

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

  20. 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

  21. 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

  22. Exhibit 3.8: Some Consequences of anInternally Aligned Structure

  23. (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

  24. (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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