MODULE#2

DEFINING CONSISTENCY
AND ASSESSING WORK
First Day of Class Activity
 Learning Objectives

1 Align the compensation approaches to organizational objectives.

2 Identify factors varying and structures shaping compensation strategy

3 Design Internal Structures through Strategic Choices

4 Learn different pay structure theories and consequences

 COMPENSATION
STRATEGY: INTERNAL
ALIGNMENT
 Internal alignment,refers to the pay
relationships among different
jobs/skills/competencies within a single
organization.
Engineering Structure at
Lockheed Martin

Exhibit 1 shows a
structure for the
engineering work at a
division of Lockheed
Martin, the world’s
largest defense
contractor.
Engineer Develops solutions to limited problems.

Senior Engineer Provides solutions to a variety of

problems.

Systems Engineer Provides solutions to a wide variety of

difficult problems.
Lead Engineer Develops solutions to complex problems
that require the regular use of ingenuity and creativity.

Advisor Engineer Works on unusually complex problems

and provides solutions that are highly innovative and
ingenious.

Consultant Engineer Develops information that extends

the existing boundaries of knowledge in a given field.
 A 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.
 Supports Organization Strategy

The organization’s strategy tells us how it

plans to achieve its purpose. Internal
structures that are aligned with a strategy
help achieve it.
Supports Work Flow
Workflow- refers to the process
by which goods and services are
delivered to the costumers
Supports Fairness
Two sources of fairness:
- Procedural
Justice
- Distributive
Justice
Motivates Behavior
-"Line-of-
sight"
 STRUCTURES
VARY AMONG
ORGANIZATIONS
Internal Factors
Structures Vary Among
Organizations
- Levels of works
- differentials
- Criteria
no. levels of work

• the number of levels and reporting

relationships. Some are more hierarchical,
with multiple levels; others are
compressed, with few levels.
Differentials

*The pay differences among levels are

referred to as differentials.

*Determined by :
• Knowledge and skills
• Working conditions
• Valued addition to the company
 Criteria

• Work content and its value are the most

common bases for determining internal
structures.

Content refers to the work performed in a job

and how it gets done
·Structures ranks jobs on tasks, behaviors,
knowledge required, etc.
 Criteria

·Value refers to the worth of the work: its

relative contribution to the organization
objectives.

·A structure based on content typically ranks

jobs on skills required, complexity of tasks,
problem solving, and/or responsibility.
 Use Value and Exchange Value

·Use value - The value of goods or services an employee

produces in a job.

·Exchange value - Whatever wage the employs and

employee agrees on for the job .

Note: Difference between exchange value and use-

value surfaces when one firm acquires another
 Job and person-based
structures
· Job-based structures rely on the work content
• tasks, behaviors, responsibilities.
Person-based Structures shift the focus to the employee.
• Skills, Knowledge, or competencies the employee
possesses.
• Whether or not they are used in the particular job.
WHAT SHAPES
INTERNAL
STRUCTURES ?
External Factors
 Economic
•
pressures
Early advocates: Adam Smith, Karl Marx
• Marginal productivity
• Supply and Demand for labor and productions
 Government
policies, laws, and
regulations
Equal pay act and civil rights Acts.
Living wage
 External
Stakeholders
• Have a stake in how internal pay structures are
determined (Unions, stockholders, and even
political groups)

• Internal alignment focuses on pay differentials.

 Cultures and
customs
• Culture- the mental programming for processing
information that people share in common.
• Global competition and an aging workforce has
made age-based pay an expensive affair
Organizational Factors
 Strategy
aligned, yet adaptable pay structures may be
required.

Work design
organization design
work to perform
skills/knowledge required to perform work.
temporary work supplier.
Outsourcing Specialists
Delayering
 Human capital
Education
Experience
Abilities
Skills required to perform work
Human Resource
Policy
Feeling of ‘ career progress’
 Combining external
and
organization factors

Internal Labor Markets

• determine to pay different jobs
within a single organization
• allocate employees among those
different jobs.
 Employee acceptance
• Sources of fairness:
procedural,
and Distributive justice
Pay Structures Change
• 'Change-and-congeal’
process
 Tailored VS Loosely Coupled

STRATEGIC CHOICES
IN DESIGNING
INTERNAL
STRUCTURES
Hierarchical VS Egalitarian
 TWO STRATEGIC CHOICES:

1.How specifically tailored to the

organization’s design and work flow to
make the structure and
2.How to distribute pay throughout the
levels in the structure
 TAILORED VS LOOSELY
COUPLED
CLOSELY TAILORED

• Low-cost, customer-focused business strategy.

• Jobs are well designed with detailed tasks or steps to follow.

• Minimal pay differential among the jobs.

 TAILORED VS LOOSELY
COUPLED
LOOSELY COUPLED

• Requires constant innovation.

• The Competitive Market is turbulent and unpredictable.

HIERARCHICAL
VERSUS
EGALITARIAN
HIERARCHICAL
• "hierarchy"
⚬ the classification of a group of people according
to ability or to economic, social, or professional
standing

• the organization values the differences in work

content, individual skills, and contributions to the
organization
EGALITARIAN

• Egalitarianism is a belief in human equality

especially with respect to social, political, and
economic affairs.

• sends the message that all employees are

valued equally
EXHIBIT 3.6 Strategic Choice: Hierarchical
versus Egalitarian
GUIDANCE
FROM THE
EVIDENCE
KUA
EQUITY THEORY: FAIRNESS
Employees judge the equity of their pay by
comparing the work, qualifications, and pay
for jobs similar to theirs.
T O U R N A M E N T T H E O R Y:
M O T I VAT I O N A N D P E R F O R M A N C E

• All players will play better in the first tournament, where the
prize differentials larger.
• Greater difference between an employee’s salary and the boss’s, harder
he/she will work
• Several studies have given rise to “winter-takes-all"
 INSTITUTIONAL THEORY:
COPY OTHERS
Some organizations ignore the question of strategy altogether.
Instead, they simply copy what others are doing. By extension,
internal pay structures are sometimes adopted because they
have been called a “best practice.”
 WHICH STRUCTURE
FITS BEST?
More hierarchical structures are related to greater performance
when the work flow depends more on individual contributors
(e.g., consulting and law practices, surgical units, stockbrokers,
even university researchers).
CONSEQUENCES
OF STRUCTURES
REYES
 Consequences of Structures
EFFICIENCY

• The structure must motivate employees to achieve the organization's

objectives.

• Internal pay structures imply future returns / rewards.

ex. Size of differential- sustain employees

Milkovich, G., Newman, J. & Gerhart, B. (2014). Consequences of

Structures. Compensation, Eleventh Edition. p. 91
 Consequences of Structures
FAIRNESS

• Differentials among jobs are not paid. Others, including labor unions argue
for only small differential.

Egalitarian Structure - relating to or believing in the principle

that all people are equal and deserve equal rights and
opportunities.

• Gives personal satisfaction in work

Milkovich, G., Newman, J. & Gerhart, B. (2014). Consequences of
Structures. Compensation, Eleventh Edition. p. 91
 Consequences of Structures
COMPLIANCE

• Design and management of internal pay structures MUST comply with

the regulation of the country

Milkovich, G., Newman, J. & Gerhart, B. (2014). Consequences of

Structures. Compensation, Eleventh Edition. p. 91-92
 MEMBERS:
ALMANZOR, Nicole M.

CAQUILALA, Shiella Dian B.

DOROTHEO, Bryan Joseph C.

KUA, Micah Laurice B.

MANGUERA, Regina Ericka M.

REYES, Ma. Angelica L.

TORRES, Leona Jamaica L.

 THANK YOU!

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