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V. Strategic Choices in Designing Internal Structures
Aligned pay structures support the way the work gets done, fit the organization’s
business strategy, and are fair to employees.
Greater internal alignment—fit—is more likely to lead to success. Misaligned
structures become obstacles. They may still motivate employee behavior, but it may be
undesirable behavior.
Two strategic choices are involved in internally aligning pay structures:
1. How to specifically tailor the organization design and work flow to make the
structure?
2. How to distribute pay throughout the levels in the structure?
A. Tailored Versus Loosely Coupled
A low-cost, customer-focused business strategy may be supported by a closely
tailored structure. Jobs are well defined with detailed tasks or steps to follow.
Their pay structures are, too. Example: McDonald’s or Walmart.
A business strategy that requires constant product innovation and short
product-design-to-market cycle times many be supported by a loosely coupled
structure. Such businesses may have a turbulent and unpredictable competitive
environment. No steps at all are laid out. Employees may work on several teams
developing several products at the same time. The pay structure is more loosely
linked to the organization in order to provide flexibility. Example: 3M
B. Hierarchical versus Egalitarian and Layered versus Delayered Structures
Exhibit 3.6 clarifies the differences between hierarchical and egalitarian pay
structures.
Egalitarian structures have fewer levels and/or smaller differentials between
adjacent levels and between the highest- and lowest-paid workers.
Structures can also be said to vary from layered to delayered.
oThe layered structure is more hierarchical than the delayered structure and
less egalitarian in terms of number of levels. Features of a hierarchical pay
structure include: multiple levels, detailed descriptions of work done at each
level, and outline who is responsible for what. Hierarchical structures send
out the message that the organization values the differences in work content,
individual skills, and contributions to the organization.
oIn the delayered structure, several levels of job titles are removed so that
all employees at all levels become responsible for a broader range of tasks
but also have greater freedom to determine how best to accomplish what is
expected of them. The delayered structure is more egalitarian in that it sends
the message that all employees are valued equally. The assumption is that
more equal treatment will improve employee satisfaction, support
cooperation, and therefore affect workers’ performance. Yet egalitarian
structures are not problem-free.
“Egalitarian”, when replaced by the term “averagism”, as is done amongst
Chinese workers, brings to light a few problems associated with egalitarian
structure. Equal treatment can mean that the more knowledgeable and
high-performing employees feel underpaid. They may quit or refuse to do
anything that is not specifically required of them. Their change in behavior, if
any, will lower overall performance.
The choice between egalitarian or hierarchical structures is rarely either/or.
Rather, the differences are a matter of degree: Levels can range from many to
few, differentials can be large or small, and the criteria can be based on the job,
the person, or some combination of the two.
VI. Guidance from the Evidence
A. Equity Theory: Fairness
This theory suggests that employees judge the equity (fairness) of their pay by
making multiple comparisons:
oComparing to jobs similar to their own (internal equity)
oComparing their jobs to others at the same employer (internal equity), and
oComparing their jobs’ pay against external pay level (external equity).
Surveys done on the degree to which employees make internal and external equity
comparisons suggest that among the organizations surveyed about one quarter to
one-third of the organizations report that employees raise these comparisons
frequently or constantly.
A job as a compensation professional requires not only designing a compensation
system, but also being able to explain to employees on a regular and ongoing basis
the rationale for the compensation system choices.
The results from these comparisons depend in part on the accuracy of employee
knowledge of other employees’ jobs, internal structures, and external pay levels.
Equity theory could support either egalitarian or hierarchical structures,
depending on the comparisons and the accuracy of information about them.
It is important to be clear that terms “equity” and “equal” are not interchangeable.
Equity theory says that people compare the ratio of their own outcomes (e.g., pay,
status, enjoyment) to inputs (e.g., effort, ability, performance) with the outcome to
input ratio of that of internals, externals, or themselves in a past or future situation.
oPerceived equity results if the ratios are very similar.
B. Tournament Theory (and Pay Dispersion): Motivation and Performance
According to the tournament theory, all players will play better in the first
tournament, where the prize differentials are larger. Applying this to organization
structures, the greater the differential between an employee’s salary and his or her
boss’s salary, the harder the employee (and everyone else but the boss) will work.
Within limits, the bigger the prize for getting to the next level of the structure, the
greater the motivational impact the structure will have.
Several studies support tournament theory.
oOne reported that giving larger raises with a promotion increases effort and
reduces absenteeism.
oOthers found that performance improves with larger differentials at the top
levels of the structure. The “winner-take-all” idea springs from these studies.
Differentiation and Dispersion in Teams
Virtually all the research that supports hierarchical structures and tournament
theory is on situations where individual performance matters most or where the
demand for cooperation among a small group of individuals is relatively low.
Using eight years of data on major league baseball, Matt Bloom found that teams
with practically identical salaries did better than those with large differentials. In
addition to affecting team performance, egalitarian structures had a sizable effect on
individual players’ performance, too. It may also be that the egalitarian pay
structure reflects a more flexible, supportive organization culture in which a
mediocre player is given the training and support needed to improve.
C. Institutional Theory: Copy Others and Conform
Sometimes internal pay structures are adopted because they have been called a
“best practice.” Organizations simply copy or imitate others.
Recent examples of such “benchmarking” behavior include the rush to outsource
jobs, to emphasize teams, to de-emphasize individual contributions, and to shift to a
competency-based pay system, often with little regard to whether any of these
practices fit the organization or its employees and add value.
Institutional theory sees firms as responding/conforming to normative pressures in
their environment so as to gain legitimacy and to reduce risk.
As such, institutional theory predicts that very few firms are “first movers”;
instead they copy innovative practices after innovators have learned how to make
the practices work.
The potential drawback of such mimetic behavior is that what aligns with the
strategy of another organization may not align with the organization’s own strategy.
And according to the resource-based view of the firm, it is not possible to
out-perform one’s competitors simply by imitating their practices.
D. (More) Guidance from the Evidence
Exhibit 3.10 summarizes the effects attributed to internally aligned structures. The
impact of internal structures depends on the 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 and when people have knowledge of the structure.
More egalitarian structures are related to greater performance when close
collaboration and sharing of knowledge are required.
The impact of any internal structure on organization performance is affected by
the other dimensions of pay model; pay levels (competitiveness), employee
performance (contributions), and employee knowledge of the pay structure
(management).
Beyond these points, much remains to be studied:
oThere is practically no research on the optimal size of the promotional
increase or its effects on behavior, satisfaction, or performance.
oNor is much known about whether more frequent promotions with minimal
change in the nature of the work are better (or worse) than less frequent
promotions with major changes in work.
VII. Consequences of Structures
A. Efficiency
An aligned structure can lead to better organization performance. If the structure
does not motivate employees to help achieve organization’s objectives, then it is a
candidate for redesign.
Internal pay structures imply future returns. The size of the differentials between
entry level in the structure and the highest level can encourage employees to remain
with the organization, increase their experience and training, cooperate with
co-workers, and seek greater responsibility.
The number of levels and titles in a career path may be rewarding beyond the pay
attached to the titles.
B. Fairness
Writers have long agreed that departures from an acceptable wage structure will
occasion turnover, grievances, and diminished motivation. But that is where the
agreement ends.
oOne group argues that if fair differentials among jobs are not paid, individuals
may harbor ill will toward the employer, resist change, change employment,
become depressed, and “lack that zest and enthusiasm which makes for high
efficiency and personal satisfaction in work.
oOthers, including labor unions, argue for only small differentials within pay
levels and for similar work, in the belief that more egalitarian structures support
cooperation and commitment and improve performance.
As with all rules, there are exceptions. For example, in U.S. professional sports
like baseball and hockey, players are unionized, yet the players’ unions do not strive
for egalitarian pay.
C. Compliance
As with any pay decision, internal pay structures must comply with the
regulations of the countries in which the organization operates.
While the research on internal alignment is very informative, there is still a lot we
do not know. For instance, what about the appropriate number of levels, the size of
the differentials, and the criteria for advancing employees through a structure? The
authors believe the answers lie in understanding the factors discussed in this
chapter: the organization’s strategic intent, its design and work flow, human capital,
and the external conditions, regulations, and customs it faces. The authors also
believe that aligning the pay structure to fit the organization’s conditions is more
likely to lead to competitive advantage for the organization and a sense of fair
treatment for employees.
