Human Resources Chapter 3 The Size The Differentials Between Entry Level The Structure And The Highest

Unlock access to all the studying documents.

View Full Document

Chapter Three: Defining Internal Alignment 3 – 12

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.

o The delayered structure is more egalitarian in that it sends the message that

all employees are valued equally.

o The assumption is that more equal treatment will improve employee

satisfaction, support cooperation, and therefore affect workers’ performance.

▪ If there are fewer levels in a delayered structure and if the difference

between the lowest and highest pay is the same as in a layered structure

• Yet egalitarian structures are not problem-free.

o Ben and Jerry’s tried to maintain a ratio of 7 to 1 but it eventually became a

barrier to recruitment.

• “Egalitarian”, when replaced by the term “averagism”, as is done amongst

Chinese workers, where maximum differentials of 3 to 1 are mandated, brings

to light a few problems associated with egalitarian structure.

o Equal treatment can mean that the more knowledgeable and high-

• 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:

o Comparing to jobs similar to their own (internal equity)

• Exhibit 3.9 provides some data. Surveys done on the degree to which employees

3 – 13 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

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.

B. Tournament Theory (and Pay Dispersion): Motivation and Performance

• According to the tournament theory, all players play better when 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.

Differentiation and Dispersion in Teams

o Virtually all the research that supports hierarchical structures and tournament

theory is on situations where individual performance matters most (racing,

Chapter Three: Defining Internal Alignment 3 – 14

▪ In addition to affecting team performance, egalitarian structures had a

sizable effect on individual players’ performance, too.

o A study of hockey teams added the factors of substantial task interdependence

and player discretionary cooperative behavior.

▪ Teams that differentiated salaries as a function of individual performance

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.

• 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

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:

o More hierarchical structures are related to greater performance when the work

3 – 15 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

o More egalitarian structures are related to greater performance when close

collaboration and sharing of knowledge are required.

• Beyond these points, much remains to be studied:

o There is practically no research on the optimal size of the promotional increase

or its effects on behavior, satisfaction, or performance.

• What should be the size of the pay differentials among the engineering levels within

Lockheed? To answer this question, we would need to understand how differentials

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

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.

o One group argues that if fair differentials among jobs are not paid, individuals

Chapter Three: Defining Internal Alignment 3 – 16

o Others, including labor unions, argue for only small differentials within pay

levels and for similar work, in the belief that more egalitarian structures support

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.

o For instance, what about the appropriate number of levels, the size of the

differentials, and the criteria for advancing employees through a structure?

VIII. Your Turn: So You Want To Lead The Orchestra!

Summary of Case

Students are provided an actual salary structure for a regional orchestra and are expected to

analyze the pay structure using various concepts related to internal alignment.

Learning Objective

Explain how various concepts that affect internal alignment are applied to an actual

organization environment.

Teaching Guidelines

Use this case to stimulate a discussion on the issues regarding internal alignment in a real-

life situation.

Discussion of Case Questions

1. Describe the orchestra’s pay structure in terms of levels, differentials, and job– or

person-based approach.

3 – 17 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

Based on the numerous job titles, the pay structure has numerous levels. In examining pay

differentials between most of the Violin I jobs and the Principal Violin II job, a large

differential exists ($2,483 vs. $3,488). Fairly large pay differentials also exist between many

2. Discuss what factors may explain the structure. Why does violinist I receive more than

the oboist and trombonist? Why does the principal trumpet player earn more than the

principal cellist and principal clarinetist but less than principal viola and principal flute

players? What explains these differences? Does the relative supply versus the demand

for violinists compare to the supply versus the demand for trombonists? Is it that

violins play more notes?

Because this chapter discusses a number of economic and psychological theories, it is useful

to ask what each theory would predict and compare those predictions to the actual salary

structure. Students are most likely to comment on “market forces” as the justification for

salary differentials. Thus, students should be challenged with the following question, “is

3. What is the pay differential between the principal viola and next highest paid viola?

What about between the principal trumpet and the next highest paid trumpet? Why

these differentials between the principal and other? Why aren’t they larger? Smaller?

Why is the differential between trumpet players different than between the viola

players?

The pay differential between the principal viola and the next highest paid viola is $2,553 and

Chapter Three: Defining Internal Alignment 3 – 18

that between the principal trumpet and the next highest paid trumpet is $595. There are four

levels of viola preceding the principal viola in the orchestra, with very little pay difference

4. How well do equity and tournament models apply? Do custom and tradition play any

role? What about institutional theory?

The tournament model seems to apply since pay increases substantially if a musician moves

to a principal position; these differentials are greater than if one moves from the position of

violinist II to violinist I. The size of the differential between the top job, Violin,

3 – 19 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich

Education.

system, a team-based reward system ensures better performance and better employee morale.

IX. Still Your Turn (If You Don’t Want to Lead the Orchestra…)

Summary of Case

Students are instructed to choose another example of how different jobs or skills get paid

differently. They may choose any profession or use the table provided in the text for

Pennsylvania Power & Light.

Learning Objective

Explain how various concepts that affect internal alignment are applied to an actual

organization environment.

Discussion Questions

Students are asked to address the same general questions as presented in the previous case.

Answers will vary according to which profession the student chooses.

X. Still (yes, still) Your Turn: NCAA

Summary of Case

The NCAA has a 14-year contract with CBS and Turner Sports under which they pay the

NCAA $10.8 billion, or $720 billion per year, for the right to broadcast the NCAA men’s

basketball tournament. The players do not get paid, though some receive scholarships.

Should the players be paid as employees and paid an amount that is consistent with the

revenue they generate for their universities? If so, how should such a pay system be

designed?

Learning Objective

Apply student’s knowledge to the issue of pay differences, or no pay at all, for student

athletes.

Discussion Questions

1. Should NCAA athletes get paid as employees?

In favor…NCAA athletes, at least in some sports, produce a great deal of revenue for universities and

Education.

2. If NCAA athletes are paid as employees, either because of legal action or

colleges/universities deciding on their own to change the system, how should the pay

strategy be designed to “work” and avoid the potential pitfalls identified above?

3. What would your pay strategy design cost and how would it be funded? What impact

would the required level of funding have on colleges and universities? How would

athletes outside of sports such as basketball and football be affected?

Answers to Review Questions

1. Why is internal alignment an important policy in a strategic perspective of

compensation?

Internal alignment, also referred to as internal equity, recognizes the relative value of various

jobs within an organization. Internal alignment forms the basis of the pay structure by

2. Discuss the factors that influence internal pay structures. Based on your own

experience, which ones do you think are the most important? Why?

The factors that influence internal equity include:

• Societal norms or customs regarding fair wage differentials

Education.

3. Internal structures are part of the incentives offered in organizations. Look into any

organization: your college, workplace, or the grocery store where you shop. Describe

the flow of work. How is the job structure aligned with the organization’s business, the

work flow, and its objectives? How do you believe it influences employee behaviors?

Internal alignment, often called as internal equity, refers to the pay relationships between the

jobs/skills/competencies within a single organization. The relationship among different jobs

4. What is the “just–wage” doctrine? Can you think of any present-day applications?

It is a “wage” deemed to be “fair” by some authority other than that negotiated in an

employer/employee relationship. In 14th century western Europe, the church endorsed a “just

5. A typical structure within colleges is instructor, assistant professor, associate professor,

full professor. Is this egalitarian or hierarchical? What added information would you

need to decide? What behaviors by the faculty do you believe the structure influences?

Chapter Three: Defining Internal Alignment 3 – 22

Is it aligned? Difficult to copy? Does it add value?

In all probability, this structure is hierarchical in nature. Further information required to

form a decision would include variables such as the content of work involved with each

level, the pay differential between each level. The responsibility associated with each level,