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internal equity
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Internal Equity
• Defining consistency
© Nancy Brown Johnson 2003
Elements of the Pay Structure
• Levels & Reporting Relationships
• Differentials
1. 1. Which of the following jobs are the most important? 2. Why?3. Are there conditions under which this would change the ordering?4. How much more are they worth?
– Clerk
– Accountant
– Lawyer
– Production Supervisor
– Production Manager
– Operator
– HR Manager
– Information Systems Supervisor
Internal Equity is about the fairness of the pay structure
• CEO Pay
• More CEO Pay
Internal Consistency
• Job’s worth to the employer
• Ranking of jobs in the organization
What is a job?
• A job is socially constructed• Used to organize work• Other ways of valuing work
– Pay based upon job– Pay the individual
• Why don’t we do this?– Opens opportunity for exploitation– Discrimination
What are problems with jobs? What is the alternative?
• Rigid, inflexible• Change slowly
– To change you need to rewrite a person’s job description• Alternative are flexible teams
– More focus on sharing work– More focus on multiple skills– Communication becomes more important
• Question: How do we select, pay & train people in de-jobbed world? How do we organize work? How is fairness insured?
From: Bridges, William, “The End of the Job” Fortune, 9/19/94.
Why might employers choose to have a pay structure that differs from
the external market?
Internal Labor Markets
• Organizations have ports of entry– these governed by external labor markets
• The pricing & allocation of labor is governed by the organization’s internal procedures
• Once in organization then internal labor markets governed by the organization’s rule
• The pay structure enforces the relationships among workers and reinforces longer term relationships with employees.
Egalitarian v. Hierarchical Structure
• Egalitarian: flat structure little difference between the top and the bottom
– more equal treatment
– employee satisfaction – teamwork
• Hierarchical: explicitly recognizes differences in skills & responsibilities
– motivation
Pilot compensation
First Officer
Year 1
First Officer
Year 5
Captain, Small Aircraft Year 10
Captain, Max
Southwest $36,132 $82,068 $140, 412 $143,508
American 25,524 67,092 132,276 185,004
Delta 33,396 95,040 112,308 209,388
United 29,808 95,100 128,124 200,796
Avg.(A,D, U) 29,576 85,744 124,236 198,396
Source: Gerhart & Rynes, Compensation, 2003.
Factors that influence internal wage structures
• Society– just price doctrine
• occupation’s station determines value• social values determine wages
• Sociological– Hierarchal level predicts job worth– People believe pay level for one position should be 1.3 to 1.4
higher than next lower position– Concludes: organizational level significant factor in predicting
the worth of positions• Winner take all
– Best performance wins big (e.g., Michael Jordan, CEOs)– Small differences in performance worth a great deal
Demand Side Models of Pay Structures
• Marginal Productivity• pay based on contributions to firm
productivity
• Time Span of Discretion– How much time you work without review
Supply side models of internal equity
• Human Capital
– pay based on investments in HC: education, skill, experience
– general human capital
• of value to many employers
– specific human capital
• training paid for by employer
• employer earns equity
• Labor’s Scarcity Model
– Factors that make labor scarce make it more valuable
• Institutional
– Pay based imitation of other employers
Organizational Factors
• Technology– work performed – skills to perform work
• HR Policies & Strategy
• Strategic skill
Relative Role of Internal v. External Equity
• Do managers place more weight on external or internal equity?– Why?
• Would this change in a world with no jobs?
Employee Acceptance Key Test
• Beliefs about what are reasonable differences
• Distributive justice: satisfaction with outcomes
• Procedural justice: satisfaction with process
Internal Equity in Practice
• Job analysis– Collecting data about jobs
• Job evaluation– Valuing jobs
Job Analysis
• Gathering information about work– Behaviors– Tasks– Critical Incidents
Job Analysis Result
• Job description: – job based– tasks– work performed
• Job Specification– employee based– knowledge, skills & abilities– experience
• Job description: – job based– tasks– work performed
• Job Specification– employee based– knowledge, skills & abilities– experience
Evaluating Work: Job Evaluation
Determining a job’s worth to the organization.
Internal equity.
Four Job Evaluation Methods
Whole Job
Specific Job Factors
Job v. Job
Ranking Factor Comparison
Job v. Standards
Classification Point Factor
Ranking
• Rank Jobs highest to lowest
• Paired comparison
Electrician Punch Press Welder Grinder Receiving Clerk
Shear Operator
E S M S S
Electrician E M E E Punch Press M P P
Welder M M Grinder G
Classification
• Like library classification system
• Define categories and then compare job against categories
Class I
Simple work, no supervisory responsibility, no public contact
Class II
Simple work, no supervisory responsibility, public contact
Class III
Medium work complexity, no supervisory responsibility, public contact
Point Factor Method
Steps:
1. Decide compensable factors: what the organization wants to pay for
skill, effort responsibility & working conditions
2. Set scales for the factors
3. Weight the factors
4. Evaluate the jobs
Point Factor Method
Working Conditions
1. Hazardous work
deals with dangerous materials or working conditions
2. Uncomfortable work
loud, hot or cold, dirty
3. Good working conditions
office environment, air conditioned, good lighting
Education1. Job requires graduate education2. Job requires bachelor degree3. Job requires high school education
Effect of Error1. Major mistake-more than $500,0002. Major mistake-more than $100,0003. Major mistake-less than $99,999
1=10 points, 2-8 points, 3=5 points
Job Evaluation
• Judgement involved
• Statistical weighting
• Employee Acceptance
Jobs v. Skills or Competencies• Jobs
– clear expectations– sense of progress– pay based on value of work– inflexible
• Skills or Competencies– continuous learning– flexibility– lateral movement
Skill & Competency Analysis
• Skill Analysis: systematic process to identify skills to perform work:
– What you know.
– Skills: basic unit of knowledge
• Competency Analysis: systematic process to identify competencies required to for success.
– What you can do.
– Competencies: basic units of knowledge & abilities
Skill or Competency Evaluation
• Person centered approach rather than job centered• Determine the skill blocks that are valued: skill or
skill units, rather than jobs are compensable.– Quantify the value– Develop certification procedures– Mastery of skill units is measured and certified.
• Pay changes do not necessarily accompany job changes.
• There is little emphasis on seniority in pay determination.
The Top Twenty Competencies
• Achievement orientation• Concern of quality• Initiative• Interpersonal understanding• Customer-service orientation• Influence and impact• Organization awareness• Networking• Directiveness• Teamwork & cooperation
• Achievement orientation• Concern of quality• Initiative• Interpersonal understanding• Customer-service orientation• Influence and impact• Organization awareness• Networking• Directiveness• Teamwork & cooperation
• Developing others
• Team leadership
• Technical expertise
• Information seeking
• Analytical thinking
• Conceptual thinking
• Self-control
• Self-confidence
• Business orientation
• Flexibility
• Developing others
• Team leadership
• Technical expertise
• Information seeking
• Analytical thinking
• Conceptual thinking
• Self-control
• Self-confidence
• Business orientation
• Flexibility
Competency Analysis Criticisms
• Competencies sometimes vague: “Can do attitude”
• Some competencies difficult to measure: can’t give a test
• Difficult to relate to what people do – Could expect a competency that they don’t
engage in
Alternative to Job Evaluation
• Market Pricing
• Assumes the firm’s values irrelevant
• Most likely done when employees only hired externally and rarely promoted from within
Summary
• Internal equity is job’s value (job evaluation) or a person’s value (competency analysis) to organization
• Established through job evaluation or competency analysis
• Alternative is to price jobs according to market value
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