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Chapter 3
Defining Internal Alignment
Learning Objectives
• Compensation strategy - Internal alignment
• Structures vary among organizations

• What shapes internal structures?
• Strategic choices in designing internal
structures
3-2
Learning Objectives
• Guidance from the evidence
• Consequences of structures
3-3
Compensation Strategy:
Internal Alignment

• Pay relationships among different
jobs/skills/competencies within a single
organization
3-4
Pay Structure
• Array of pay rates for different works or skills
within a single organization
3-5
Internal Alignment

• 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
3-6
Structures Vary Among Organizations
• Internal pay structure can be defined by:
• Number of levels of work
• Pay differentials between the levels
• Criteria or base used to determine those levels
and differentials
3-7

Number of Levels
• Pay structure is hierarchical in nature, based
on:
• Number of levels
• Reporting relationships
3-8
Differentials
• Pay differences among levels
• Pay is determined by:

• Knowledge/ skills involved
• Working conditions
• Valued addition to the company
• Percent differentials can be paired with
different pay level policies
3-9
Criteria: Content and Value
• Content: Work performed in a job and how it
gets done
• Structure- Ranks jobs on:
• Skills required
• Complexity of tasks
• Problem solving
• Responsibility
• Value: Worth of the work and its

contribution to the organization
3-10
Criteria: Content and Value
• Structure - Focuses on relative contribution of skills,
tasks, and responsibilities
• Can include external market value
3-11
Use Value and Exchange Value
• Use value: Value of goods or services an
employee produces in a job

• Exchange value: Wage agreed upon by the
employer and the employee
3-12
Job and Person-Based Structures
• Job-based structures: Rely on the work
content
• Person-based structures: Shift the focus to
the employee:
• Skills, knowledge, or competencies and their
usage for particular job
3-13

Exhibit 3.4 - What Shapes Internal
Structures?
3-14
What Shapes Internal Structures?
• Economic pressures
• Marginal productivity
• Supply and demand for labor and products and
services
• Government policies, laws, and regulations
• Equal Pay Act and Civil Rights Act
• Living wage
3-15

• External stakeholders
• Unions - To promote solidarity:
• Seek smaller pay differences among jobs and
seniority-based promotions
• Stockholders - Interested in pay differences
between executives and others
3-16
• Cultures and customs
• Play an important role in shaping pay structures
• Judge what size of pay differential is fair
• Organization strategy

• Aligned, yet adaptable pay structures required
3-17
• Organization human capital
• Constitutes:
• Education
• Experience
• Knowledge
• Abilities
• Skills
• Greater the value added by the skills and
experience, higher is the pay
3-18

• Organization work design
• Technology used in producing goods and services
influences:
• Organizational design
• The work to be performed
• The skills/knowledge required to perform the work
• Outsourcing specialists
• Pay for employees under both practices based on
internal structure of home employer
3-19

• Delayering
• Cuts unnecessary, non-contributing work
• Adds work to other jobs, enlarges them, changes the
job’s value and structure
3-20
• Overall HR policies
• More levels
• Organizations can offer more promotions
• There may be smaller pay differences between levels
• Frequent promotions (without significant pay
rise) offer a sense of career progress
3-21

• Internal labor markets
• Rules and procedures that:
• Determine pay for different jobs within a single
organization
• Allocate employees among those different jobs
3-22
Exhibit 3.5- Illustration of an
Internal Labor Market
3-23

• Employee acceptance - A key factor
• Employees judge the fairness of pay through
comparisons with others
• Sources of fairness
• Procedural justice: Process by which a decision is
reached
• Distributive justice: The fairness of the decision
3-24

• Pay procedures are more likely to be perceived
as fair if:
• They are consistently applied to all employees
• Employees participated in the process
• Appeals procedures are included
• The data used are accurate
• Pay structures change
• In response to external factors such as skill
shortages
3-25
Strategic Choices in Designing
Internal Structures
• Tailored versus loosely coupled
• Tailored
• Adopted by organizations with low-cost, customer-
focused business strategy

• Has well designed jobs with detailed steps or tasks
• Very small pay differentials among jobs
• Loosely coupled
• Require constant innovation
• Pay structures are more loosely linked to the
organization to provide flexibility
3-26
Internal Structures
• Egalitarian versus hierarchical
• Egalitarian structures
• All employees are valued equally
• Advantages
• Fewer levels

• Smaller differentials
• Disadvantages
• Equal treatment can mean more knowledgeable
employees feel underpaid
3-27
Internal Structures
• Hierarchical structures
• Value the differences in work content, skills, and
contributions
• Include detailed descriptions of work done at each
level
3-28

Exhibit 3.6 - Strategic Choice:
Hierarchical versus Egalitarian
3-29
Exhibit 3.7 - Which Structure has the Greatest Impact
on Performance? On Fairness?
3-30
Guidance from the Evidence
• Equity theory: Fairness

• People compare the ratio of their own outcomes
to inputs with that of others
• Employees judge fairness by comparing:
• To jobs similar to their own
• Their job to others at the same employer
• Their pay against external pay levels
3-31
• Tournament theory: Motivation and performance
• Greater the differential between your and your
boss’s salary, harder you work
• Does not directly address turnover
• Institutional model: Copy others
• Responding/conforming to normative pressures
in the external environment

3-32
• Drawback
• What aligns with the strategy of one organization may
not align with that of another organization
3-33
Exhibit 3.9 - Some Consequences of an
Internally Aligned Structure
3-34

• Hierarchical structures result in:
• Greater performance when work flow depends
on individual contributors
• High performers quit less under hierarchical
systems when:
• Pay is based on performance rather than
seniority
• People have knowledge of the structure
3-35
• Egalitarian structures are related to greater

performance when:
• Close collaboration and sharing of knowledge
are required
• Impact of internal structure on performance:
• Is affected by the pay model
3-36
Consequences of Structures
• Importance of internal alignment
• Efficiency
• Aligned structure lead to better performance
• Pay structures imply future returns
• Fairness
• For fair (sizable) differentials
• Against fair (sizable) differentials

• Compliance
• Comply with regulation of the country
3-37
HBR.ORG JUNE 2013
REPRINT R1306J
THE GLOBE
L’Oréal Masters
Multiculturalism
The cosmetics giant manages to be very global—
yet very French. by Hae-Jung Hong and Yves Doz
Distributed by The Case Centre North America Rest of the
world
www.thecasecentre.org t +1 781 239 5884 t +44 (0)1234 750903
All rights reserved e [email protected] e [email protected]
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L’Oréal Masters
Multiculturalism
The cosmetics giant manages
to be very global—yet very
French. by Hae-Jung Hong
and Yves Doz
The Globe
At the heart of every global business lies a tension that is never
fully resolved: Achieving economies
of scale and scope demands some unifor-
mity and integration of activities across
markets. However, serving regional and
national markets requires the adaptation
of products, services, and business models
to local conditions. As U.S. and European
companies increasingly look for customers
in emerging economies, both the advan-
tages of global scale and the need for local
differentiation will only increase.
It’s easy to get the balance wrong. Some
offerings may feel like commodities—think
refrigerators and washing machines—yet
there are often important variations in the
way people use them. An Italian washing
machine, for instance, has to be made to
rather different specs than a Swedish one.
Others, such as restaurants and cafés, come
across as intrinsically local, yet global for-

mulas and brands do succeed—think Beni-
hana, Wagamama, and Starbucks.
The tension between global integration
and local responsiveness is especially high
when product development and market-
ing require complex knowledge. This kind
of knowledge—usually tacit and collective,
revealed only in action and interaction—is
often the mainspring of a company’s com-
petitive advantage. The trouble is that tacit
knowledge functions best within national
boundaries, where workers share a lan-
ABOVE CEO Jean-Paul Agon
speaks at the January 2013
opening of L’Oréal’s first research
and innovation center in India. PH
O
TO
G
RA
PH
Y:
G
ET
TY
IM
A
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ES
2 Harvard Business Review June 2013 COPYRIGHT © 2013
HARVARD BUSINESS SCHOOL PUBLISHING
CORPORATION. ALL RIGHTS RESERVED.
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guage and cultural and institutional norms
and can draw on strong interpersonal net-
works. Without close, face-to-face interac-
tion between knowledge creators and users,
an understanding of how bits of informa-
tion fit together may be lost and the knowl-
edge may become unusable. Further, when
tacit knowledge must cross borders, it is
often reduced to information that moves
easily (words and numbers, for instance)
but may then fall prey to local misinterpre-
tations that are difficult to detect from afar.
The French cosmetics giant L’Oréal ex-

emplifies this global-local tension. It has
built a portfolio of brands from many cul-
tures—French, of course (L’Oréal Paris, Gar-
nier, Lancôme), but also American (May-
belline, Kiehl’s, SoftSheen-Carson), British
(The Body Shop), Italian (Giorgio Armani),
and Japanese (Shu Uemura). The company
now has offices in more than 130 countries,
and in 2012 over half its sales came from
new markets outside Europe and North
America, mostly in emerging economies,
up from only a third as recently as 2009.
In 2012, sales grew in the Asia Pacific re-
gion by 18.4% and in Africa and the Middle
East by 17.6%, without significant acquisi-
tions. Despite the financial crises in Europe
and North America, L’Oréal has been grow-
ing and gaining market share, mostly at the
expense of its competitors. It is the uncon-
tested world leader in skin care, makeup,
and hair color and a close second to P&G in
hair care worldwide. Since 2004 L’Oréal’s
revenue has increased by half and its prof-
its have almost doubled, with an increase
in net profits of 17.6% in 2012 alone.
Yet this remarkable global success
was built largely by a management team
strongly rooted in its home culture. Tradi-
tionally employees became part of manage-
ment over many years, weaving a dense
network of relationships through which
knowledge about products, cultures, and
how to work together was internalized.
Since its inception, more than a century ago,

L’Oréal has had only five CEOs (including
the founder), all but one with long tenures
and all promoted from within. Only a few
foreigners have become senior executives.
Lindsay Owen-Jones, who was CEO from
1988 to 2006, was one of them. Although
an Englishman, he was described by mem-
bers of L’Oréal’s founding family as Français
dans l’âme (“French in his soul”). For de-
cades, L’Oréal recruited few senior execu-
tives from outside. After several years the
exceptions took pains to explain that they
had worked for L’Oréal for a long time and
prided themselves on their perfect French.
As its global-loc al tensions have
mounted, L’Oréal has managed them by
deploying professionals with multicultural
backgrounds in new-product development,
the company’s most critical source of com-
petitive advantage. That strategy, according
to top management, is the main reason for
L’Oréal’s impressive success in emerging
markets. As the company has transformed
itself from a very French beauty products
business to a global leader, multicultural
executives have come to play a critical role
in product development not just in Paris
but also in New York, Tokyo, Shanghai, Rio,
and Mumbai.
Achieving Global-Local Balance
L’Oréal’s main consumer-products catego-
ries are all highly sensitive to global econo-
mies of scale and scope, yet to win custom-

ers they must also be responsive to local
preferences. This tension is perhaps most
critical in the L’Oréal Paris brand, which is
sold in mass markets worldwide and ac-
counts for half the sales of the consumer
products division.
L’Oréal also has to maintain a steady
stream of new products (every year, roughly
20% are new) in order to extend market
share in the face of stiff competition from
rivals such as Estée Lauder and Revlon and
units of global giants such as Unilever and
P&G. L’Oréal, which invests 3.5% of its rev-
enue in R&D, outspends all its major com-
petitors: Revlon, for instance, spends 1.7%
on R&D, and Estée Lauder about 1%.
As L’Oréal managers confront those
challenges, they must be mindful that their
products are much more than chemical
mixes. They are global symbols of fashion
and sophistication, appealing to the ideal-
ized self-image of customers. Technical in-
novation and responsiveness to local tastes
must not undermine the brand.
Traditional approaches to internation-
alization probably would not have resolved
L’Oréal’s global-local tensions. Structural
solutions, such as setting up largely au-
tonomous subsidiaries and regional en-
tities (which might have compromised
economies of scale) or global business units
(which might have ignored the richness of

cultural differences across markets), would
not have worked for most L’Oréal products,
given their need for both local responsive-
ness and global integration. Refocusing the
company on either a more local or a more
global portfolio would have been tanta-
mount to letting the tail wag the dog, for-
feiting L’Oréal’s many marketing and distri-
bution advantages.
The only alternative to international-
izing the structure was to internationalize
the management team. That is what L’Oréal
did, but with a twist. The rapid infusion of
foreign executives would have disrupted
the tightly knit community of senior man-
agers so critical to L’Oréal’s success. Rely-
ing on global teams—whether function- or
project-based—would have been equally
difficult. Culturally diverse teams often
experience the so-called Tower of Babel
syndrome: Their members talk past one an-
other, and teamwork breaks down. Compa-
nies quickly realize that little knowledge is
actually shared; even seemingly universal
and explicit knowledge, such as mathemat-
ics, is open to interpretation.
L’Oréal has dealt with these shortcom-
ings by recruiting and building teams
around individual managers, who by virtue
of their upbringing and experience have
gained familiarity with the norms and be-
haviors of multiple cultures and can switch
easily among them.

International Talent
Since the late 1990s, when L’Oréal started
to recruit internationally for positions
at headquarters, L’Oréal Paris—the unit
where we conducted our research—has
placed executives from mixed cultural
June 2013 Harvard Business Review 3
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backgrounds in its most critical activity:
new-product development. These manag-
ers account for a small proportion of L’Oréal
Paris employees but for more than a third
of the unit’s product development team
managers—a balance the unit has main-
tained for more than 10 years.
L’Oréal Paris generally has about 40

product development teams, each work-
ing on a different concept. A team consists
of three or four people, two of whom may
be multicultural. For example, in a team
we spoke with that is working on women’s
hair-care products for Latin America, a
Lebanese-Spanish-Americ an manager
was in charge of hair color while a French-
Irish-Cambodian was in charge of hair care.
They shared an office so that they could ex-
change ideas.
ences in understanding and communica-
tion, serving as a buffer both within teams
and more broadly in the organization. In
addition, he or she will probably be more
open to adapting to multiple mind-sets and
communication modes; it’s well known
that people find it easier to learn new lan-
guages if they have grown up speaking
more than one. These skills equip L’Oréal’s
multiculturals to play five critical roles.
Recognizing new-product opportu-
nities. L’Oréal Paris finds that multicultur-
als are better placed than others to draw
analogies among cultural groups. Accord-
ing to a director who worked with multicul-
turals for five years, “Their background is a
kind of master class in holding more than
one idea at the same time. They think as if
they were French, American, or Chinese,
and all of these together at once.”
This very flexible perspective can lead
to unexpected opportunities for product

innovation. For instance, a French-Irish-
Cambodian manager working on skin care
noticed that many tinted face creams in
Asia had a lifting effect, which minimizes
wrinkles. In Europe, creams tended to be
either tinted (and considered as makeup)
or lifting (and considered as skin care).
Drawing on his knowledge of Asian beauty
trends and their increasing popularity in
Europe, he and his team developed a tinted
cream with lifting effects for the French
market, which proved to be a success.
Although people rooted in one culture
can also uncover such opportunities, multi-
culturals are more likely to do so—and to
do so faster—because they have been deal-
ing with cultural complexities since child-
hood. As an Indian-American-French man-
ager in a team that launched a men’s skin
care line in Southeast Asia explained, “I
am able to do this because I have a stock of
references in different languages: English,
Hindi, and French. I read books in three
different languages, meet people from dif-
ferent countries, eat food from different
countries, and so on. I cannot think about
things in one way.”
Preventing losses in translation.
Even when there’s a common syntax or
graduates of leading international business
schools. The recruits undergo a 12-month
training program in Paris, New York, Sin-
gapore, or Rio, followed by management

development programs at Cedep, an execu-
tive education consortium in France.
After spending two or three years in
global product development at headquar-
ters, the more experienced managers usu-
ally return to their home regions as direc-
tors, responsible for managing a brand or
function. Most of those recruited from
business schools remain for another few
years in product development at headquar-
ters. After this second tour they, too, usu-
ally go to a regional office at the director
level, though some remain in Paris. Their
promotion prospects, like those of all em-
ployees, depend on performance.
Since the late 1990s, L’Oréal Paris has placed
executives from mixed cultural backgrounds in its
most critical activity: new-product development.
Developing a new product takes at least
a year of knowledge exchanges among the
product development team, regional sub-
sidiaries, and functional units in France,
such as R&D. In addition to interacting with
their peers, who may come from different
cultures, team managers must discuss their
work with top management, formally and
informally, as it progresses.
Once a new-product concept is ready,
the team presents it at Réunion Interna-
tionale, the consumer products division’s
annual event, held at the Paris headquar-
ters. The teams pitch their launch action

plans to regional directors from around
the globe, who come looking for ideas that
might be ready to hit the market in one or
two years.
The multicultural managers are drawn
from three pools. The most seasoned
come from the company’s international
subsidiaries and have at least five years of
experience in sales and marketing. A few
are recruited from other global companies.
The third and youngest group consists of
An increasing number of multicultur-
als are starting to find their way into senior
management in the company—a sign of the
success of the approach. Among the people
we met, one Hong Kong–British–French
project manager (recruited at headquar-
ters) was subsequently promoted to lead
the team developing all facial products for
the East Asian market, and an Indian-Amer-
ican-French project manager (recruited
from the Indian subsidiary) moved to an-
other division with a significant promotion.
In sum—and there is an important mes-
sage here for other multinational compa-
nies—L’Oréal nurtures a pool of multicul-
tural managers, placing them at the center
of knowledge-based interactions among
brands, regions, and functions. Let’s look
at what these young men and women offer
the company in return.
The Advantages of

Multiculturals
A person rooted in more than one culture
is usually able to spot and reconcile differ-
4 Harvard Business Review June 2013
THE GLOBE
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language, as in mathematical and chemi-
cal formulas, cross-cultural semantic dif-
ferences can cause confusion. What the
person initiating a communication means
is not necessarily what the person receiv-
ing the communication hears. The problem
thus shifts to who interprets what, and how
accurately—a critical issue in the design of
new products.
For instance, a French manager’s prod-
uct test failed because he asked a German
colleague in the laboratory to translate

the characterization of some hair features.
Through conversations with an English-
French-German manager, the French
manager discovered that there had been a
gap between what he meant and what the
German heard. It was a nuanced difference:
The words were the same, but their mean-
ing was not. He had to run the test again, at
significant cost. Since then, the multicul-
tural manager who spotted the difference
has been called on frequently to decode
communications between headquarters
and the German office.
Integrating outsiders. Teams staffed
with people who are not multicultural find
it hard to assimilate newcomers with differ-
ent behaviors and modes of communica-
tion, particularly when the team has devel-
oped its own norms or its members belong
predominantly to one culture. Given the
intensity of a team’s internal interactions,
incumbent team members can quickly re-
sort to stereotypes about a newcomer, and
the situation can become toxic. The pres-
ence of a multicultural member can help
prevent this dynamic from taking hold.
Consider the experience of a Hong
Kong–British–French director: “After a new
person joined my team from the Shanghai
office, a member complained that she was
‘very rude.’ I said, ‘Let’s give her more time
to adjust. Maybe she’s not being rude and
that’s just how she expresses herself. Why

don’t you also try to adapt to her?’ When I
went to Shanghai, I had a meeting with my
new team member and found she was not
being rude. The way she expressed herself
was direct, without bad intention. I didn’t
tell her about the complaints but gave
some advice on how to better work with
people whose cultures are different. When
I returned to HQ, I told my group about my
experience with the new member. Things
became much better.”
If a newcomer is disruptive because of
personal style or personality, there may be
little anyone can do. But if the issue origi-
nates in cultural differences, which it often
does, multiculturals can help integrate the
outsider. They can perform this function
because they are adept at moving from one
mode of interaction to another. They grew
up doing so—switching from one parent to
another, or from school to home.
Mediating with bosses. The role
of cultural buffer is important at L’Oréal
Paris, especially for reducing the potential
for conflicts between the multicultural
product- development teams and the peo-
ple they report to, who are, for the most
part, French. Here’s how a multicultural
manager explained one aspect of his role as
team leader: “My French boss never starts
meetings on time. So whenever we have a
meeting planned with him, we can get frus-

trated if we are not flexible. If I am running
behind myself, I make sure to tell my team
members in advance why I am behind and
ask them for their next availabilities. Con-
flicts may still exist in my team, but we
handle them more tolerantly.”
Bridging differences between sub-
sidiaries and headquarters. Multicul-
tural managers have frequently defused
acrimonious communications between a
subsidiary and L’Oréal Paris. For example,
on a project to develop an organic shampoo
Emulating Multicultural Managers
Managers rooted in more than one culture have many skills that
allow them to fill five
crucial roles. Other managers can learn to play the first two
roles through training and
management development programs. But the final three roles
are based on skills acquired
through early life experiences and are therefore more difficult
for others to learn. The
careful management of international assignments can help. Be
cautious about short-term
rotations: Without deep exposure to national contexts, managers
concentrate on what’s
common across cultures instead of what’s different. As a result,
their cultural sensitivity is
dulled rather than sharpened.
ROLE
RECOGNIZING
NEW-PRODUCT
OPPORTUNITIES

MEDIATING
WITH
BOSSES
BRIDGING
DIFFERENCES
BETWEEN
SUBSIDIARIES AND
HEADQUARTERS
Sensitivity to one’s own
and others’ cultures
Cultural awareness and
curiosity
Cultural empathy
Multilingual skills
Contextual understanding
and sensitivity
Semantic awareness
Ability to switch among
cultural frames of reference
and communication modes
Training with multiculturals
and repatriates
One-on-one coaching by
multiculturals
Regular evaluation by an

HR specialist knowledgeable
about multiculturals’
competence and skills
Foreign language and
semantics training
Enhanced promotion
prospects for foreign
language speakers
Opportunities to carry out
leadership responsibilities in
a foreign language
How multiculturals do it How others can learn
1RNOO
PREVENTING
LOSSES IN
TRANSLATION2TT
INTEGRATING
OUTSIDERS3
4
5BDBBSSH
June 2013 Harvard Business Review 5
FOR ARTICLE REPRINTS CALL 800-988-0886 OR 617-783-
7500, OR VISIT HBR.ORG
U
sa
ge

p
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for the European market, the product de-
velopment team in Paris asked the Indian
unit to find a rare local plant that would
provide a key ingredient. The Indians told
the team that they would “do their best”
but sat on the request. As the team’s Indian-
American-French leader told us, “Even-
tually the Indian manager said, ‘We need
confirmation that this ingredient can really
please consumers.’”
At this point, the team leader under-
stood that the initial “We’ll do our best”
(which the French interpreted as a clear
yes) was actually a polite way of saying
that they wouldn’t do anything. The “We
need confirmation” follow-up signaled
that the request was too difficult—but the
Indians did not want to come out and say
that and thus fail to honor a commitment.
The leader realized that if he told head-
quarters that India wouldn’t come up with
the goods, he risked triggering open con-
flict between the two parties. Instead, he
worked with both to explore other ingre-

dients that would not be so challenging to
source.
The team leader grasped that there had
not yet been enough collaboration or social
interaction between the two teams to allow
them to decode each other’s expressions of
expectations. He could also see that this
particular misunderstanding might under-
mine trust and make more-important tasks
harder. (Ultimately he found a substitute
ingredient and dropped the matter.) This
manager could play a bridging role because
he had deep knowledge about both Indian
and French ways of expressing commit-
ment, strong communication skills, intense
cultural sensitivity, and high flexibility—a
bundle of qualities seldom found among
managers rooted in just one culture.
For a global company to deploy multi-
culturals strategically, HR should appoint a
manager to lead a program for developing
and nurturing them. This manager should
obviously be knowledgeable about the
competence and skills of these individu-
als and how they differ from those of other
employees. Because of considerable varia-
tion among multiculturals themselves, the
manager needs to tailor a training system
to each one. With this support, commit-
ment to the program from top managers,
and the granting of some autonomy in their
work, multicultural managers can make a
huge difference in whether a company is

able to balance global and local imperatives
by learning from cultural differences—or
instead suffers from them.
AS MARKETS AND COMPETENCIES have be-
come more dispersed and differentiated
with the strategic thrust into emerging re-
gions, companies need to reverse the old
knowledge flows (from their home country
to far-flung subsidiaries) and instead learn
how to learn from their peripheries. Cultur-
ally this is difficult. It calls for a shift from
an ethnocentric approach to a truly global
network. L’Oréal’s strategic use of multicul-
tural managers provides a shortcut: These
managers can integrate knowledge from
many locations to develop successful new
products and minimize conflict between
home-country and international executives.
It’s an approach that can transfer easily to
other industry and functional contexts in
which complex knowledge from multiple
cultures must be coordinated and shared.
HBR Reprint R1306J
Hae-Jung Hong is an assistant professor at
Rouen Business School, in France. Yves Doz
is the Solvay Chaired Professor of Technological
Innovation at Insead. This article is adapted from
a feature published in the French edition of HBR,
April 2013, and is based on Hong’s doctoral work,
supported by the Diversity and Leadership Chair
at ESSEC Business School, in Paris.

Harvard
Business
Review
Business
Not As
Usual
HBR.ORG
The Revival of Smart
An increasing number of multiculturals
are starting to find their way into senior
management—a sign of the success of the
approach.
6 Harvard Business Review June 2013
THE GLOBE
U
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[email protected]
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BHR 3301, Compensation and Benefits 1
Course Learning Outcomes for Unit II
Upon completion of this unit, students should be able to:
2. Develop a pay survey and pay structure.
2.1 Discuss internal alignment and how it relates to establishing
pay structures.
2.2 Outline the criteria involved in determining work levels and
differentials within pay structures.
Reading Assignment
Chapter 3: Defining Internal Alignment
Unit Lesson
What is internal alignment, and how does it relate to
establishing pay structures?
Many times, an organization does not discuss internal alignment
and pay structures in detail with the
employees. Not knowing is what leads to the various questions
employees have in regards to pay equity.
Although many companies have a policy that states employees
are not to discuss salaries with each other, it
does happen. Many employees question why their pay is not
aligned with others in the organization. What
determines what an employee gets paid? How does a company

determine an employee’s worth? Why do
companies have different pay levels? Why do employees
performing similar but different functions receive
differences in pay? If there is such a thing as pay equity, does it
exist within organizations? These are
questions that many employees ponder. These thoughts and
questions will be addressed in Unit II.
When you think of the word internal, automatically you know it
applies to those things within the organization.
When you think of the term alignment, you should immediately
focus on structure, togetherness, consistency,
and equity. Putting these two words together should help you
define internal alignment as the ability of an
organization to develop pay structures that will support the
company’s strategic goals, support the overall
operation (work-flow), and motivate employees to meet
organization objectives. Yes, objectives must be
specific and measurable. The objectives must be set first in
order for the company to determine what
processes are needed to create the internal structures. Keep in
mind that the strategies should ultimately
position the company competitively among other similar
companies. We all know that when an organization
loses its competitive advantage, many employees look to find
other employment opportunities.
In terms of pay structures, it is a known fact there are various
levels of work and pay differentials among the
various levels. The size of the organization is a determining
factor in the levels of work. Many of us have had
the opportunity to work for some really large organizations
which had multiple work levels. In such situations,
you have managers managing managers. Perhaps some of you
have experienced this at one point or
another. Many of you are familiar with the pay differentials and

deal with it in your organizations. How do you
view differentials within your organization? Do you think
internal equity exists?
In order to determine the work levels and differentials, of
course, certain criteria must be taken into
consideration. All aspects of the position must be considered
including the content, which refers to the actual
work performed and the tools, skills, knowledge, or behaviors
needed to get the job done efficiently and
effectively. When you think about content, you must also
consider how complex the job is and what additional
responsibilities (i.e., supervision of others, or possession a
bachelor’s degree) are required. Perhaps many of
you are facing some of these issues now, which is why you have
decided to obtain your degree. The issue of
pay differentials is a big factor in motivating many to obtain
their degrees.
The other basis for determining internal structures is value.
Value can be identified as job worth. Many
companies look at competitors when they determine the value
and base their pay rates in a medium range in
UNIT II STUDY GUIDE
Internal Alignment
BHR 3301, Compensation and Benefits 2
UNIT x STUDY GUIDE

Title
order to stay competitive. What do we mean by being
competitive? Well, some companies will pay just
enough to keep employees from going to another company.
Some former HR Managers conduct wage
analyses to determine if their organization is able to compete
with other companies in terms of benefits and
pay.
As, you can see, there are many key points to cover in this unit.
As you read the material, do not only focus
on some of the things highlighted in the above paragraphs, other
key areas of emphasis include the following:
1. Identify the major factors that shape internal structures. Some
of those factors may be external, as
well as, organizational factors.
2. Distinguish how government policies, laws, and regulations
have an impact on pay internal structures.
3. Best practices are often used or stated in an effort to
eliminate complaints. Are best practices always
the best thing for an organization? Think about it.
With this in mind, the pay structures should be fair. When
employees are on board and agree with the
structure, it leads to a better work environment. If an employee
feels as though the pay differentials are not
equitable and fair, it could lead to many issues and low
performance. Employees have a tendency to work
harder when they are happy and feel the reward at the end is
worth it. This keeps morale high and motivates

employees. It even helps the employees motivate one another.
However, we must remember, as with
anything, the company must look at all positive and negative
consequences that may be a result of the
internal alignment.
Suggested Reading
Click here to access the Chapter 3 PowerPoint Presentation.
Click here to access a PDF of the presentation.
Key Terms
1. Content and value
2. Differentials
3. Entry job
4. Equity theory
5. Instructional theory
6. Internal alignment
7. “Just wage” doctrine
8. “Line-of-sight”
9. Outsourcing
10. Pay structure
11. Surplus value
12. Tournament theory
13. Work flow
https://online.columbiasouthern.edu/bbcswebdav/xid-

62366384_1
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