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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  ...
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  – ...
What are problems with jobs? What         is the alternative?  • Rigid, inflexible  • Change slowly        – To change you...
Why might employers choose tohave 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 & allo...
Egalitarian v. Hierarchical                 Structure• Egalitarian: flat structure little difference between the top and  ...
Pilot compensation               First        First Officer   Captain,      Captain,               Officer      Year 5    ...
Factors that influence internal wage              structures• Society   – just price doctrine       • occupation’s station...
Demand Side Models of Pay          Structures• Marginal Productivity     • pay based on contributions to firm       produc...
Supply side models of internal                equity•   Human Capital     – pay based on investments in HC: education, ski...
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?  – W...
Employee Acceptance Key Test• Beliefs about what are reasonable  differences• Distributive justice: satisfaction with  out...
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  – know...
Evaluating Work: Job Evaluation    Determining a job’s worth to the            organization.            Internal equity.
Four Job Evaluation Methods            Whole            Specific            Job              Job FactorsJob v.      Rankin...
Ranking• Rank Jobs highest to lowest• Paired comparison                 Electrician       Punch Press       Welder        ...
Classification• Like library                        Class I  classification system                           Simple work, ...
Point Factor MethodSteps:1. Decide compensable factors: what the  organization wants to pay for     skill, effort responsi...
Point Factor Method                                    EducationWorking Conditions                                    1. J...
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  –   i...
Skill & Competency Analysis•   Skill Analysis: systematic process to identify skills to perform work:     – What you know....
Skill or Competency Evaluation• Person centered approach rather than job  centered• Determine the skill blocks that are va...
The Top Twenty Competencies•   Achievement orientation        •   Developing others•   Concern of quality             •   ...
Competency Analysis Criticisms• Competencies sometimes vague: “Can do  attitude”• Some competencies difficult to measure: ...
Alternative to Job Evaluation• Market Pricing• Assumes the firm’s values irrelevant• Most likely done when employees only ...
Summary• Internal equity is job’s value (job  evaluation) or a person’s value  (competency analysis) to  organization• Est...
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Internal Equity (1)

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Internal Equity (1)

  1. 1. Internal Equity• Defining consistency © Nancy Brown Johnson 2003
  2. 2. Elements of the Pay Structure• Levels & Reporting Relationships• Differentials
  3. 3. 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
  4. 4. Internal Equity is about the fairness of the pay structure• CEO Pay• More CEO Pay
  5. 5. Internal Consistency• Job’s worth to the employer• Ranking of jobs in the organization
  6. 6. 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
  7. 7. 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.
  8. 8. Why might employers choose tohave a pay structure that differs from the external market?
  9. 9. 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.
  10. 10. 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 ↑
  11. 11. Pilot compensation First First Officer Captain, Captain, Officer Year 5 Small Max Year 1 Aircraft Year 10Southwest $36,132 $82,068 $140, 412 $143,508American 25,524 67,092 132,276 185,004Delta 33,396 95,040 112,308 209,388United 29,808 95,100 128,124 200,796Avg.(A,D, U) 29,576 85,744 124,236 198,396 Source: Gerhart & Rynes, Compensation, 2003.
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. Organizational Factors• Technology – work performed – skills to perform work• HR Policies & Strategy• Strategic skill
  16. 16. 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?
  17. 17. Employee Acceptance Key Test• Beliefs about what are reasonable differences• Distributive justice: satisfaction with outcomes• Procedural justice: satisfaction with process
  18. 18. Internal Equity in Practice• Job analysis – Collecting data about jobs• Job evaluation – Valuing jobs
  19. 19. Job Analysis• Gathering information about work – Behaviors – Tasks – Critical Incidents
  20. 20. Job Analysis Result• Job description: – job based – tasks – work performed• Job Specification – employee based – knowledge, skills & abilities – experience
  21. 21. Evaluating Work: Job Evaluation Determining a job’s worth to the organization. Internal equity.
  22. 22. Four Job Evaluation Methods Whole Specific Job Job FactorsJob v. Ranking FactorJob ComparisonJob v. Classification Point FactorStandards
  23. 23. Ranking• Rank Jobs highest to lowest• Paired comparison Electrician Punch Press Welder Grinder Receiving Clerk Shear E S M S S Operator Electrician E M E E Punch Press M P P Welder M M Grinder G
  24. 24. Classification• Like library Class I classification system Simple work, no supervisory• Define categories and responsibility, no public contact then compare job Class II against categories Simple work, no supervisory responsibility, public contact Class III Medium work complexity, no supervisory responsibility, public contact
  25. 25. Point Factor MethodSteps:1. Decide compensable factors: what the organization wants to pay for skill, effort responsibility & working conditions2. Set scales for the factors3. Weight the factors4. Evaluate the jobs
  26. 26. Point Factor Method EducationWorking Conditions 1. Job requires1. Hazardous work graduate education deals with dangerous 2. Job requires bachelor degree materials or working 3. Job requires high conditions school education2. Uncomfortable work loud, hot or cold, dirty Effect of Error3. Good working 1. Major mistake-more than $500,000 conditions 2. Major mistake-more office environment, air than $100,000 conditioned, good 3. Major mistake-less lighting than $99,999 1=10 points, 2-8 points, 3=5 points
  27. 27. Job Evaluation• Judgement involved• Statistical weighting• Employee Acceptance
  28. 28. 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
  29. 29. 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
  30. 30. 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.
  31. 31. The Top Twenty Competencies• Achievement orientation • Developing others• Concern of quality • Team leadership• Initiative • Technical expertise• Interpersonal understanding • Information seeking• Customer-service orientation • Analytical thinking• Influence and impact• Organization awareness • Conceptual thinking• Networking • Self-control• Directiveness • Self-confidence• Teamwork & cooperation • Business orientation • Flexibility
  32. 32. 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
  33. 33. 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
  34. 34. 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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