Internal equity refers to the fairness of pay within an organization. It can be established through job evaluation, which determines a job's worth, or competency analysis, which evaluates an individual's skills. Job evaluation methods include ranking, classification, and point factor analysis. Competency analysis focuses on skill blocks rather than rigid jobs. Alternatively, organizations can price jobs based on external market values.

1. Internal Equity
• Defining consistency
© Nancy Brown Johnson
2003

2. Elements of the Pay Structure
• Levels & Reporting
Relationships
• Differentials

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. Internal Equity is about the fairness
of the pay structure
• CEO Pay
• More CEO Pay

5. Internal Consistency
• Job’s worth to the employer
• Ranking of jobs in the organization

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. 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. Why might employers choose to
have a pay structure that differs from
the external market?

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. 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. Pilot compensation
First First Officer Captain, Captain,
Officer Year 5 Small Max
Year 1 Aircraft Year
10
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.

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. 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. 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. Organizational Factors
• Technology
– work performed
– skills to perform work
• HR Policies & Strategy
• Strategic skill

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. Employee Acceptance Key Test
• Beliefs about what are reasonable
differences
• Distributive justice: satisfaction with
outcomes
• Procedural justice: satisfaction with
process

18. Internal Equity in Practice
• Job analysis
– Collecting data about jobs
• Job evaluation
– Valuing jobs

19. Job Analysis
• Gathering information about work
– Behaviors
– Tasks
– Critical Incidents

20. Job Analysis Result
• Job description:
– job based
– tasks
– work performed
• Job Specification
– employee based
– knowledge, skills & abilities
– experience

21. Evaluating Work: Job Evaluation
Determining a job’s worth to the
organization.
Internal equity.

22. Four Job Evaluation Methods
Whole Specific
Job Job Factors
Job v. Ranking Factor
Job Comparison
Job v. Classification Point Factor
Standards

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. 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. 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

26. Point Factor Method
Education
Working Conditions
1. Job requires
1. Hazardous work graduate education
deals with dangerous 2. Job requires
bachelor degree
materials or working 3. Job requires high
conditions school education
2. Uncomfortable work
loud, hot or cold, dirty Effect of Error
3. 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. Job Evaluation
• Judgement involved
• Statistical weighting
• Employee Acceptance

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. 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. 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. 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. 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. 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. 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