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
Jobs 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 dont 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 persons 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 organizations internal procedures Once in organization then internal labor markets governed by the organizations 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 Southwest American Delta United $36,132 25,524 33,396 29,808 First Officer Year 5 Captain, Captain, Small Max Aircraft Year 10 $140, 412 132,276 112,308 128,124 $143,508 185,004 209,388 200,796

$82,068 67,092 95,040 95,100

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 occupations 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 Labors 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

Evaluating Work: Job Evaluation

Determining a jobs worth to the organization. Internal equity.

Four Job Evaluation Methods

Whole Job Job v. Job Job v. Standards Ranking Classification

Specific Job Factors Factor Comparison Point Factor

Ranking
Rank Jobs highest to lowest Paired comparison

Electrician Shear Operator E Electrician

Punch Press S E Punch Press

Welder M M M Welder

Grinder S E P M Grinder

Receiving Clerk S E P M G

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

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
Education 1. Job requires graduate education 2. Job requires bachelor degree 3. Job requires high school education Effect of Error 1. Major mistake-more than $500,000 2. Major mistake-more than $100,000 3. 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

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: cant give a test Difficult to relate to what people do
Could expect a competency that they dont engage in

Alternative to Job Evaluation

Market Pricing Assumes the firms values irrelevant Most likely done when employees only hired externally and rarely promoted from within

Summary
Internal equity is jobs value (job evaluation) or a persons value (competency analysis) to organization Established through job evaluation or competency analysis Alternative is to price jobs according to market value