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

Southwest American Delta United Avg.(A,D, U) First Officer Year 1 $36,132 First Officer Year 5 $82,068 Captain, Small Aircraft Year 10 Captain, Max $140, 412 $143,508 25,524 33,396 29,808 67,092 95,040 95,100 132,276 112,308 128,124 185,004 209,388 200,796 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 :

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 Shear Operator E Punch Press S Welder M Electrician E M Punch Press M Grinder S E P Welder M Receiving Clerk S E P M Grinder G

Classification

• Like library classification system Class I • Define categories and then compare job against categories 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

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:

required to for success. systematic process to identify competencies – 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: 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