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

First Officer

Year 1

First Officer

Year 5

Captain, Small Aircraft Year 10

Captain, Max

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.

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: – job based– tasks– work performed

• Job Specification– employee based– knowledge, skills & abilities– experience

• Job description: – job based– tasks– work performed

• Job Specification– employee based– knowledge, skills & abilities– experience

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 Punch Press Welder Grinder Receiving Clerk

Shear Operator

E S M S S

Electrician E M E E Punch Press M P P

Welder M M Grinder G

Classification

• Like library classification system

• Define categories and then compare job against categories

Class I

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

Education1. Job requires graduate education2. Job requires bachelor degree3. Job requires high school education

Effect of Error1. Major mistake-more than $500,0002. Major mistake-more than $100,0003. 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

• 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

• 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