Defining Internal Alignment

Module 2
Definition Of Internal Alignment
"Internal alignment, often called internal equity,
refers to the pay relationships among different
jobs/skills/competencies within a single
organization. The relationships form a pay
structure that should support the organization
strategy, support the work flow, be fair to employees, and
motivate behavior toward organization objectives,"
according to Milkovich and Newman
 Does Your Organization Have Internal Alignment?

Understanding the organization's purpose is the first step in

this alignment process. The next step is seeing if the
organization has aligned the pay structures to follow.
The internal alignment process should be reviewed on a
regular basis at the top levels, probably not less than annually.
This allows for any changes or modifications if the company
or the industry changes. It also helps to keep the organization
running as productively and as aligned as possible.
 Pay Structure
A pay structure is a collection of pay grades, levels or bands,
linking related jobs within a hierarchy or series, that provides a
framework for the implementation of reward strategies and
policies within an organization.
a collection of pay grades or bands, which set out the different
levels of pay for workers in a certain profession, etc
Pay Structure example
 Compensation Strategy
Supports organization strategy:
Fundamentally, organizations exist for a purpose (profits, not-for-profits,
government agencies, and so on).
The organizations strategy tells us how it plans to achieve its purpose. Internal
structures that are aligned with a strategy help achieve it.
Research, design, and development of advanced technology systems help to
achieve the companys objectives.

Supports work flow:

Work flow refers to the process by which goods and services are delivered to
the customer.
The pay structure ought to support the efficient flow of that work and the
design of the organization.
For example, drug companies traditionally base the size of their sales forces on
the number of physicians to be called on per day and the number of working
days per year.
 Support fairness:
An internally aligned pay structure is more likely to be judged fair if
it is based on the work and the skills required to perform the work
and if people have an opportunity to be involved in some way in
determining the pay structure.
Two sources of fairness are important: the procedures for
determining the pay structure, called procedural justice; and the
results of those proceduresthe pay structure itselfcalled
distributive justice.

Motivates Behaviors:
pay in-creases for promotions, bigger titles, more challenging work.
The challenge is to design the structures so that they engage people to
help achieve organization objectives.
STRUCTURES VARY AMONG ORGANIZATIONS

An internal pay structure can be defined by

Number of levels of work
The pay differentials between the levels, and
The criteria used to determine those levels and
differentials.
 WHAT SHAPES INTERNAL STRUCTURES?

The major factors that shape internal structures are shown in

Exhibit 3.4.
We categorize them as external and organization factors, even
though they are connected and interacting.
Shapes internal structure
STRATEGIC CHOICES IN DESIGNING INTERNAL STRUCTURES

The basic premise underlying the strategic approach is that fit

matters.
Aligned pay structures support the way the work gets done, fit
the organizations business strategy, and are fair to employees.
Greater internal alignmentfitis more likely to lead to
success.
Misaligned structures become obstacles. They may still motivate
employee behavior, but it maybe undesirable behavior.
 Two strategic choices are involved:
how tailored to organization design and work flow to make the
structure, and
how to distribute pay throughout the levels in the structure.

Tailored versus Loosely Coupled:

A low-cost, customer-focused business strategy such as that
followed by McDonalds or Wal-Mart may be supported by a
closely tailored structure.
In contrast to McDonalds, 3Ms (Minnesota Mining and
Manufacturing ) business strategy requires constant product
innovation and short product-design-to-market cycle times.
The 3M competitive environment is turbulent and unpredictable.
 Egalitarian versus Hierarchical
Pay structures can range from egalitarian at one extreme to
hierarchical at the other.
Exhibit 3.6 clarifies the differences. Egalitarian structures have
fewer levels and smaller differentials between adjacent levels and
between the highest- and lowest-paid workers.
Hierarchical versus Egalitarian
Which Structure Fits Best?
More hierarchical structures are related to greater performance
when the work flow depends more on individual contributors (e.g.,
consulting and law practices, surgical units, stockbrokers, even
university researchers).
More egalitarian structures are related to greater performance
when close collaboration and sharing of knowledge are required
(e.g., firefighting and rescue squads, manufacturing teams, hotel
customer service staffs, global software design teams).
The competition fostered in the winner-take-all tournament
hierarchies appears to have negative effects on performance when
the work flow and organization design require teamwork.
Structures that are not aligned with the work flow appear to be
related to greater turnover.