Factors that Influence Internal Pay Structure

Internal pay structure refers to an array of pay rates for different skills and work of
employees in an organization (Milkovich, Newman & Gerhat 72). It can also be defined as the
number of pay levels in an organization, the differentials in pay between one level and another
one, and the criteria that the organization uses to establish the pay differences (Milkovich et al.
72). They are many factors that influence internal pay structures in an organization. They are
broadly classified into external and organizational factors.
External factors
External factors are factors that are not within the control of the organization. They
include economic pressure, external stakeholders, cultures and customs, and government policies
and laws (Milkovich et al. 78). Economic pressure constitutes forces of demand and supply of
not just labor but also goods and services that an organization produces. For instance, when
supply for employees of given skills, knowledge, and experience is low, organizations will have
to pay more for the few available ones. External stakeholders such as trade unions and political
groups also influence internal pay structures (Milkovich et al. 78). For instance, trade unions
often push organizations to have promotion of employees based on seniority rather than
performance.

Apart from external stakeholders, government laws and policies also have an impact on
an organization’s internal pay structure. For instance, government minimum wage laws stipulate
the amount of wages below which an employer cannot pay their employees (Milkovich et al. 79).
Government laws also prevent organizations from discriminating employees based on their race
or gender when formulating their pay systems. Cultures and customs also affect internal pay
structures of organizations. For instance, in some countries such as Japan promotion is mainly
based on seniority while in America promotion is mainly based on performance.
Organizational factors
Organizational factors are factors that are within the control of the business organization.
They include organization human capital, human resource policies, and organization work
design. Each organization has a range of tasks that require specific skills, knowledge, experience,
and level of education (Milkovich et al. 81). Employees whose skills add more value to the
organization receive better pay than those whose skills add less value. In addition to human
capital, organization work design also affects an organization’s internal pay structure. For
instance, some organizations have a business model which heavily relies on outsourcing of some
of its services to other organizations. In such organizations, employees of the organization may
be paid differently from those whose services have been outsourced.
Human resource policies of an organization also impact an organization’s internal pay
structure. Each organization establishes its own human resource policies to help it achieve its
objectives. For instance, some organizations have so many job levels that allows them to carry
out regular promotion of employees. Such human resource policies are based on the assumption
that promoting an employee to a higher position motivates them even if the tasks and
responsibilities of the new position are not much different from their previous ones (Milkovich et

al. 81). Others have regular wage/salary increment but not promotions. For instance,
organizations providing IT services may have human resource policies that encourage their top
IT experts to remain as software developers rather than seek promotion to managerial positions.
Such organizations will, therefore, provide few incentives for IT experts seeking promotion to
higher positions of responsibility.
Most important factors affecting internal pay structure
From my own experience, the most important factors are economic pressures,
government laws and policies, and human resource policies at the organization. Economic
pressure mainly impacts pay as organizations usually compensate their employees at market
rates. Government policies are also important because all business organizations have to comply
with them. Lastly, human resource policies of the organizations matter because every
organization has to structure its internal pay structure in a manner that suits its goals and the kind
of goods and services that it produces.

Works Cited

Milkovich George, Jerry Newman & Barry Gerhart. Compensation. McGraw-Hill Higher
Education, 2016.