Chapter 7 -- Defining competitiveness - College of Business ...

Part
II
External Competitiveness: Determining
the Pay Level
7 - 1
Chapter 7 Defining Competitiveness
Chapter 8 Designing Pay Levels, Mix,
and Pay Structures
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7 - 2
STRATEGIC
POLICIES
TECHNIQUES
STRATEGIC
OBJECTIVES
ALIGNMENT
COMPETITIVENESS
CONTRIBUTORS
Work Descriptions Evaluation/ INTERNAL
Analysis Certification STRUCTURE
Market Surveys Policy PAY
Definitions Lines STRUCTURE
Seniority Performance Merit INCENTIVE
Based Based Guidelines PROGRAMS
EFFICIENCY
• Performance
• Quality
• Customers
• Stockholders
• Costs
FAIRNESS
COMPLIANCE
ADMINISTRATION
Planning Budgeting Communication EVALUATION
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7 - 3
Chapter
7
Defining Competitiveness
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Learning Objectives
After studying Chapter 7, students should be able to:
1. Explain the importance of external
competitiveness to the pay model.
2. Discuss the factors that influence external
competitiveness.
3. Discuss the difference between labor market,
product market, and organizational factors in
determining external competitiveness.
4. Explain the different pay policy decisions and
the consequences of using each.
7 - 4
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7 - 5
External competitiveness
External competitiveness
refers to the pay relationships
among organizations - the
organization’s pay relative to its
competitors.
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7 - 6
External competitiveness is expressed in
practice by:
1. setting a pay level that is above,
below, or equal to competitors, and
2. by considering the mix of pay forms
relative to those of competitors.
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7 - 7
Pay level refers to the average of the array of
rates paid by an employer.
Σ Base + Bonuses + Benefits + Options / Σ Employees
Pay forms Pay forms refer to the mix of the various types of
payments that make up total compensation.
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7 - 8
Pay level and mix focus attention
on two objectives:
Control Labor Costs
Attract and Retain
Employees
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7 - 9
Pay Level Decisions Impact Labor Costs
Labor Costs
Number of
Employees
= x
Pay Level
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What Shapes External Competitiveness?
LABOR MARKET FACTORS
Nature of Demand
Nature of Supply
7 - 10
PRODUCT MARKET FACTORS
Degree of Competition
Level of Product Demand
EXTERNAL
COMPETITIVENESS
ORGANIZATION FACTORS
Industry, Strategy, Size
Individual Manager
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Labor Demand
! The marginal product of labor is the additional
output associated with the employment of one
additional human resource unit, with other
production factors held constant.
! The marginal revenue of labor is the additional
revenue generated when the firm employs one
additional unit of human resources, with other
production factors held constant.
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Supply and Demand at the Market and Individual
Employer Level
7 - 12
Market level
Employer level
$100,000 $100,000
Pay for business graduates
$50,000
Demand Demand
Supply Supply
Pay for business graduates
$50,000
Marginal Marginal revenue revenue
product product
Supply to
individual
employer
$25,000
$25,000
0 5 10 15 20 25
Number of business graduates available
Number of business graduates available
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7 - 13
Labor Demand Theories and Implications
Theory Prediction
So What?
Compensating
differentials
Efficiency wage
Signaling
Work with negative
characteristics requires higher
pay to attract workers.
Above-market wages will improve
efficiency by attracting workers
who will perform better and be
less willing to leave.
Pay policies signal the kinds of
behavior the employer seeks.
Job evaluation must collect
and compensable factors
most capture these negative
characteristics.
Staffing programs must have
the capability of selecting the
best employees. Work must
be structured to take
advantage of employees’
greater efforts.
Pay practices must recognize
these behaviors by better pay,
larger bonuses, and other
forms of compensation.
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Labor Supply Theories and Implications
7 - 14
Theory
Reservation wage
Human capital
Job competition
Prediction
Job seekers won’t accept jobs
whose pay is below a certain
wage, no matter how attractive
other job aspects.
The value of an individual’s skills
and abilities is a function of the
time and expense required to
acquire them.
Workers compete through
qualifications for jobs with
established wages.
So What?
Pay level will affect ability to
recruit.
Higher pay is required to
induce people to train for
more difficult jobs.
As hiring difficulties increase,
employers should expect to
spend more to train new hires.
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Competitive Pay Policy Alternatives
7 - 15
Pay with Competition
(Match)
Lead Policy
Lag Policy
Flexible Policies
Shared Choice
Employer of Choice
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Pay Mix Policy Alternatives
7 - 16
Performance - Driven
Market Match
Options
16%
Benefits
17%
Base 50%
Options 4%
Bonus 6%
Benefits
20%
Base 70%
Bonus
17%
Options
10%
Work - Life Balance
Benefits
30%
Bonus
10%
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Base 50%
Security (Commitment)
Benefits
20%
Base 80%
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Some Consequences of Pay Levels
7 - 17
Contain operating
expenses (labor costs)
Increase pool of
qualified applicants
Competitiveness of total
compensation
Increase quality and
experience
Reduce voluntary
turnover
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Reduce pay-related
work stoppages
Increase probability of
union-free status
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Summary
! There is no “going rate,” thus managers make conscious
pay level and mix decisions influenced by several
factors.
! There are both product market and labor market factors
that impact the pay level and mix decisions.
! Alternative pay level and mix decisions have different
consequences.
! Pay policies need to be designed to achieve specific pay
objectives.
! To achieve the objectives stipulated for the pay system,
both the pay level and mix must be properly positioned
relative to competitors.
7 - 18
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7 - 19
Review Questions
1. Distinguish policies on external competitiveness
from policies on internal alignment. Why is
external competitiveness so important?
2. What factors shape an organization’s external
competitiveness?
3. What does marginal revenue product have to do
with pay?
4. What pay level does the efficiency wage theory
predict? Does the theory accurately predict
organization behavior? Why or why not?
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7 - 20
Review Questions (continued)
5. What is a relevant market? What difference does it
make when determining people’s pay?
6. Can you think of any companies that follow a lag
and/or lead policy? Why do they believe it pays to
pay differently? Can you think of any companies
that follow performance-driven and/or work-life
balance policies?
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