Exam 2 Notes
Two-Tier Wages
-Big Three -Google -FedEx -Kohler -Equal pay for equal work?
Efficiency Wage
-attracts higher-quality applicants -lowers turnover -increases worker effort -reduces "shirking" -reduces the need for supervision According to efficiency-wage theory, high wages may increase efficiency and actually lower labor cost. The underlying assumption is that pay level determines effort
Competitiveness of total compensation
-contain operating expenses (labor costs) -increase pool of qualified applicants -increase quality and experience -reduce voluntary turnover -increase probability of union-free status -reduce pay-related work stoppages
Some Major Decisions in Pay-Level Determination
-specify pay-level policy -define purpose of survey -specify relevant market -design and conduct survey -interpret and apply result -design grades and ranges or bands
Relationships that form pay structure
-support the organization -support the work flow -motivate behavior toward organization objectives
Benefits of having a pay structure
-undertake training -increase experience -reduce turnover -facilitate career progression -facilitate performance -reduce pay-related grievances -reduce pay-related work stoppages
Procedural Justice
-voice -correctability -consistency -bias suppression -representativeness -accuracy
Internal Pay structure defined
1. number of LEVELS of work 2. the pay DIFFERENTIALS between the levels 3. the CRITERIA or BASES used to determine those levels and differentials.
Major Decisions
1. specify the employer's competitive pay policy 2. define the purpose of the survey 3. select relevant market competitors 4. design the survey 5. interpret survey results and construct the market line 6. construct a pay policy line that reflects external pay policy 7. balance competitiveness with internal alignment through the use of ranges, flat rates, and/or bands. These are the major decisions in setting externally competitive pay and designing the corresponding pay structures.
Purpose of a Survey
1. to adjust the pay level in response to changing rates paid by competitors 2. to set the mix of pay forms relative to that paid by competitors 3. to establish or price a pay structure 4. to analyze pay-related problems 5. to estimate the labor costs of product/service market competitors
Deunionization
13-20% for women and 33-37% for men Unions help raise women's wage by 6%
Relevant Markets
3 Rights: What is the RIGHT PAY to get the RIGHT PEOPLE to do the RIGHT THINGS Managers define relevant markets by: -occupation (KSAs, importance to org) -geography (relocation, commute, telecommute, housing cost) -competitors (other employers in the same industry + labor markets) Data from PRODUCT MARKET competitors receives more weight when: -employee skills are specific to product market: Barbers and stylists -labor costs are a large share of total costs -product demand is responsive to price change (consumers won't pay high price for mediocre product) -labor supply is unresponsive to pay changes
Grades and Ranges (Pay Range)
A Pay Range: exists whenever two or more rates are paid to employees in the same job. provides managers with the opportunity to: -recognize individual performance differences with pay -meet employees' expectations that their pay will increase over time, even in the same job -encourage employees to remain with the organization
Skill-Based Pay
A compensation system that rewards employees with additional pay in exchange for formal certification of the employee's mastery of skills, knowledge, and/or competencies. Most widely-implemented, poorly understood and under-researchable HR practices in use today.
Survey Definition
A survey is the systematic process of collecting and making judgements about the compensation paid by other employers. ...surveys provide the data for translating that policy into pay levels, pay mix, and structures. ...translating an external pay policy into practice requires information on the external market.
Additional Factors in Human Capital Impacting Labor Supply
Additional factors affecting labor supply: -geographic barriers -union requirements (entry barriers) -lack of information about job opening -the degree of risk involved (upfront investment in tools, education, etc.) -unemployment rate -nonmonetary aspects of the job (length of study, prestige, work-life, EX: dermatologists)
Purpose of a Survey
Adjust pay level -how much to pay? -the overall movement of pay rate caused by competition for people in the market Adjust pay mix -what forms? -base, bonus, stock, and benefits Adjust pay structure -validate job evaluation results -establish internal structures Study special situations -specify pay-related problems Estimate competitors' labor costs -competitive intelligence -employment cost index (ECI) ---measures quarterly changes in employer costs for compensation
Which big firm is showing a union drive?
Amazon
What Shapes Internal Structures? Organization Factors
An effective organization strategy may require an aligned, yet adaptable, structure. Human capital is: -the education, experience, knowledge, abilities, and skills required for the job -a major influence on internal structures -the greater the added value, the higher the pay -human as "capital" - critique -re-presentation -> intervention
Line of Sight Definition
An employee's ability to see how individual performance affects incentive payout. Employees on a straight piecework pay system have a clear line of sight - their pay is a direct function of the number of units they produce; employees covered by profit sharing have a fuzzier line of sight - their payouts are a function of many forces, only one of which is individual performance. employees should be able to "see" the links between their work, the work of others, and the organization's objectives the structure ought to be fair to employees
Standard Deviation Example
An increase of 1 SD is the size of pay differentials was associated with 2% to 6% lower average tenure among executives
Structures Vary Among Organizations
An internal pay structure can be defined by: 1. the number of LEVELS of work 2. the pay DIFFERENTIALS between the levels 3. the CRITERIA used to determine those levels and differentials.
Efficiency Wage
An org's ABILITY TO PAY means firms with greater profits than competitors can share this success with employees by paring above-market wages and/or varying bonuses = RENT SHARING Rent sharing: sharing of profits with employees after accounting for all costs of production. (net profit) Economic Rent: profits received from activities that are IN EXCESS OF THE MINIMUM needed to attract people to those activities
Relevant Labor Markets by Geographic and Employee Groups
As the importance and complexity of the qualifications increase, the geographic limits also increase
Advantages and Disadvantages of Measures of Compensation
Base Pay: -tells how competitors are valuing the work in similar jobs -fails to include performance incentives and other forms, so will not give true picture if competitors offer low base but high incentives Total cash (base + bonus): -tells how competitors are valuing work; also tells the cash pay for performance opportunity in the job -all employees may not receive incentives, so it may overstate the competitors' pay; plus, it does not include long-term incentives Total compensation (base + bonus + stock options + stock awards + benefits): -tells the total value competitors place on this work -all employees may not receive all the forms. Be careful; don't set base equal to competitors' total compensation. risks high fixed costs.
Shared Choice
Begins with generic choices of lead, meet or lag Offers employees choices in the may mix (single/family, growth/value portfolio, cash/options)
Which jobs to include?
Benchmark-Job Approach: -benchmark jobs have stable job content, are common, and include sizable numbers of employees Low-high approach: -wages of lowest- and highest-paid benchmark jobs used as anchors for skill-based structures Benchmark conversion/survey leveling: -differences are quantified when job content does not sufficiently match survey jobs
Broad Banding
Branding takes two steps: -set the number of bands -price the bands (reference market rates) Flexibility and Control: -career moves within bands are more common than between bands -take advantage of the flexibility without increasing labor costs or opening the organization up for illegal practices (personal attributes, not job).
Market Pricing
Business strategy: Pay structure aligned with competitors -unique or difficult-to-imitate aspects of the pay structure are deemphasized -fairness is presumed to be reflected by market Orgs may choose to differentiate their pay strategy Balancing internal and external pressures is a matter of judgement.
Occupational Equity
Compared with others doing my job in other companies in the area with similar education, seniority, and effort, I earn about:
Job Equity
Compared with others doing the same job as me in my org with similar education, seniority, and effort, I ear about:
Company Equity
Compared with others in my org on other jobs doing work that is similar in responsibility, skill, effort, education, and working conditions required, I earn about:
Educational Equity
Compared with people I know with similar education and responsibilities as me, I earn about:
Age Equity:
Compared with those of my age: I earn about:
Competency-based pay system
Compensation approach that links pay tot he depth and scope of competencies that are relevant to doing the work. Typically used in managerial and professional work where what is accomplished may be difficult in identify.
Consequences of Pay-Level and -Mix Decisions: Guidance from the Research
Compliance: -Employers must pay at or above the legal minimum wage. -Prevailing wage laws and equal rights legislation must be met. -Caution must be exercised when sharing salary information to avoid antitrust violations. (INTC, AAPL, GOOG, ADBE)
Globalization of Relevant Labor Markets: Offshoring + Outsourcing
Consider these factors when deciding job locations: -assure labor savings are not neutralized by lower productivity -devote resources to monitor output + distance -consider customers' reactions -how long will the labor cost advantage last?
Criteria: Content and Value
Content: Work performed in a job and how it gets done (UPS driver: location to location based on precise route documented, cannot change route.) Value: The worth of the work (Worth of UPS driver to UPS/customers waiting for delivery: how time sensitive) A structure based on CONTENT ranks jobs based on skills required, complexity of tasks, problem solving, and/or responsibility. A structure based on VALUE focuses on the relative contribution of the skills, tasks, and responsibilities (work flow).
Competitive Pay Policy Alternatives
Conventional pay-level policies are to: -lead, meet, or follow competition -Newer policies emphasize flexibility. -What difference does the pay-level policy make? ◦The basic premise is it affects performance.
Institutional Theory
Copy others and conform - firms and individual managers feel the pressure to conform because it's easier to confront than to craft and rationalize your own solution. -orgs use "best practices -what aligns with the strategy of one org may not align with that of another
Employer of Choice
Corresponds to the brand the company projects as an employer
Sorting and Signaling
Designing pay levels and mix as a strategy that signals to employees what the employers prefers Employers signals include pay level and mix, famous clients, challenging assignments, org culture, etc. Employees signals include better training, education, GPA, coursework, certifications, and work experience
Efficiency Wage
Do above-market wages allow and org to operate with fewer supervisors? -some researchers say yes -hospitals that paid higher wages to staff nurses employed fewer supervisors -researchers don't know: (1) higher wages attracted more qualified nurses or (2) caused average nurses to work harder. -researchers also don't know if hospitals were able to reduce overall nursing cost
What Shapes Internal Structures: External Factors
Economic Pressures: -Marginal Productivity says that employers pay use value -Unless an employee can produce a value equal to the value received in wages, it will not be worthwhile to hire that employee. -CRNA vs. Anesthesiologist -Supply and demand for both labor and products or services affect internal pay structures Gov Policies, Laws, and Regulations: -The Equal Pay Act and the Civil Rights Act require "equal pay for equal work." -Legislation aims at differentials with the "living wage." Stakeholders: -Unions, stockholders, and political groups have a stake in pay structure -Unions seek smaller pay differences and seniority based promotions -A main focus is on the pay differences between executives and others. Cultures and Customs: -Cultural factors play a role in shaping pay structures -Shared mindsets may judge what size pay differential is fair
Labor Market Factors
Economists label two market types: 1.The quoted price. ◦Example - stores that label each item's price or ads that list jobs' starting wages. 2.The bourse. ◦Example - stores that allow haggling until an agreement is reached, eBay is an example. In both market types, employers are buyers and potential employees are sellers.
Efficiency Wage
Efficiency increase by hiring better employees or by motivating present employees to work smarter or harder Assumption here is that pay level determines effort Insufficient data to show whether firms choose only superior applicant within the applicant pool Research shows that higher wages do in fact attract higher quality applicants However, above-market wage also attracts more unqualified applicants This, above-market wage does not guarantee a more productive workforce EXAMPLE: One outstanding employee gets more done and costs less that two employees" -Netflix -For that reason, Netflix strives to pay its employees top-of-market salaries. This is true assuming that Netflix is able to.........
Consequences of Pay-Level and -Mix Decisions: Guidance from the Research
Efficiency: -No research suggests which pay mix is best for which situation. -We don't know what % pay-level variation makes a difference to 'ees. -Pay level may not gain any competitive advantage. -Wrong pay level may be a serious disadvantage.
Different Policies for Different Employee Groups
Employers may vary policy for: -different occupational families, -different pay mix policies (Exhibits 7.4 + 7.16) -different business units. Pay mix strategies may be: (Exhibit 7.16) -performance driven, -market match, -work/life balance, and -security. -national culture / local norms: housing, food, etc.
Grades and Ranges
Establish range midpoints, minimums, and maximums: size of the range is based on judgement about how the ranges support: -career paths -promotions -other organization systems
What Shapes Internal Structures
External Factors: -economic pressures -gov. policies, laws, and regulations -stakeholders -cultures and customs Organizational Factors: -strategy -technology -human capital -HR policy -employee acceptance -cost implications Internal Structure: -levels -differentials -criteria
Competitive Strategy: External Competitiveness
External competitiveness is expressed by: 1. setting a pay level that is above, below, or equal to the of competitors 2. determining the pay mix relative to those of competitors Pay level and pay mix decisions focus on two objectives: 1. control costs and increase revenues 2. attract and retain employees
Consequences of Pay-Level and -Mix Decisions: Guidance from the Research
Fairness: -Satisfaction with pay is directly related to pay level. -A sense of fairness is related to how others are paid.
How Labor Markets Work
Four basic assumptions: 1. employers always seek to maximize profits 2. people are homogenous and therefore interchangeable = fungible 3. pay rates reflect all costs associated with employment 4. markets faced by employers are competitive, so there is no advantage for a single employer to pa above or below the market rate.
Grades and Ranges
Grades and ranges offer flexibility to: deal with pressures form external markets differences among firms regarding: -quality of individuals applying for work -productivity or value of these quality variations -the mix of pay forms competitors use
Grades and Ranges
Group jobs into grades: these are difference jobs but considered equal for pay purposes all jobs within a single grade will have the same pay range grades permit flexibility but are challenging to design
Compensating Differentials
If a job has negative characteristics, then employers must offer higher wages. Negative characteristics: -very expensive education: med/law -job security: stockbrokers, CEO -Working conditions: highway construction -success probability: pro sports Such compensating differentials explains the presence of various pay rates in the market -notion is appealing, but hard to document
Consequences of Structures
Importance of internal alignment: Efficiency: -aligned structures lead to better performance -pay structures imply future returns Fairness: -proponents say fair differentials motivate -others say only small differentials incite cooperation Compliance: -regulations
Marginal productivity definition
In contrast to Marxist "surplus value" theory, a theory that focuses on labor demand rather than supply and argues that employers will pay a wage to a unit of labor that equals that unit's use (not exchange) value. That is, work is compensated in proportion to its contribution to the organization's production objectives. employers do in fact pay use value
Organization Factors
Industry and technology: -labor intense industries (education, health care) pay lower than technology intense industries (petroleum, pharmaceuticals). -professional services (law, medicine, consulting) pay high -new technology influences pay level -machinists building trains vs airplanes Employer size: -large firms pay more than small firms -talented individuals have a higher marginal value in a large firm b/c they can influence more people and decision = more profits Employees' preferences for total compensation differs widely -yet an accurate gauge is crucial to determining external competitiveness.
Compensable factors
Job attributes that provide the basis for evaluating the relative worth of jobs inside an organization. A compensable factor must be work-related, business-related, and acceptable to the parties involved. Compensable factors are based on the strategic direction of the business and how they work contributes to these objectives and strategy. The factors are scaled to reflect the degree to which they are present in each job and weighted to reflect their overall importance to the org.
Adjusting the Pay Structure
Job structure: -orders jobs on the basis of internal factors (reflected in job evaluation or skill certification) Pay structure: -is anchored by the org's external competitive position and reflected in its pay-policy line.
Job- and Person-Based Structures
Job-based structure: relies on the work content - tasks, behaviors, responsibilities. Person-based structure: shifts the focus to the employee - the knowledge, skills, and abilities the employee possesses and if they are used in the job.
Entry Jobs Definition
Jobs that are filled from the external labor market and whose pay tends to reflect external economic factors rather than an organization's culture and traditions.
Surplus Value Definition
Karl Marx the difference between labor's use and exchange values. According to Marx, under capitalism wages are based on labor's exchange value - which is lower than its use value - and thus provide only a subsistence wage. he waged workers to overthrow capitalistic systems to become owners themselves and reap the full use value of their labor
Egalitarian
Levels: fewer Differentials: small Criteria: person or job Supports: loose fit Work Org: teams Fairness: equal treatment Behaviors: cooperation Egalitarian structures have fewer levels and/or smaller differentials between adjacent levels and between the highest- and lowest-paid workers. In the delayered structure, several levels of job titles are removed so that all employees at all levels become responsible for a broader range of tasks but also have greater freedom (with less close supervision) to determine how best to accomplish what is expected of them. Sends the message that all employees are valued equally.
Hierarchial
Levels: many Differentials: large Criteria: person or job Supports: close fit Work Org: individual performers Fairness: performance Behaviors: opportunities for promotion
Benchmarks
Managerial Group: -vice presidents -division general managers -managers -project leaders -supervisors Technical Group: -head/chief scientist -senior associate scientist -associate scientist -scientist -technician Manufacturing Group: -assembler 1, inspector 1 -packer material handler inspector -assembler -drill press operator rough grinder -machinist coremaker Administrative Group: -administrative assistant -principle administrative secretary -administrative secretary -work processor -clerk/messenger *the more heavily shaded jobs in the structures are benchmark jobs.
Marginal Revenue
Managers using the marginal revenue product model must do two things: 1. determine the pay level set by market forces 2. determine the marginal revenue generated by each new hire The model provides an analytical framework, but it oversimplifies
Marginal Revenue
Marginal revenue is the money generated by the sale of the marginal product Employers seek to maximize profits -employer will continue to hire until the marginal revenue generated by the last hire is equal to the costs associated with employing that person. -so, the employer will hire until the marginal revenue equals the costs associated with the most recent hire.
Lead Pay-Level Policy
Maximizes the ability to attract and retain quality employees, and -minimizes dissatisfaction with pay. -It may offset less attractive job features. Linked to reduced turnover, quit rates and absenteeism. Negative effects include the need to increase current employees wages and it may mask negative job attributes.
Differentiation
Merit pay is tough. Making it requires three things: 1. the ability to differentiate people based on their performance 2. the willingness to reward them accordingly 3. a commitment to balancing the long-term interests of the larger group with the short-term interests of an individual. The ability and willingness to differentiate employees by their individual performance Requires a performance-assessment process or tool. The biggest obstacle to true performance differentiation is not the ability to recognize performance differences, but rather the willingness to do so.
Pay levels
Most organizations tie money to promotions in order to induce employees to apply for higher-level positions. If an organization has more level, it can offer more promotions, but there may be smaller pay differences between levels. It is a belief that more frequent promotions (even without significant pay increases) offer a sense of "career progress" to employees.
Breadth-Oriented Base Pay Systems
Most recognized as "skill-based pay". The goals are to reward an appropriate balance between employee flexibility through skill breadth (the ability to do different jobs in the organization); skill depth; and self‐management skills (such as training, hiring and performance appraisal) that are critical in systems with few or no supervisors. This type of system is most common in manufacturing.
Internal Alighnment
Often called INTERNAL EQUITY, refers to the pay relationships among different jobs/skills/competencies within a single organization.
A Different View: What Managers Say
One manager was incredulous at the suggestion that high unemployment should lead to cutting salaries. Profitability is considered when setting budget for total compensation but not in cases of individual pay adjustments. In direct contradiction to efficient wage theory, managers believed that recruiting and retention problems were the result of poor management, not low compensation -"supervisors try to solve with money their difficulties with managing people", dig themselves into an a hole
What Shapes Internal Structures? Organizational Factors
Organization Work Design: The ability to produce the goods and services influences and is influenced by: -the ORGANIZATINAL DESIGN, the WORK ITSELF, and the SKILLS/KNOWLEDGE required to perform the work. The design of the organizations is changing (internal and external factors) -The software engineers supplied by an outsourcing specialists are paid based on the internal structure of their home employer (outsourcing specialist), not their current location. -DELAYERNG may cut an entire level of work. --Delayering cuts "unnecessary, noncontributing" work and changes remaining jobs' structure and value.
Organization Factors
Organization strategy -low-wage, no-service strategy (lowest wage possible, Nike) -low-wage, high-services strategy (lowest wage, Marriott employee support hotlines) -High-wage, high services strategy (Medtronic's "fully present at work" approach, Exhibit 2.7). ◦Jobs that impact the org's success receive the best total compensation. -onsite everything -Higher wages must result in higher productivity, quality, and/or innovation if firm is to succeed.
Work Flows to the People On-site, Off-site, Offshore
Orgs can source employees from on-site, off-site, or offshore. Which source depends on: -customer preferences, time schedules, and the nature of the work Three points to remember: ◦Reality is complex and theories are general. ◦Segmented sources of labor -> pay levels + pay mix determination requires understanding of market conditions in WW locations. ◦Managers must understand jobs + tasks + skills + competencies + knowledge required to bundle tasks to send to different locations.
Equity Theory
Outcome: -pay -benefits -status symbols -satisfying supervision -workplace perks -intrinsic rewards Inputs: -effort -performance -skills and abilities -education -experience/seniority -training
What Shapes Internal Structures? Organizational Factors
Overall HR policies may influence design. -are promotions important for "career progress"? Internal labor market refer to the rules and procedures that: 1. Determine the pay for the different jobs within a single organization 2. Allocate employees among those different jobs. A key factor of an internal pay structure is its acceptability by the employees involved. Two sources of fairness are important: -PROCEDURAL JUSTICE refers to the process by which a decision was reached (org politics) -DISTRIBUTIVE JUSTICE refers to the fairness of the decision (favoritism) an important internal pay structure factor is its ACCEPTABILITY TO THE EMPLOYEES INVOLVED.
Grades and Ranges (overlap)
Overlap: Promotion increases matter: -the size of differentials between grades should support career movement through the structure -overlap ought to be large enough to induce employees to seek promotions -not all employers use grades and ranges --skill-based plans establish a single flat rate for each skill level, regardless of performance or seniority
Labor Supply - Assumptions
Oversimplified assumptions about the behavior of potential employees: -many people are seeking jobs. -they possess accurate information about all job openings -there are no barriers to mobility (discrimination, license, union membership, family ties, etc.) -as pay increases, more people are willing to take a job. but not if unemployment rates are low -if firms lower job requirements, training costs go up
Outsourcing Pay
Pay for outsourced employers is based on the internal structure of their home employer, rather than of the workplace at which they are currently located.
Levels and reporting relationships
Pay structure is hierarchical in nature
Lag Pay-Level Policy
Paying below market rates may not attract employees unless coupled with higher future returns (a startup offering stock options). Lag in base pay but lead in other elements. The combination may: -increase employee commitment, and -foster teamwork, -which may increase productivity.
Equity Theory: Fairness
People compare the ration of their own outcomes to inputs with that of others. Employees judge fairness by comparing: -to jobs similar to their own -their job to others at the same employer -their pay against external pay levels Motivation/Fairness is matched when an employee's ratio of "outcomes" to "inputs" matches those of some "comparison other." Motivation/Fairness also depends on the outcomes received by other employees Employees create a mental ledger of the inputs they put into their job duties and behave according to the comparison outcome.
Theory: efficiency wage
Prediction: Above market wage/pay level will improve efficiency by attracting higher ability workers and discouraging shirking due to risk of losing high wage job. A high wage policy may substitute for intense monitoring. So What?: The payoff to a higher wage depends on the employee selection system's ability to validly identify the best workers. An efficient wage policy may require the use of fewer supervisors.
Human Capital Theory
Prediction: General and specific skills require an investment in human capital. Firms will invest in firm-specific skills, but not general skills. Workers must pay for investment in general skills. So What?: Skill/ability requires investment by workers and firms. There must be a sufficient return (ex: pay level) on investment for the investment to take place. Workers, for example, must see a payoff to training. ROI Jobs that require long and expensive training (physicians, engineers, lawyers) should receive higher pay than jobs that require less investment (K-12 teachers).
Theory: Job Competition
Prediction: Job requirements may be fixed. Workers compete for jobs based on qualification and now how low of a wage they are willing to accept. Thus wages are sticky downward. So What? s hiring difficulties increase, employers should expect to spend more money to 1. train new hires 2. increase compensation 3. search/recruit more
Reservation Wage Theory
Prediction: Job seekers won't accept jobs if pay is below a certain wage, no matter how attractive other job aspects. So What?: Pay level will affect ability to recruit. Pay must meet some minimum level.
Theory: Sorting and Signaling
Prediction: Pay policies signal to applicants the attributes that fit the organization. Applicants may signal their attributes by investments they have made in themselves So What?: How much, but also how (pay mix and emphasis on performance) will influence attraction-selection-attrition and resulting work force composition.
Theory: compensating differentials
Prediction: Work with negative characteristics requires higher pay to attract/retain workers So What?: Job evaluation and compensable factors must capture these negative characteristics.
Product Market Factors and Ability to Pay
Product market conditions determine what an org can afford to pay. Two key product market factors are: 1. product demand: caps maximum pay level 2. degree of competition: highly competitive markets are less able to raise prices. Other factors include productivity of labor, the technology employed, and the level of production relative to capacity.
Contrasts between Ranges and Bands
Ranges Support: -Some flexibility within controls -Relatively stable organization design -Recognition via titles or career progression -Midpoint controls, comparatives -Controls designed into system -Give managers "freedom with guidelines" -To 150 percent range-spread Bands Support: -Emphasis on flexibility within guidelines -Global organizations -Cross-functional experience and lateral progression -Reference market rates, shadow ranges -Controls in budget, few in system -Give managers "freedom to manage" pay 100-400 percent spread ***perhaps the most important difference is in the location of controls. bias. favoritism
Adjusting the Pay Structure
Reconciling differences: May entail a review of: -job analysis -evaluation of the job -market data Differences may arise due to shortage of a particular skills, driving up market rate
Pay Structure
Refers to the array of pay rates for different work or skills within a single organization. The NUMBER of levels, the DIFFERENTIALS in pay between the levels, and the CRITERIA used to determine those differences describe the structure.
Select Relevant Market Competitors
Relevant labor markets include employers who compete in one or more areas: -the same occupations or skills -employees within the same geographic area -the same products and services Fuzzy Markets: -new orgs and unique jobs may fuse diverse factors making relevant markets fuzzy -place more emphasis on external market data
What Shapes Internal Structures? Organizational Factors
Research suggests pay procedures are more likely to be perceived as fair if: 1. They are consistently applied 2. Employees participated in the process 3. Appeals procedures are included 4. The data used are accurate Pay structures change in response to external factors such as skill shortage or emergency or macro factors (TSA)
Depth-Oriented Base Pay Systems
Reward employees for gaining greater expertise on existing skills. In these systems, employees build skills for years, receiving only one or two promotions during their career. Disadvantage: create overly-specialized employees who identify more with their craft or profession than with the mission of the org.
Employer of Choice/Shared Choice
Risks include employees making the "wrong" choices and offering too many choices causes confusion, mistakes, and dissatisfaction
Effiency Wage
Shirking: -working less when there is no chance of earning a higher return -employees who are paid poorly may shirk their responsibilities since there is no incentive rewarding hard work -efficency wage theory predicts that high wages -> high effort -> less shirking when -unemployment rate is high (harder to find another job quickly) -> employees will appreciate having the jobs that they have and will work hard to keep these jobs
Market Pricing
Some orgs use market pricing: which emphasize external competitiveness and deemphasize internal alignment -sets pay structures almost exclusively on external market rates the objective is to: -base most of the internal pay structure on external rates -break down the boundaries between the internal organization and the external market forces
Compensation Strategy: Internal Alighment
Supports organization strategy Supports work flow -Work flow: is the process by which goods and services are delivered to the customer. Motivates behavior -"Line-of-sight" -Employees should be able to see the links between their work, the work of others, and the org's objectives. -Structure must be fair to employees.
Strategic Choices in Designing Internal Structures
Tailored (McD/Walmart) -adapted by organizations with a low-cost, customer-focused strategy. -has well-designed jobs with detailed steps or tasks timed and mapped. -very small pay differentials among jobs. Loosely Coupled (Apple) -requires constant innovation -pay structures are more loosely linked to provide flexibility. Egalitarian (SAS) -all employees are equally valued -advantages: fewer levels and smaller differentials -disadvantages: equal treatment can mean more knowledgeable employees feel underpaid Hierarchical (Microsoft) -values the differences in work content, skills, and contribution. -includes detailed descriptions of work done at each level - to document and to rationalize pay differentials.
Pay structure definition
The array of pay rates for different jobs within a single organization; they focus attention on differential compensation paid for work of unequal worth. The NUMBER OF LEVELS, the DIFFERENTIALS in pay between the levels, and the CRITERIA used to determine those differences describe the structure.
Labor Supply - Assumptions
The assumptions about the behavior of potential employees are oversimplified. ◦Even in piece rate settings, it's hard to separate individual contribution from those of other resources (machines, materials, consumer behavior, brand reputation, etc). ◦Thus, neither the marginal product nor the marginal revenue is directly measurable. ◦Next best thing = What orgs value = Compensable factors (skills, problem solving req', responsibilities). ◦Job evaluation = proxy for MARGINAL REVENUE PRODUCT.
Pay Level
The average of the array of rates paid by an employer *equation
Design the Survey: Who should be involved?
The compensation manager is responsible for the survey Outside consulting firms protect against lawsuits -may be guilty of price fixing if the overall effect of the info exchanged is to interfere with competitive prices and artificially hold down wages
Bonus Systems
The goal of the system is to manage attraction and retention in particular occupational specialties.
Tournament Theory
The greater the differential between your and your boss's salary; the harder you work. The notion that larger differences in pay are more motivating than smaller differences. Like prize awards in a gold tournament, pay increases should get successively greater as one moves up the job hierarchy. Differences between the top job and the second-highest job should be the largest. PAY DISPERSION: which is also referred to as spread, range, variation, and inequality, is defined generally as differences in pay levels between individuals within and across jobs or org levels.
Pay with Competition (Match)
The most common policy is to match rates paid by competitors -least risky choice, importance of market data A pay-with-competition policy tries to: -match wage costs to product competitors, and -attract applicants equal to the labor market competitors -avoid unions
Differentials
The pay differences amount levels are DIFFERENTIALS Higher pay is usually due to work: -requires more KSAs -performed in unpleasant work conditions (hazardous pay) -work that adds more value to the company (work flow)
External Competitiveness
The pay relationships among organizations - the org's pay relative to its competitors
Work Flow Definition
The process by which goods and services are delivered to the customer.
Pay Mix
The various types of payments, or pay forms, that make up total compensation.
Attract and Retain the Right Employees
There is no "going rate" in the labor market for a specific job. A single org my have different pay levels for different job families. How a company compares to the market depends on: -what competitors it chooses to compare itself to -what pay forms are included
Distributive Justice
Three types: Equity Norms -more outcomes allocated to those who contribute more inputs -goal is to maximize the productivity of individual employees Equality Norms -every team member receives the same amount of rewards to encourage teamwork. Need -(ex:) on election day, providing free transportation to voters who don't have cars
External Stakeholders (internal pay structures)
Unions Stockholders Political groups
Use Value and Exchange Value
Use Value: The value of goods/services an employee produces in a job. Exchange Value: The wage agreed upon by the employer and employee. (What is being changed is time and work between employer and employee)
Design the Survey
What information to collect? organization data includes: -financial data and reporting relationships -turnover and revenues total compensation data includes: -base pay -total cash -total compensation
Marginal product of labor
additional output associated with the employment of one additional person, with other production factors held constant (assumption)
From Grades to Bands
broad banding collapses salary grades into only a few broad bands, each with a sizable range
Lockheed
decided that six levels of engineering work would support the company's strategy of researching, designing, and developing advanced technology systems.
Marginal Product
diminishing marginal productivity means -each additional employee has a progressively smaller share of production factors --held constant-- to work with. example: numbers of cars on lot, pounds of flour, number and name of potential clients, and hours of clerical support -until these factors change, each new hire produces less than the previous hire. -the additional output each hire produces is the MARGINAL PRODUCT
minimums and maximums
minimums: minimum wage legislation maximums: special reporting requirements for executive pay
How many employers?
no firm rules on how many to include publicly available data - Bureau of Labor Statistics (BLS) online salary information - highly suspect many surveys but few are validated
Dodd-Frank law
now requires public US companies to report ratio of CEO pay to that of entry-level employees.
Internal Alignment Definition
often called internal equity, refers to the pay relationships among different jobs/skills/competencies within a single organization.
Differentials definition
pay differences among levels within the organization, such as the difference in pay between adjacent levels in a career path, between supervisors and subordinates, between union and nonunion employees, and between executives and regular employees
Institutional theory
sees firms as responding/conforming to normative pressures in their environments so as to gain legitimacy and to reduce risk.
Marginal revenue of labor
the additional revenue generated by the sale of the marginal product or when the firm employs one additional person, with other production factors help constant (assumption)
Modifications to the Demand Side
when focus changes from all the employers to a single employer, economic theories must be revised frequently to account for reality.
Apple Stores
◦Avg. store 'ee annual revenue: $420,000. ◦Avg. store 'ee pay: $28,276 to $58,481 ◦Revenue per square foot: $5,500 --> ranked #1 among 250 retail firms, including Coach, Tiffany, & Michael Kors. ◦2015: AAPL store can generate 1/3 of an entire mall's sales -->rent is only 2% of sales per sq. ft. vs. 15% for other tenants.
Summary Chapter 7
◦External competitiveness = pay level + pay mix -> profound consequences on the org's objectives. ◦There is no "going rate" for each job so mgrs must make pay level and pay mix decisions using several factors. ◦Product mkt and Labor mkt competitors impact pay level and pay mix decisions. ◦Alternative pay level and pay mix decisions have different consequences.
Offshoring + Outsourcing Examples
◦IBM programmers: $56 v. $12.50. ◦Lawyers: $200 v. $75 to $100. ◦Wall St. processing of transactions, research analysts. ◦IP theft. ◦Product quality and reputation. ◦AAPL realized substantial labor cost savings -> high margin -> high market cap -> high compensation for whom?
Efficiency Wage Example
◦If an 'ee is paid $5,000 per week but would be willing to work for only $1,000, that 'ee's economic rent is $4,000 per week. ◦Pay levels at more profitable firms were about 15% greater than at firms with lower profits. ◦Rent sharing = sharing of profits with 'ees after accounting for all costs of production.
Apple (U.S. retail specialist)
◦Key Qualifications / Compensable factors? ◦Strong interest in technology, particularly Apple products, and agility at learning new products and features. ◦Ability to deliver great customer experiences in any environment and to be invigorated by constant personal interaction. ◦Strong communication skills that let you converse as freely and comfortably with small groups as with individual customers.
Control Costs and Increase Revenues
◦Labor costs = (pay level) X (# of employees) ◦As pay level increases, labor costs increase. ◦Not all orgs pay the same rate. ◦The pay strategy should translate into revenues exceeding the cost of the strategy.