ch. 7 compensation defining competitiveness

(II.)FACTORS INFLUENCING EXTERNAL COMPETITIVENESS (See T. Ex. 7.5 p. 215)

(A. )Labor Market Factors - Supply, Demand (B.) Product Market Factors - Product demand, Degree of Competition (C.) Organizational Factors - Industry, Technology, Size, Ability to Pay, Culture, Individual Manager

EXTERNAL COMPETITIVENESS: what falls under External Competitiveness?

(A.) External Competitiveness (B.) Pay Level (C.) Pay Level Policy (D.) Objectives

EXTERNAL COMPETITIVENESS : (D) Objectives

1. Attract and retain the right employees a. Exceptional, average, marginal? 2. Cost containment a. Labor Costs = pay level * number of employees

VI CONSEQUENCES OF PAY-LEVEL DECISIONS (T. Ex. 7.19, p. 240) A. Efficiency 2. Potential consequences a. b. c. d. Reduce voluntary turnover e. Increase probability of union free workforce f. Reduce pay related stoppages B. Equity - C. Compliance D. Opportunity for a competitive advantage

1. Discussion assumes that managers really investigate the implications of the decision. 2. B. Fewer complaints? C. 1. No legal requirement except consistency 2. a. Contain operating costs b. Increase pool of qualified applicants c. Increase quality and experience

(E.) Labor Capacity Theory

1. Employee differ in terms of productivity 2. Supports motivational theories

IV. MODIFICATIONS TO THE DEMAND SIDE C. Fair Wage Model

1. Higher profits demand higher wages 2. Provides the logic for profit sharing plans

E. Accuracy of Assumptions 1. _____ assumptions create need for other theories to explain the ___ 2. Create variances around the equilibrium point - 3. Create opportunities for a competitive advantage through better ____ _____. a. Managers don't know marginal revenue of labor or marginal product of labor. b. Managers do not understand model c. Non-economic decision making

1. Inaccurate; differences 2. Wage Contour 3. decision making

V. MODIFICATIONS TO SUPPLY SIDE (T. Ex. 7.9, p. 222) A. Reservation Wage C. Labor Scarcity 1. Characteristics that limit the supply of workers raise wages a. Monopsony b. Risk c. Ignorance d. Non-economic Preferences e. Geographic f. Unionization 2. Implications a. Location of new operations b. Advertising process c. Relocation programs D. Job Competition Model 1. Assumptions a. Workers have different characteristics (KSAs) b. Workers compete for jobs and training opportunities, not wages 2. Model a. Wage = Marginal Revenue of Labor - training cost 1. Applicant placed in queue based on education, experience, etc. 2. Top of queue demands higher wages and requires less training

1. There is a minimum total compensation that must be paid for each job, including benefit levels. 2. The lowest wage that an employee will accept, excluding benefits.

III. LABOR MARKET FACTORS

A. Classical Economics B. Labor Demand D. Labor Supply E. Accuracy of Assumptions

EXTERNAL COMPETITIVENESS : A. External Competitiveness - 1. Does not require an organization to

EXTERNAL COMPETITIVENESS A. External Competitiveness - Refers to the pay relationships among organizations, the organization's pay relative to its competition. 1. pay above average wages.

IV. MODIFICATIONS TO THE DEMAND SIDE B. Efficiency Wage Theory - 1. Attract ____ quality applicants 2. _______ turnover 3. ___ worker effort 4. _____ need for supervision 5. Reduce _____ 6. NOTE: Assumes fit with other __ _______ 7. Source of maintained ______ ______

Higher wages increase efficiency and lower labor costs; profit maximized by paying higher wages 1. higher 2.lower 3.increase 4.reduce 5.shirking 6.HR practices 7.Competitive advantage

II. FACTORS INFLUENCING EXTERNAL COMPETITIVENESS Organizational Factors -

Industry, Technology, Size, Ability to Pay, Culture, Individual Manager

B. Labor Demand 1. Marginal Revenue Theory 2. Model MRL = MPL x MR where: MRL = MPL = MR =

MRL = Marginal Revenue of Labor MPL = Marginal Product of Labor MR = Marginal Revenue

II. FACTORS INFLUENCING EXTERNAL COMPETITIVENESS Product Market Factors -

Product demand Degree of Competition

II. FACTORS INFLUENCING EXTERNAL COMPETITIVENESS Labor Market Factors-

Supply, Demand

b. Marginal Product of Labor:

The additional output associated with the employment of one additional person, with other production factors held constant. 1. Each additional employee hired will yield lower production.

a. Marginal Revenue of Labor:

The additional revenue generated when the firm employees one additional person, with other production factors held constant. 1. Each additional employee yields lower marginal revenue of labor.

c. Marginal Revenue:

The additional revenue, excluding wages, generated by the sale of an additional unit of production. 1. Each additional unit of production yields lower marginal revenue.

EXTERNAL COMPETITIVENESS : (C) Pay Level Policy -

The organizations stated or implied policy concerning the average pay compared to the marketplace. "I'm going to meet market" statement

g. Markets faced by employers are competitive, no advantage to pay above or below the market rate. 1. Supply curve for an individual employer is horizontal 2. Example:

a. An organization raises its wages in an attempt to attract more employees. The organization's competitors immediately raise their wages to the same level. b. Result: Higher wages needed to keep current employees, no change in employment levels for the organization.

B. Human Capital Theory 1. Activities that entail costs in current period and increase value require greater ROI. a. Present Value of a Decision - b. Private Rate of Return - c. Social Rate of Return -

a. Long term ROI in today's dollars b. Financial and non-financial returns to individual c. Return realized by society (higher taxes, greater increases for later generations)

A. Classical Economics 1. Basic Model a. Wages are set by the interaction of labor supply and demand (See T. Ex. 7.6 p. 216, 7.7 p. 217) 2. Assumptions a. Profit and Income ____ 1. Employers will continue to hire until marginal revenue of the last hire equals the market wage rate in order to maximize profits. b. Perfect _______ c. ______ and interchangeable workers and jobs d. ____ Buyers and Sellers 1. No Collusion 2. No Unions e. Free _____ 1. No Barriers, Free Mobility f. ____ ______ reflect all costs and returns in the employment relationship g. Markets faced by employers are ______, no advantage to pay ___ or ___ the market rate.

a. Maximizer b. information c. homogenous d. Multiple e. markets f. pay rates g. competitive ; above ; below

D. Job Competition Model 1. Assumptions 2. Model formula? 1. Applicant placed in queue based on 2. Top of queue demands higher wages and requires ___ ______

a. Workers have different characteristics (KSAs) b. Workers compete for jobs and training opportunities, not wages 2. Wage = Marginal Revenue of Labor - training cost 1. education, experience, etc. 2. less training

D. Labor Supply 1. Assumption: Increased wages = increased supply!!!!!!! a. Overall full employment (96% employed) - b. Full employment with barriers to entry (Nursing) -

a.Increased wages do not increase supply, only increased labor costs. b.Increased wages do not increase supply, only increase labor costs.

2. Determines maximum rate of pay a. Logic also applies to the ____ contribution to the organization. b. Logic for_____ employee pay at the top of a pay grade.

a.maximum b. freezing

IV. MODIFICATIONS TO THE DEMAND SIDE (See T. Ex. 7.8 p. 219) A. Compensating Differentials - Adam Smith 1. Consider the whole of the advantages and disadvantages of a particular job offer 2. Negative job characteristics require higher wages a. ____ and ____ to acquire skill b. Tenuous job _____ c. ____ working conditions d. ___ chance of success 3. Examples

a.time; expense b. security c.disagreeable d. low a. Mining to clerical, inside v. outside, shift differentials

2. Implications a. Increased education requires higher pay - only hire what you need b. Social return c. General v. Specific Training -

b.Decrease cost of college, enrollment should increase - c.Organizations should pay only for specific training unless used as a mechanism to retain or attract to a new job in the future.

C. Labor Scarcity 1. Characteristics that limit the supply of workers raise wages a. Monopsony b. Risk c. Ignorance d. e. f. 2. Implications a. Location of new operations b. c.

d. Non-economic Preferences e. Geographic f. Unionization a. Location of new operations b. Advertising process c. Relocation programs

2. The cost associated with acquiring job-related skills causes the labor supply curve to be?

inelastic

EXTERNAL COMPETITIVENESS : (b) Pay Level-

the employer's average total compensation compared to the marketplace 1. Includes all forms of compensation 2. Cost of all compensation/number of employees "current pay level is 10% behind its comparison"