Compensation Ch 7

3 conventional pay-level policies

(1) lead (2) meet (3) lag

if compensable factors define what organizations value, the job evaluation reflects the job's contribution and may be viewed as what

a proxy for marginal revenue product (proxy- a figure that can be used to represent the value of something in a calculation)

"So What?" of job competition theory

as hiring difficulties increase employers should expect to spend more to (a) train new hires (b) to increase compensation (c) search and recruit more

Two studies shed light on the issue of defining the relevant market. They conclude that managers look at what

both competitors (their products, location, and size) and the jobs (the skills and knowledge required and their importance to the organization's success)

Graduating students usually find themselves in what type of market

bourse

2 components of product market factors

degree of competition, level of product demand

the reservation wage theory seeks to explain what

differences in workers' responses to offers

Neither the marginal product nor the marginal revenue is what

directly measurable

Consequences of pay level and mix decisions

efficiency, fairness, and compliance

in both the bourse and the quoted market, who are the buyers and who are the sellers

employers are the buyers and the potential employees are the sellers

what is the problem of much of the pay-level research

it focuses on base pay and ignores other forms of compensation

Part of USAir's success in reducing labor costs is due to what

it going through bankruptcy and using that as an opportunity to reduce pay and benefits costs

the 'So What?' of compensating differentials theory

job evaluation and compensable factors must capture these negative characteristics

reservation wage theory prediction

job seekers won't accept jobs if pay is below a certain wage, no matter how attractive other job aspects (economists describe pay as "noncompensatory")

the amount each hire produces is what

marginal product

negative effects of a lead pay level policy

may force the employer to increase wages of current employees too (to avoid internal misalignment and murmuring), and may mask negative job attributes that contribute to high turnover later on

Managers must define and establish what

must define the markets that are relevant for pay purposes and establish the appropriate competitive positions in these markets

2 components of labor market factors

nature of demand, nature of supply

The pay model emphasizes strategic policy issues:

objectives, alignment, competitiveness, contributions, and management

If a job has negative characteristics (i.e. if the necessary training is very expensive, such as medical school, job security is tenuous, such as stockbrokers or CEOs, working conditions are disagreeable, such as highway construction, or changes of success are low, such as professional sports) then employers must do what

offer higher wages to compensate for these negative features

2 basic types of markets

quoted price bourse

Stores that label each item's price or ads that list a job opening's starting wage are examples of what

quoted price markets

besides furloughs, what is another common cut companies are doing

reducing contributions to 401k retirement plans imposing pay freezes

external competitiveness

refers to the pay relationships among organizations- the organization's pay relative to its competitors

Firms with greater profits than competitors are able to share this success (referring to ability to pay) with employees. This could be done via "leading" competitors' pay levels and/or via bonuses that vary with profitability. Academics see this as what

rent sharing

what is furloughs

requiring employees to take days off

Both characteristics of the applicants (degrees, grades, experience) and organization decisions about pay level (lead, match, lag) and mix (higher bonuses, benefit choices) act as what

signals that help communication

Both pay level and pay mix send a signal, which results in what

sorting effects (who joins and who stays with the organization) (demand side)

what make up a greater percent of total compensation in performance driven policies

stock ownership and incentives

what are major determinants of an employer's pay level

supply and demand for labor

signaling works on what side of the model

supply side (as suppliers of labor signal to potential employers)

research on efficiency wage shows what

that higher wages actually do attract more qualified applicants (but higher wages also attract more unqualified applicants)

the underlying assumption of efficiency wage is what

that pay level determines effort

pay level

the average of the array of rates paid by an employer

commonplace definition of economic rent

the income your landlord receives from your apartment

Organizations often claim to be "market-driven" which means what

they pay competitively with the market or even are market leaders

3 modifications to address the phenomenon of why an employer would pay more than what theory states is the market-determined rate (labor demand theories)

(1) compensating differentials (2) efficiency wage (3) signaling

"So What?" for human capital theory

Skill and ability requires investment by workers and firms. There must be a sufficient return (i.e. pay level) on investment for the investment to take place. (for example, workers must see a payoff to training)

compensating differentials

The difference in wages offered to offset the desirability or undesirability of a job

the theories of labor markets are oversimplified, but they provide what

a framework for understanding the labor market

what is a satisfier

a job seeker that takes the first job offer they get where the pay meets their reservation wage

karl marx referred to the unemployed as a what

a reserve army that employers can use to replace current workers

efficiency wage theory prediction

above market wage/pay level will improve efficiency by attracting higher ability workers (sorting effect from chapter 1) because of risk of losing high wage job. A high wage policy may substitute for intense monitoring (i.e. use of many supervisors)

Deamnd is the sum of what

all employers

shared choice

an external competitiveness policy that offers employees substantial choice among their pay forms

what explains the presence of various pay rates in the market

compensating differentials

an employer's pay level is constrained by its ability to do what

compete in the product/service market (so product market conditions to a large extent determine what the organization can afford to pay)

Factors that affect decisions on pay level and mix

competition in the labor market for people with various skills competition in the product and service markets, which affects the financial condition of the organization characteristics unique to each organization and its employees, such as its business strategy, technology, and the productivity and experience of its workforce

Our first labor market theory assumption is that employers seek to maximize profits. So, (when talking about marginal revenue) the employer will do what

continue to hire until the marginal revenue generated by the last hire is equal to the costs associated with employing that person (because other potential costs will not change in the short run, the level of demand that maximizes profits is that level at which the marginal revenue of the last hire is equal to the wage rate fro that hire)

off-site

contract employees from throughout the US

both pay level and pay mix decisions focus on what two objectives

control costs and increase revenues attract and retain employees

signaling theory hols that

employers deliberately design pay levels and mix as part of a strategy that signals to both prospective and current employees the the kinds of behaviors that are sought

a companies pay policy helps communicate what

expectations

pay level decisions have a significant impact on what

expenses

an efficiency wage policy may require the use of what

fewer supervisors

newer pay policies emphasize what

flexibility (among policies for different employee groups, among pay forms for individual employees, and among elements of the employee relationship that the company wishes to emphasize in its external competitiveness policy)

marginal revenue of labor

is the additional revenue generated when the firm employs one additional person, with other production factors held constant

What is the prediction of the job competition theory

job requirements may be relatively fix. Thus, workers may compete for jobs based on their qualifications, not based on how low of a wage (wage competition) they are willing to accept. Thus, wages are sticky downward. (see also internal labor markets)

If $40,000 is the market-determined rate for business graduates, how many bsiness graduates will a specific employer hire? The answer to this question requires an analysis of what

labor demand

US airline industry is a notable example of what

pay cuts (due to significant competition)

What two theories focus on understanding employee behavior (the supply side of the model)

reservation wage and human capital

the demand side of the labor market focuses on what

the actions of the employers (i.e. how many new hires they seek and what they are willing and able to pay new employees)

qualifications and experience tailored to particular technologies is important in what

the analysis of labor markets

utility theory can help compare what

the costs and benefits of different pay level policies

an organization's ability to pay is related to what

the efficiency wage model

job evaluation reflects what

the job's contribution

An employer cannot change any other factor of production (i.e. technology, capital, or natural resources). Thus, its level of production can change only if it changes what

the level of human resources

the market rates is where what lines cross

the lines for labor demand and labor supply

if the level of production changes, a single employer's demand for labor coincides with what

the market product of labor

marginal revenue

the money generated by the sale of the marginal product, the additional output from the employment of one additional person

In general, the value of an individual's skills and abilities is a function of what

the time, expense and effort to acquire them

pay satisfaction

those employers with which an organization competes for skill and products/services (three factors commonly used to determine the relevant markets are the occupation or skills required, the geography, and the employers that compete in the product market)

The observable benefits of higher wages may include

higher pay satisfaction, improved attraction and retention of employees, and higher quality, effort, and (or) performance

A study of college students approaching graduation found that both pay level and mix affected their job decisions. Students wanted jobs that offered high pay, but they also showed a preference for what

individual based (rather than team based) pay, fixed (rather than variable) pay, job based (rather than skill based) pay and flexible benefits

What 3 things shape external competitiveness

labor market factors, product market factors, and organization factors

what are the 3 factors that usually determine the relevant labor markets

occupation (skill/knowledge required),, geography (willingness to relocate, commute,m or become virtual employees), and competitors (other employers in the same product/service and labor markets)

the supply side of the labor market looks at what

potential employees (i.e. their qualifications and the pay they are willing to accept in exchange for their services)

what are the two key product market factors

product demand and the degree of competition (both affect the ability of the organization to change what it charges for its products and services)

Assume that 2 business graduates form a consulting firm that provides services to 10 clients. The firm hires a third person, who brings in four more clients. The marginal product (the change in output associated with the additional unit of labor) of the third person is four clients (but adding a fourth employee generates only 2 new clients.) This diminishing marginal productivity results from what

the fact that each additional employee has a progressively smaller share of the other factors of production with which to work (In the short term, these other factors of production, such as office space, number of computers, telephone lines, etc, are fixed. Until these other factors are changed, each new hire produces less than the previous hire)

pay forms

the various types of payments, or pay mix, that make up total compensation

"So What?" for reservation wage theory

pay level will affect ability to recruit. Pay must meet some minimum level

compared to efficiency wage theory, signaling theory is more useful in understanding what

pay mix (efficiency wage discusses primarily pay level only, virtually ignoring what forms- the mix question)

managers often underestimate the role of ___, and overestimate the role of ___

pay, relationship with supervisor

True or false: large organizations tend to pay more than smaller organizations

true (consistent evidence shows this)

segmented labor supply is an example of what

people flow to the work

When we change our focus from all the employers in an economy to a particular employer, models must be modified to help us understand what

what actually occurs

what are the labor demand theories

(1) compensating differentials (2) efficiency wage (3) sorting and signaling (4) job competition

A manager using the marginal revenue product model must do what two things:

(1) determine the pay level set by market forces (2) determine the marginal revenue generated by each new hire (this will tell the manager how many people to hire)

The data from product market competitors (as opposed to labor market competitors) are likely to receive greater weight when:

(1) employee skills are specific to the product market (2) labor costs are a large share of total costs (3) Product demand is responsive to price changes (4) the supply of labor is not responsive to changes in pay

what are the 3 "So What?"'s of the section work flows to the people- On-site, Off-site, Offshore

(1)Reality is complex and theories abstract (it's not that our theories are useless, they simply abstract away the detail, clarifying the underlying factors that help us understand how reality works.) (2) The segmented sources of labor means that determining pay levels and mix increasingly requires understanding market conditions in different (even worldwide) locations (3) managers also need to know the jobs required to do the work, the tasks to be performed, and the knowledge and behaviors required to perform them, so that they can bundle the various tasks to send to different locations

Compensable factors are usually defined as what rather than what

input (skills required, problem solving required, responsibilities) rather than the value of output

rent

is a return (profits) received from activities that are in excess of the minimum (pay level) needed to attract people to those activities

In exhibit 7.6 in the book, the point on the graph at which the incremental income generated by an additional employee equals the wage rate is the what

marginal revenue product

economic theories must frequently be revised to account for what

reality

the human capital theory assumes what

that people are in fact paid at the value of their marginal product (improving productive abilities by investing in training or even in one's physical health will increase one's marginal product)

what is shirking

what economists say when they mean screwing around

The prediction of the compensating differentials theory

work with negative characteristics requires higher pay to attract and retain workers

according to the efficiency-wage theory, high wages may increase efficiency and actually lower labor costs if they:

(1) attract higher quality applicants (2) lower turnover (3) increase worker effort (4) reduce shirking (the higher the wage, the less likely it is that an employee will be able to find another job that pays as well. Also, the risk of losing one's high paying job depends on how likely it is that you can be replaced. One indicator is the unemployment rate. Thus, efficiency wage predicts that high effort will be most likely and shirking less likely to the degree that the wage premium is high and the unemployment rate is high.) (5) reduce the need to supervise employees (academics say "monitoring")

3 important contributions of chapter 7

(1) there is no going rate and so managers make conscious pay level and mix decisions influenced by several factors (2) there are both product market and labor market competitors that impact the pay level and mix decisions (3) alternative pay level and mix decisions have different consequences

Ebay allows haggling over the terms and conditions until an agreement is reach. Ebay is a what

Bourse

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

basically, efficiency increase by doing what

hiring better employees or motivating present employees to work harder

little research has been done on what

how do employers choose their relevant markets

"So What?" of sorting and signaling theory

how much, but also how (i.e. pay mix and emphasis on performance) will influence attraction-selection-attrition and resulting workforce composition

the most influential economic theory for explaining pay-level differences

human capital theory

Organization factors that influence pay level and mix decisions

industry and technology, employer size, people's preferences, and organization strategy

2 components of organization factors

industry, strategy, size individual manager

marginal product of labor

is the additional output associated with the employment of one additional person, with other production factors held constant

an employer that combines lower base pay with high bonuses may be signaling that it wants employees who are what

risk takers

options to reduce labor costs

segmenting the source of labor, offshoring, pay cuts

begins with alternatives of lead, meet, or lag. But then adds a second part, which is to offer employees choices (within limits) in the pay mix

shared choice (employee as a customer view)

what is the result of the labor market

that people and jobs match up at specified pay rates

in addition to differences in technology across industries affecting compensation, what else about technology influences pay levels

the introduction of new technology within an industry

compensable factors define what

what organizations value

Theories of labor markets usually begin with what four basic assumptions

(1) employers always seek to maximize profits (2) people are homogeneous and therefore interchangeable (a business school graduate is a business school graduate is a business school graduate) (3) the pay rates reflect all costs associated with employment (i.e. base wage, bonuses, holidays, benefits, even training) (4) the markets faced by employers are competitive, so there is no advantage for a single employer to pay above or below the market rate

Adam Smith argued that individuals consider what and make decisions based on what

(consider the) whole of the advantages and disadvantages of different employments (make decisions based on) the alternative with the greatest "net advantage"

If the inducements (total compensation) offered by the employer and the skills offered by the employee are mutually acceptable, a deal is struck. It may be formal contracts negotiated by unions, professional athletes, and executives, or it may be a brief letter or maybe only the implied understanding of a handshake. All of this activity makes up the what

labor market

maximizes the ability to attract and retain quality employees and minimizes employee dissatisfaction with pay

lead pay level policy

sorting is what

the effect that pay strategy has on the composition of the workforce (who is attracted and who is retained) (signaling is a closely related process that udnerlies the sorting effect)

If competitors quickly match a higher offer then what

the employer may face a higher pay level but no increase in supply (for example, when Giant Foods raised its hourly pay $1 above the minimum wage in the Chicago area, Wendy's and Burger King quickly followed suit. The result was that the supermarket was paying more for the employees it already had but was still shorthanded. Although some firms find lowering the job requirements and hiring less-skilled workers a better choice than raising wages, this choice incurs increased training costs, which were included in assumption 3 of the labor market)

ability to pay

the ability of a firm to meet employee wage demands while remaining profitable (a frequent issue in contract negotiations with union. A firm's ability to pay is constrained by its ability to compete in the product market)

As the assumptions change, so does what

the supply (For example, the upward slope supply assumes that as pay increases, more people are willing to take a job. But if unemployment rates are low, offers of high pay may not increase supply- everyone who wants to work is already working)

the factors that shape external competitiveness act in concert to influence what

pay level and pay mix decisions

employer of choice

the view that a firm's external wage competitiveness is just one facet of its overall human resource policy and that competitiveness is more properly judged on overall policies (challenging work, great colleagues, or an organization's prestige must be factored into an overall consideration of attractiveness)

what factors affect the supply of labor (what influences labor markets) (human capital section of the book)

geographic barriers to mobility among jobs, union requirements, lack of information about job openings, the degree of risk involved, and the degree of unemployment

In exhibit 7.6 in the book, the market level supply and demand interaction shows that what

pay level is determined by the interaction of all employers' demands for business graduates

Altough labor market conditions (and legal requirements) put a floor on the ____, the product market puts a lid on the ____

pay level required to attract sufficient employees, maximum pay level that an employer can set

utility theory

the analysis of utility, the dollar value created by increasing revenues and/or decreasing costs by changing one or more human resource practices. It has been most typically been used to analyze the payoff to making more valid employee hiring and selection decisions

econmic rent (second definition)

the difference between what a factor of production is paid and how much it would need to be paid to remain in its current use (if an employee is paid 10k a week but would be willing to work for only 1k a week, the employee's economic rent is 9k a week)

Factors to consider when deciding where the job will be

(1) labor costs (2) countries with lower average labor costs also tend to have lower productivity (3) agency theory (tells us that companies must devote resources to systems that monitor worker effort or output. This can be as well as coordination of efforts, can be more difficult and more costly when geographic or cultural distance is great, even with advances in technology) (4) customers' reactions must be considered (5) If labor costs are the driving force behind placing jobs, one must ask for how long the labor cost advantage at a significantly lower wage even will hold and whether even will hold and whether sufficiently qualified employees will continue to be available as other companies also tap into this pool of labor

relevant markets are shaped by what

the pressures from the labor market and product markets and the organization

in the case of the consulting firm (from the book), what is marginal revenue

the revenue generated by each additional hire

what is a particularly troublesome issue for economists

why an employer would pay more than what theory states is the market demand rate

the relationship between organization size, ability to pay, and pay level is consistent with economic theory that says:

talented individuals have a higher marginal value in a larger organization because they can influence more people and decisions, thereby leading to more profits

In one study, a number of scenarios were presented in which unemployment, profitability, and labor market conditions varied. Managers were asked to make wage adjustment recommendations for several positions.

level of unemployment made almost no difference the company's profitability was considered a factor for higher management in setting the overall pay budget but not something managers consider for individual pay adjustments (in direct contradiction to efficiency-wage theory, managers believed that problems attracting and keeping people were the result of poor management rather than inadequate compensation. They offered the opinion that, "Supervisors try to solve with money their difficulties with manage people")

what are the factors that affect pay level

product market conditions, productivity of labor, the technology employed, the level of production relative to plant capacity available (all affect compensation decisions)

segmented labor supply

a labor supply that comes from multiple markets. Some employees may come from different global locations, may receive different pay forms, and may have varied employment relationships

sorting and signaling theory prediction

pay policies signal to applicants the attributes that fit the organization. Applicants may signal their attributes (i.e. ability) by the investments they have made in themselves

tries to ensure that an organization's wage costs are approximately equal to those of its product competitors and that its ability to attract applicants will be approximately equal to its labor market competitors

pay with competition policy

human capital theory is based on what premise

that higher earnings flow to those who improve their potential productivity by investing in themselves (through additional education, training, and experience)

The assumptions about the behavior of potential employees assumes what

that many people are seeking jobs, that they possess accurate information about all job openings, and that no barriers to mobility (discrimination, licensing provisions, or union membership requirements) exist

"So What?' of efficiency wage theory

the payoff to a higher wage depends on the employee selection system's ability to validly identify the best workers. (see the appendix at end of ch 7 on utility.) An efficiency wage policy may require the use of fewer supervisors