Econ 448 Quiz 3
Product market conditions determine what an organization can ____
- afford to pay
Newer policies emphasize ____
- flexibility
Translating an external pay policy into practice requires information on the external market. Surveys provide the data for translating that policy into ____
- pay levels, pay mix, and structures
Lead pay-level policy - Linked to ____, quit rates and absenteeism
- reduced turnover
Interpret survey results and construct a market line
1. Verify data for accuracy and anomalies 2. Statistical analysis
How to obtain info on the external market?
A survey
Weighted mean - Advantage/Disadvantage
Gives equal weight to each individual's wage. Captures size of supply and demand in the market
R^2
How much variance in y (the market level variation) can be explained by x (the job evaluation points)
Sorting and Signaling so what?
How much, but also how (pay mix and emphasis on performance) will influence attraction -selection-attrition and resulting work force composition
What shapes external competitiveness?
Labor market factors Product market factors Organization factors
Expectancy
employees have high expectancy; whether employees believe they are able to do the job
Product market factors
o Degree of competition o Level of product demand
The quoted price example
stores that label each item's price or ads that list job opening's starting wage
The pay relationships among organizations
the organization's pay relative to its competitors
Instrumentality
will be rewarded if they have good performance
____ collapses salary grades into only a few broad bands, each with a sizable range
- Broad banding
Design the survey o Publicly available data - Bureau of Labor Statistics (BLS)
- Cash, bonus, and benefits (no stock ownership) - Data are often not specific enough
How to get these behaviors? Practice - ____ is only one of the many rewards that influence employee behavior o Some workers value ____, such as empowerment, recognition, and opportunities for advancement - Trend of ____: letting employees choose their own "blend" of rewards - Companies are moving toward compensation programs ____ on the risk continuum
- Compensation - other job rewards - flexible compensation - higher
Verify data for accuracy and anomalies b. Anomalies
- Does any one company dominate? - Do all employers show similar patterns? - Outliers?
Data from product market competitors receives more weight when: - ____ are specific to product market - ____ are a large share of total costs - ____ is responsive to price change - Labor supply is unresponsive to ____
- Employee skills - Labor costs - Product demand - pay changes
Combine internal structure and external market rates a. Two parts of the total pay model have merged: i. ____ (horizontal axis) ii. ____ (vertical axis)
- Internally aligned structure - External competitive data
Economists label two market types: the quoted price and the bourse - In both market types, employers are ____ and potential employees are ____
- buyers; sellers
Different mix at ____
- different organization levels
Market pricing emphasizes ____ and deemphasizes ____ o Sets pay structures almost exclusively on ____
- external competitiveness - internal alignment - external market rates
Organization data includes
- financial data and reporting relationships - turnover and revenues
Fuzzy markets. o New organizations and unique jobs may ____ diverse factors making relevant markets fuzzy o Place more emphasis on ____ market data
- fuse - external
Lag pay-level policy - Paying below market rates may not attract employees unless coupled with ____. o E.g., stock ownership in a high-tech start-up firm
- higher future returns
Lead pay-level policy - Negative effects include the need to ____ and it may mask negative job attributes
- increase current employees wages
The most common policy is to ____ paid by competitors
- match rates
Design the survey - Online salary information (need to confirm whether it is ____)
- reliable
Group jobs into grades o These are different jobs but considered ____ for pay purposes o All jobs within a single grade will have ____ pay range o Grades permit ____ but are challenging to design
- substantially equal - the same - flexibility
Volatility of stock value changes ____
- total pay mix
Design the survey o Many surveys but few are ____
- validated
A pay-with-competition policy tries to: o match ____ to product competitors o attract ____ equal to the labor market competitors
- wage costs - applicants
Sorting and signaling - Designing pay levels and mix as a strategy that signals to employees ____ - Employer signals include ____ - Employee signals include ____
- what is sought - pay level and mix - better training, education, and work experience
Labor supply The assumptions about the behavior of potential employees: o Many people are seeking jobs o They possess accurate information about all job openings o There are no barriers to mobility These assumptions are oversimplified: o Upward sloping supply curve assumes that as pay increases, more people are ____ o However, if unemployment rates are low, offers of higher pay may not ____
- willing to take a job - increase supply
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
Design the survey - Which jobs to include? Benchmark-Job Approach
Benchmark jobs have stable job content, are common across employers, and include sizable numbers of employees
Expectancy Theory
Expectancy, Instrumentality, and Valence
Human capital 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
Compensating Differentials so what?
Job evaluation and compensable factors must capture these negative characteristics
Statistical analysis c. Variation
Quartiles and percentiles are a common measure
Statistical analysis a. Frequency distribution
Unusual shapes may reflect problems
Design the survey - Which jobs to include? Low-high approach
Wages of lowest- and highest-paid benchmark jobs used as anchors for skill-based structures
Compensating Differentials predication
Work with negative characteristics requires higher pay to attract/retain workers
Valence
adequate level of rewards to employees' good performance
Estimate Competitors' Labor Costs - Employment Cost Index (ECI) by BLS
measures quarterly changes in employer costs for compensation
How labor markets work - Four basic assumptions
o 1. Employers always seek to maximize profits o 2. People are homogeneous and therefore interchangeable o 3. Pay rates reflect all costs associated with employment o 4. Markets faced by employers are competitive
Organization factors
o Industry, strategy, size o Individual manager
Broad banding - Banding takes two steps
o set the number of bands o price the bands (reference market rates)
Relevant labor markets include employers who compete in one or more areas
o the same occupations or skills o employees within the same geographic area, or o the same products and services
Pay-mix strategies
performance driven market match work/life balance security (commitment)
External competitiveness: pay relationships among organizations
specify policy --> select market --> design survey --> draw policy lines --> merge internal & external pressures --> competitive pay levels, mix, and structures
The bourse example
stores that allow haggling until an agreement is reached: Ebay, Priceline, etc.
Pay level
the average of the array of rates paid by an employer: (base + bonuses +benefits + value of stock holdings) / number of employees
Verify data for accuracy and anomalies a. Accuracy of match
the benchmark conversion/survey leveling approach can be used if the match is not perfect
Pay forms
the various types of payments, or pay forms, that make up total compensation
- Sherman Act: Section 1: Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of ____ among the several States, or with foreign nations, is declared to be illegal
trade or commerce
The purpose of a survey - Adjust Pay Level - How Much to ____? - Adjust Pay Mix - What ____? - Adjust ____ - Study Special ____ - Estimate Competitors' ____
- Pay - Forms - Pay Structure - Situations - Labor Costs
Combine internal structure and external market rates a. Two aspects of pay structure: i. ____ ii. ____
- Pay-policy line - Pay ranges
Establish range midpoints, minimums, and maximums. o ____ of the range is based on judgment about how the ranges support: - career paths - promotions - other organization systems o Top-level management positions have ____ ranges compared to lower-level positions
- Size - larger
Does compensation motivate behavior? - Do people join a firm because of pay?
- Yes. Level of pay and pay system characteristics influence a job candidate's decision to join a firm
External competitiveness is expressed by: o setting a pay level that is ____ to that of competitors o determining the ____ relative to those of competitors
- above, below, or equal - pay mix
Adjusting the pay structure - Reconciling differences: o May entail a review of: - Job ____ - Job ____ - ____ data o Differences may arise due to shortage of a ____, which drives up the market rate
- analysis - evaluation - Market - particular skill
Goal Setting Theory o Goal has to be ____ o Rewards should be ____ o Receive ____ for attaining the goal o Appropriate ____ from employers o Performance ____ should be challenging and specific o Performance-based payouts should be contingent upon ____ o The amount of the incentive reward should ____ the goal difficulty
- attainable - significant - recognition - feedback - goals - goal achievement - match
What behaviors do employers care about? 1. How do we ____ good employment prospects to join our company? 2. How do we ____ these good employees once they join? 3. How do we get employees to ____ for current and future jobs? 4. How do we get employees to ____ while they are here?
- attract - retain - develop skills - perform well
Lead pay-level policy - Maximizes the ability to ____ quality employees, and o minimize ____ with pay o It may offset ____ job features
- attract and retain - dissatisfaction - less attractive
Reinforcement Theory o Base salary for ____ o Rewards if ____ the base level o Punish if ____ than the base level o Awards are not ____ o Rewards must be closely associated with desired ____ o ____ of payouts is important: performance- based payments must follow closely behind performance o ____ can be a way to discourage unwanted behaviors
- base level of work - passing - lower - cumulative - performance/behavior - Timing - Withholding payouts
Total compensation data includes
- base pay - total cash and - total compensation
Maslow's Need Hierarchy o Base pay must be set high enough to meet individuals' ____ o ____ pay is motivating to the extent it is attached to achievement & recognition o ____ may be demotivating if it impinges upon employees' capacity to meet living needs
- basic living needs - Incentive - Performance-based pay
Construct a market pay line a. A market line links a company's ____ on the horizontal axis with ____ paid by competitors (market survey) on the vertical axis. It summarizes the distribution of going rates paid by competitors in the market
- benchmark jobs - market rates
Do Employees Perform Better on Their Jobs Because of Pay? o A well-designed plan linking pay to behaviors of employees generally results in ____ individual and organizational performance o Performance increases when pay is tied to ____ o ____ has a stronger impact on individual and corporate performance than the level of base pay o Link pay to performance: ____ o However, poorly designed / implemented ____ can hurt rather than help
- better - performance - Variable pay - incentive effect and sorting effect - incentive pay plans
1. Update the survey data a. The pay data are usually updated (aging or trending) to forecast the ____ for the future date when the pay decision will be implemented b. ____ measures the rate of changes in prices for goods and services in the product market, not wage changes in labor market
- competitive rates - CPI
Broad banding - Flexibility and Control o Broad banking encourages flexibility in moving ____ o Need to avoid ____
- crossfunctionally - inconsistencies and favoritism
When managers were asked to make wage adjustment recommendations for several positions: o Level of unemployment made no ____ o Profitability is considered when budgeting pay but not considered for ____ o ____, rather than inadequate compensation, leads to problems attracting and keeping employees
- difference - individual pay adjustments - Poor management
Agency Theory o Performance-based pay can be used to direct and induce ____ o Performance-based pay must be tightly linked to ____ o Performance-based pay is useful for complex jobs where ____ employees' work is difficult
- employee performance - organizational objectives - monitoring
Grades and ranges offer flexibility to: o Deal with pressures from ____ and o ____ among firms regarding: - Quality of individuals applying for work - Productivity or value of these quality variations - The mix of pay forms competitors use
- external markets - Differences
Market pricing - The objective is to: o base most of the internal pay structure on ____ o break down the ____ between the internal organization and the external market forces
- external rates - boundaries
Companies commonly vary the pay policies for: o different job ____ o different forms of ____ o different business ____
- families - pay - units
Bands support: o Emphasis on ____ within guidelines o ____ organizations o ____ experience and lateral progression o Reference ____, shadow ranges o Controls in ____, few in system o Give managers "freedom to manage" o pay 100-400 ____
- flexibility - Global - Cross-functional - market rates - budget - freedom - percent spread
Ranges support: o Some ____ within controls o Relatively ____ organization design o Recognition via ____ or career progression o Midpoint controls, ____ o ____ designed into system o Gives managers "____ with guidelines" o To 150 percent ____
- flexibility - stable - titles - comparatives - Controls - freedom - range-spread
Do people stay in a firm (or leave) because of pay? o Turnover is ____ for poor performers when pay is based on individual performance o Group incentive plans may lead to ____ turnover of better performers if not well designed o Dissatisfaction with pay can be a key factor in ____ o The way an organization ____ may impact turnover o Besides money, ____ influence the decision to stay (retention) in a firm
- higher - more - turnovers - pays - other rewards
Compensating differentials - If a job has negative characteristics, then employers must offer ____ to attract/retain workers - Such compensating differentials explains the presence of ____ in the market - These characteristics should be captured by ____
- higher wages - various pay rates - job evaluation and compensable factors
Efficiency wage - Attracts ____, 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 ____ - The underlying assumption is that ____ determines effort
- higher- quality applicants - labor costs - pay level
Overlap o Promotion ____ matter - The size of ____ between grades should support career movement through the structure - Overlap ought to be large enough to induce employees to seek ____ - Not all employers use ____ --> e.g.: Skill-based plans establish a single flat rate for each skill level, regardless of performance or seniority
- increases - differentials - promotions - grades and ranges
Expectancy Theory o Performance targets should be set appropriately so employees believe they are able to achieve the targets by ____ o A clear link of ____ and rewards should be established o Rewards for good performance must be large enough to be ____ by employees
- increasing efforts - performance - valued
Evidence about "what's important": o Employees prefer pay systems influenced by ____, COLA, seniority, and the market rate as the most important factors o ____ is based on the idea that only the individual employee knows what package of rewards would best suit personal needs
- individual performance - Flexible compensation
Market pricing - Business strategy o Pure market pricing ignores ____, as well as the link of internal pay structures with business strategy o In contrast, organizations may choose to ____ their pay strategy to better execute their own strategy o ____ internal and external pressures requires sound judgment based on the pay system objectives
- internal alignment - differentiate - Balancing
From regression results to a market line - For ____, the market pay lines are especially useful
- nonbenchmark jobs
Do employees more readily agree to develop job skills because of pay? o The answer is ____ o Skill-based pay: reward employees for learning new skills; but may turn out to be ____ for training needs and skills that are not used o There is some evidence that paying for skill may not ____ productivity but may improve quality
- not known - costly - increase
The pay-policy line - Choice of measure o The targets set by ____ - Updating - Policy line as percent of market line o Specify a ____ above or below market line an employer intends to match o There are many options but ____ to avoid confusion
- organizations - percent - practice must match policy
Does compensation motivate behavior? - Candidates look for a 'fit' with their personalities: o Materialistic - concerned about ____ o Low self-esteem - want little ____ o Risk takers - want pay ____ o Risk-averse - want less ____ o Individualist - want pay ____ o A strong pay/performance link is attractive for ____
- pay level - pay for performance - based on performance - performance-based pay - based on individual performance - talented employees
The assumptions about the behavior of potential employees: o Many people are ____ o They possess ____ about all job openings o There are no barriers to ____
- seeking jobs - accurate information - mobility
Product market factors and ability to pay - Two key factors: Product demand and Degree of competition - Other factors include ____
- the productivity of labor, the technology employed, and the level of production relative to capacity
Equity Theory o Everyone is treated ____ o ____ for certain groups of employees o Same benefits for ____ o Performance ____ must be clearly defined (so they are perceived as objective by employees) o ____ of performance-based pay across employees in an organization is important o ____ in performance must be matched by commensurate increases in pay
- the same - Pay for performance plans - everyone - measures - Fairness and consistency - Increases
A pay range: o Exists whenever ____ are paid to employees in the same job o Provides ____ 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
- two or more rates - managers
Design the survey - Which jobs to include? Benchmark conversion/survey leveling
Differences are quantified when job content does not sufficiently match survey jobs: using the difference between job evaluation points for internal jobs and survey jobs
Reservation Wage prediction
Job seekers won't accept jobs if pay is below a certain wage, no matter how attractive other job aspects
Design the survey - How many employers to include?
No firm rules on how many to include - Some companies may only compare with a few others - National surveys often include more than 100 employers
Design the survey - What information to collect?
Organization data and total compensation data
Reservation Wage so what?
Pay level will affect ability to recruit. Pay must meet some minimum level
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
Statistical analysis b. Central tendency
Reduces a large amount of data into a single number
which two theories focus on understanding employee behavior: the supply side of the model
Reservation Wage and Human capital
Human capital so what?
Skill/ability requires investment by workers and firms. There must be a sufficient return (e.g., pay level) on investment for the investment to take place. Workers, for example, must see a payoff to training
Efficiency Wage so what?
The payoff to a higher wage depends on the employee selection system's ability to validly identify the best workers. An efficiency wage policy may require the use of fewer supervisors
Economists label two market types
The quoted price and the bourse
Weighted mean - What Does It Tell Us?
The rate for each company is multiplied by the number of employees. Total of all rates is divided by total number of employees
A survey
The systematic process of collecting and making judgments about the compensation paid by other employers
Product market factors and ability to pay - Two key factors
o 1. Product demand - caps maximum pay level o 2. Degree of competition - highly competitive markets are less able to raise prices
Organization factors - People's preferences
o Employees' preferences are increasingly important; but they are difficult to measure
Adjusting the pay structure - Pay structure
o Is anchored by the organization's external competitive position and reflected in its paypolicy line
Organization factors - Industry and technology
o Labor-intensive industries pay lower than technology- intensive industries o New technology influences pay level
Organization factors - Employer size
o Large firms pay more than small firms
Conventional pay-level policies
o Lead the market o Lag the market o Match the market
Labor market factors
o Nature of demand o Nature of supply
Managers define relevant markets by
o Occupation, geography, and competitors
Adjusting the pay structure - Job structure
o Orders jobs on the basis of internal factors (reflected in job evaluation or skill certification)
Some major decisions in pay-level determination - These are the major decisions in setting externally competitive pay and designing the corresponding pay structures
o Specify pay-level policy o Define purpose of survey o Specify relevant market o Design and conduct survey o Interpret and apply result o Design grades and ranges or bands
What difference does the pay-level policy make?
o The basic premise is it affects performance
Design the survey - Who should be involved?
o The compensation manager is responsible for the survey o Outside consulting firms are used to protect against possible "price-fixing" lawsuits
Motivation involves three key elements
o What's important to a person o How do we offer it o How does it help deliver desired behaviors
Pay level and pay mix decisions focus on two objectives
o control costs and increase revenues o attract and retain employees
Additional factors affecting labor supply
o geographic barriers o union requirements o lack of information about job openings o the degree of risk involved o the degree of unemployment and o nonmonetary aspects of the job
