MGMT 472 Chapter 7 Compensation Systems
What is a bourse market?
Ebay, allows haggling until an agreement is made (Car dealerships, Houses-never pay market price)
What shapes external competitiveness?
1.competition in the labor market for people with various skills. 2. competition in the product and service markets, affects financial conditions. 3. characteristics unique to each organization and employees.
What is external competitiveness?
Comparisons outside the organization.
There are two objectives of external competitiveness
Controlling cost, attracting and retaining employees
Analysis of labor demand indicates how many employees will be hired by an employer
In the short run, an employer cannot change any factor of production except human resources -An employer's level of production can change only if it changes the level of human resources -An employer's demand for labor coincides with the marginal product of labor
Two types of market
Quoted Price Market, Bourse Market
What type of market do most graduating seniors negotiating for jobs experience?
Quoted-Labor Market (minor haggling)
What is quoted price market?
Stores that label each item's price or ad that list a job opening's starting wage
What is the effect of pay level on relative costs?
The higher the pay level relative to what competitors pay, the greater the relative costs to provide similar products or services
Assumptions on behavior of potential employees -Several job seekers -Possess accurate information about all job openings -No barriers exist to mobility among jobs
Upward sloping supply curve: -More people willing to take a job as pay increases If unemployment rates are low, offers of higher pay may not increase supply
What is pay forms/pay mix?
are the various types of payments that make up total compensation.
What is the marginal product of labor?
is the additional output associated with the employment of one additional person, with other production factors held constant. (output with hiring extra people)
Supply and Demand Chart (pushup video example)
keep hiring people as long as they are producing. Once we hire enough people at the same rate as income we are no longer making money.
What is pay level?
refers to the average of the array of rates paid by an employer
What is meant by "rent sharing"?
shared profit (motivating)
How does signaling theory suggest an employer interested in getting employees committed to the organization's long term performance should signal with their pay level and mix?
stock-ownership in company (long-term)
What is a satisfi(c)er?
take the first job offer they get where the pay meets their reservation wage.
What is the marginal revenue of labor?
the additional revenue generated when the firm employs one additional person, with other production factors held constant.
A manager using the marginal revenue product model must :
1. Determine the pay level set by market forces. 2. Determine the marginal revenue generated by each new hire.
What does efficiency wage theory predict?
1. attract higher quality applicant 2. lower turnover 3. increase worker effort 4. reduce "shirking" (slacking) 5. reduce the need to supervise employees
What are some consequences of higher pay levels
Cost more There is no single going rate in the labor market for a specific job
What does reservation wage suggest about employers ability to recruit if their base pay is too low? (e.g. what is meant by 'noncompensatory pay'?
Job seekers won't accept jobs if pay is below a certain wage, no matter how attractive other job aspects. Pay level will affect ability to recruit. Pay must meet some minimum level.
Which Pay Policy Achieves Competitive Advantage?
-Involves assessing consequences of different pay policy options -Evidence: --Pay level affects costs --Effects on productivity --Effects on ability to attract and retain employees -Possibility of achieving competitive advantage -Message that pay level and mix signal to people
How is external competitiveness expressed in practice?
-setting a pay level that is above, below, or equal to competitors -determining the mix of pay forms relative to those of competitors
Consequences of Pay-Level and Mix Decisions
1. Efficiency 2. Fairness 3. Compliance
Necessary conditions for efficiency wage theory:
1.Organizations paying higher wages need good selection tools to separate the qualified from unqualified applicants 2. Organizations need to determine if greater effort by better employees & fewer supervisors justify higher wages
How does signaling theory suggest an employer interested in encouraging risk taking should signal with their pay level & mix?
Combine high pay with risk network
How are labor costs determined?
Labor costs= pay level times number of employees.
Why is it important to compare not only base wages but total compensation between companies
Lower pay but good benefits look at "total package" The company has different pay level for different job families however when bonuses, stock options, and benefits are included, only mkt mangers remain above the mkt.
What is the marginal revenue product?
the additional output from the employment of one additional person.
What does signaling theory predict?
the way we pay, sends a message. example: google
Theories of labor markets begin with four assumptions?
1.Employers always seek to maximize profits 2.People are homogeneous and therefore interchangeable 3.Pay rates reflect all costs associated with employment 4.Markets faced by employers are competitive, so no advantage for a single employer to pay above or below market wage (The market rate is where the lines for labor demand and labor supply intersect)