Chapter 7 - External Competitiveness
How do you calculate labor costs?
(Pay level) X (number of employees)
A number of additional factors affect the supply of labor:
- Geographic barriers to mobility among jobs - Union requirements - Lack of information about job openings - Degree of risk involved - Degree of unemployment - Nonmonetary aspects of jobs (time flexibility)
Theories of labor markets begin with four basic assumptions:
1. Employers always seek to maximize profits 2. People are homogeneous and interchangeable 3. Pay rates reflect all costs associated with employment 4. Competitive markets give no advantage in paying a non-market rate
how do people's preferences affect organizational factors of external competitiveness?
Better understanding of employee preferences is increasingly important in determining external competitiveness People place more importance on pay than they are willing to admit
Both pay-level and pay mix decisions focus on two objectives:
Control cost and increase revenues Attract and retain employees
External competitiveness has two major consequences:
It affects operating expenses It affects employee attitudes and work behaviors
how does employer size affect organizational factors of external competitiveness?
Large organizations tend to pay more than smaller ones
Describe the concept of relevant markets
Managers look at both competitors (their products, location, and size) and the jobs (the skills and knowledge required and their importance to the organization's success Managers must define the markets that are relevant for pay purposes and establish the appropriate competitive positions in these markets.
The three factors usually used to determine the relevant labor markets are:
Occupation (skill/knowledge required) Geography (willingness to relocate, commute, or become virtual employees) Competitors (other employers in the same product/service and labor markets)
Why not all pay the same job the same rate?
Paying employees above the market can be an effective or ineffective strategy depending on what the organization gets in return and whether that return translates into revenues that exceed the cost of the strategy. Higher or lower pay doesn't necessarily mean better returns. Different employers set different pay levels; that is, they deliberately choose to pay above or below what others are paying for the same work.
external competitiveness is expressed in practice by:
Setting a pay level that is above, below, or equal to that of competitors Determining the pay mix relative to those of competitors
What are some major efficiency consequences of pay-level and pay-mix decisions?
Some theories recommend policies to diminish shirking and permit hiring better-qualified applicants No research suggests under what circumstances managers should choose which pay-mix alternative
Describe the concept of marginal product?
Unless other factors are changed, each new hire produces less than the previous hire (workers don't need to work as hard if another person is added to the staff). The amount each hire produces it to marginal product
Describe the concept of labor supply
Upward-sloping supply assumes that as pay increase, more people are willing to take a job But if employment rates are low, offers of higher pay may not increase supply - everyone who wants to work is already working
Having a competitive pay policy requires that managers balance:
Workforce needs Costs/productivity Satisfaction with the pay level and perceptions of fairness
Competitive choices in pay are made to maintain or secure competitive advantage and there are three possible choices:
You can lead the market You can match the market Or you can lag behind the market
efficiency wage theory states...
above-market wage/pay level may improve efficiency by attracting higher ability workers through the sorting effect The payoff to a higher wage depends on the employee selection system's ability to validly identify the best workers May require the use the fewer supervisors
Why would an employer pay more than what a theory states as the market-determined rate? There are three modifications for demand:
compensating differentials, efficiency wage, and signaling.
Employers in highly competitive markets, such as manufacturers of automobiles or generic drugs, are less able to raise prices without the loss of revenue
degree of competition
T or F: The higher the pay level relative to competitors, the smaller the relative costs to provide similar products or services.
false; The higher the pay level relative to competitors, the greater the relative costs to provide similar products or services.
What are relevant markets?
include employers with which an organization competes for skills and products/services.
Identify the forces that shape external competitiveness:
labor market factors, product market factors, and organizational factors
a wage structure that is set to match market rates at the beginning of the plan year only. The rest of the plan year, internal rates will lag behind market rates. Its objective is to offset labor costs, but it may hinder a firm's ability to attract and retain quality employees Coupled with the promise of higher future returns (Ex: stock ownership) This combination may increase employee commitment and foster teamwork, which may increase productivity A policy of paying below-market rates may hinder a firm's ability to attract potential employees May be beneficial if coupled with promise of greater future returns (stock options)
lag pay-level policies
a wage structure that is set to lead the market throughout the plan year. It aims to maximize the ability to attract and retain quality employees and minimizes employee dissatisfaction with pay. It may also offset less attractive features of the work "net advantage" maximizes the ability to attract and retain quality employees and minimizes employee pay dissatisfaction. PROS: Can also offset negative features of the work, Reduces turnover and absenteeism CONS: may force the employer to increase wages of current employees too, to avoid internal misalignment and murmuring. May mask negative job attributes that contribute to high turnover later on Link to financial performance isn't clear
lead pay-level policies
A major decision with external competitiveness is whether to...
mirror what competitors are paying or design a pay package that may differ from competitors, yet is a better fit for business strategy.
reservation wage theory states...
ob seekers won't accept jobs if pay is BELOW a certain wage, no matter how attractive other job aspects Pay level will affect the ability to recruit Pay must meet some minimum level
how does organizational strategy affect organizational factors of external competitiveness?
orgs differ based on types of strategy: cost cutter, innovator, and customer focused Some employers adopt a low-wage, no-service strategy; they compete by producing goods and services with the lowest total compensation possible. Others select a low-wage, high-services strategy.
sorting and signaling theory states...
pay policies signal to applicants the attributes that fit the organization Employers deliberately design pay levels and pay mix as part of a strategy that signals to both prospective and current employees the kinds of behaviors that are sought Applicants may signal their attributes by the investments they have made in themselves
what is a pay level?
refers to the AVERAGE of the rates paid by an employer
What is a pay mix?
refers to the various types of payments, or pay forms, that make up total compensation
There are two theories for modifying supply:
reservation wage and human capital
job compensation theory states..
states that job requirements may be relatively fixed. Thus, workers may compete for jobs based on their qualifications, not based on how low of a wage they are willing to accept Wages are sticky downward As hiring difficulties increase, employers should expect to spend more to train new people, increase compensation, or search/recruit more
labor demand focuses on...
the actions of employers = how many new hires and what they are willing and able to pay new employee
What is marginal product?
the additional output associated with the employment of one additional person, with other production factors held constant
what is marginal revenue of labor?
the additional revenue generated when the firm employs one additional person, with other production factors held constant
What is labor supply?
the availability of workers with the required skills to meet the firm's labor demand
What is labor demand?
the employment level organizations require.
What is the concept of marginal revenue?
Employer will continue to hire until the marginal revenue generated by the last hire is EQUAL to the costs associated with employing that person 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 for that hire
human capital theory states...
General and specific skills require and investment in human capital Higher earnings flow to those who improve their potential productivity by investing in themselves through additional training, education, and experience There must be a sufficient return on investment for the investment to take place. Workers must see a payoff in training
What are some major compliance consequences of pay-level and pay-mix decisions?
Provisions of prevailing wage laws and equal rights legislation must also be met In addition to pay level, various pay forms are also regulated. No matter the competitive pay policy, it needs to be translated into practice
What are some major fairness consequences of pay-level and pay-mix decisions?
Satisfaction with pay is directly related to the pay level: more is better Employees' sense of fairness is also related to how others are paid
Other factors besides product market conditions affect pay level and compensation decisions:
The productivity of labor The technology employed The level of production relative to plant capacity available
policies try to ensure than 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 This model predicts that employers should meet competitive wages. PRO: competitive advantage in labor markets CON: employer disadvantage in pricing products
pay with compensation (MATCH) policies
what is the concept of labor demand
An increase in wage rages will reduce the demand for labors, other factors constant Level of production can change only if it changes the level of human resources; A single employer's demand for labor coincides with the marginal product of labor
how does industry and technology affect organizational factors of external competitiveness?
The industry in which an organization competes influences the technologies used Labor intensive industries pay less than technology-intensive ones Introduction of new technology WITHIN AN INDUSTRY influence pay levels
labor supply focuses on...
potential employees = qualifications and pay they are willing to accept
Product market puts a lid on the MAXIMUM PAY LEVEL that an employer can set. If the employer pays above the maximum, it must either pass on to consumers the higher pay level through price increases or hold prices fixed and allocate a greater share of total revenues to cover labor costs
product demand
The supply and demand for labor are major determinants of an employer's pay level. However, any organization must, over time, generate enough revenue to cover expenses, including compensation. It follows that an employer's pay level is constrained by its ability to compete in the product/service market. Therefore, the two key factors in a product market are...
product demands and degree of competition
what is external competitiveness?
the pay relationships among organizations - the organization's pay relative to its competitors - OUTSIDE OF THE ORGANIZATION Requires us to decided HOW to pay and HOW MUCH to pay
Compensating differentials theory states...
working with negative characteristics requires higher pay to attract/retain workers (sewage, dangerous jobs, nursing, etc) Pay differences must overcome negative characteristics to attract employees