Compensation Test 3 Chapter 7 Slides

What shapes external competitiveness?

Labor markets, modifications to supply and demand, product market factors and organization factors.

the value of an individual's skills and abilties is...

a function of the time, expense, and effort to acquire

adam smith

argued that individuals consider the "whole of the advantages and disadvantages of different employments, and make decisions based on alternating with greatest 'net advantage'"

product market conditions

determine what an organization can afford to pay

employers may vary policy for

different occupational families, different forms of pay, different business units

diminishing marginal productivity means

each additional employee has a progressively smaller share of production factors to work with

the quoted price

ex) stores that label each item's price or ads that list job opening's starting wage

an organization's ability to pay means...

firms with greater profits than competitors can share success with employees

reservation wage theory

job seekers wont accept jobs if pay is below a certain wage, no matter how attractive other job aspects

As pay level increases

labor costs increase

pay above the market

lead

conventional pay-level policies

lead, meet, or follow competitors

there is no simple _____________ of pay forms

"going mix"

organizations can and do vary in how closely they match the _______________

"going rate"

pay level formula

( base + bonuses + benefits + value of stock ) / # of employees

external competitiveness is expressed by

(1) setting a pay level that is above, below, or equal to that of competitors (2) determining the mix of pay forms relative to those of competitors

labor costs =

(pay level) x (# of employees)

ex 7.8 looks at modifications to the demand side

1) compensating differentials 2) efficiency wage 3) sigaling

pay mix

The various types of payments, or pay forms, that make up total compensation.

newer policies emphasize

flexibility

application of sorting and signaling

how much, but also how (pay mix and emphasis on performance) will influence attraction-selection-attrition and resulting work force composition

external competitiveness second pay policy

looks at comparison outside organization, with other employers that hire people with the same skill

organization strategies

low-wage, no services low-wage, high-services high-wage, high services (may differ within a single organization), higher wages must bring something in return

Competitive Pay Policy Alternatives

match, lag, lead, hybrid

factors that affect marginal productivity

office space, number of computers, telephone lines, and hours of clerical support

3 points to remember in work flow

reality is complex, understand market conditions to et pay level, managers must bundle tasks to different locations

application of human capital theory

skill/ability requires investment by workers and firms. there must be a sufficient return on investment for the investment to take place. workers, for example, must see a payoff

pay level

the average of the array of rates paid by an employer

Pay with Competition (Match)

the most common policy, tries to match wage costs to product competitors and attract applicants equal to the labor market

how a company compares to the market depends on

what competitors it compares to and what pay forms are included

shared choice

Begins with traditional options of lead, meet, or lag. Offers employees choices in the pay mix.

pay with the market

match

the underlying assumption of efficiency wage

pay level determines effort

sorting and signaling

pay policies signal to applicants the attributes by investments they have made in themselves

labor market activities result in...

people and jobs matching up at specified pay rates

reservation wage

says that some job seekers satisfiers take the first offer they get where pay meets this (at or below market value)

"market level" supply and demand model

shows the pay is determined by the interaction of all employers' demand for business grads

the demand side focuses on...

the actions of employers, how many new hires they seek and what they are willing to pay

what difference does the pay-level policy make

the basic premise is it affects performance

ex 7.7 shows...

the connection between the labor market and the condition facing a simple employer

the problem with pay level research

the focus on base pay, ignoring other forms of pay

economists label two market types

the quoted price and the bourse

lag pay-level policy

-paying below market rates may not attract employees unless coupled with higher future returns -the combination may: increase employee commitment, foster teamwork, which may increase productivity

pay level and pay mix decisions focus on two objectives

1) control costs and increase revenues 2) attract and retain employees

rent

a return received from activities in excess of the minimum needed o attract people to those activities

efficiency wage theory

above market wage/pay level will improve efficiency by attracting higher ability workers and discouraging shirking due to risk of losing high wage jobs. a high wage policy may substitute for intense monitoring

employee signals

better training, education, and work experience

product demand

caps max pay level

the data in ex 7.3 is based on...

comparisons of base pay, a look at total compensation shows the emergence of a different pattern

competitiveness of total compensation

contain operating expenses, increase pool of qualified applicants, increase quality and experience, reduce voluntary turnover, increase probability of union-free status, reduce pay-related work stoppages

compliance consequences of pay-level decisions

employers must pay at or above the legal minimum wage, prevailing wage laws and equal rights legislation must be met, pay forms are regulated caution must be exercised when sharing salary information

the bourse

ex? stores that allow haggling until an agreement is reached (ebay)

human capital theory

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 generals skills

modifications to the supply

geographic barriers, union requirements, lack of info about job openings, the degree of unemployment, and nonmonetary aspects of the job

There is no __________ in the labor market for a specific job

going rate

if a job has negative characteristics then employers must offer _____________

higher wages

employers seek to maximize profits by

hiring until the marginal revenue equals the costs associated with the most recent hire

organization factors

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

why are the assumptions about the behavior of potential employees oversimplified?

many people are seeking jobs, they possess accurate information about all job openings, and their are no barriers to mobility

Lead Pay-Level Policy

maximizes the ability to attract and retain quality employees and minimizes employee dissatisfaction with pay; may offset less attractive job features

efficiency consequences of pay-level decisions

no research suggests under what circumstances managers should choose which pay mix, pay level may not gain any competitive advantage, wrong pay level may be a serious

relevant markets are defined by

occupation, geography, and competitors

organizations can source employees from

on-site, off-site, or offshore

the marginal revenue model provides an analytical framework, but it...

oversimplifies

employer signals

pay level and mix

application of reservation wage

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

pay mix stratgies may be

performance driven, market match, work/life balance, and security

lead pay-level policy is linked to

reduced turnover, quit rates and absenteeism

(ex 7.9) labor supplies theories

reservation wage and human capital; focus on understanding employee behavior

as assumptions change, ______ changes

supply

what is the labor market

supply/demand of jobs

marginal product of labor

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

marginal revenue of labor

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

the higher the pay level relative to what competitors pay...

the greater the relative costs to provide similar products and/or services

in ex 7.6, the market rate is where...

the line for labor demand and labor supply cross

application of efficiency wage theory

the payoff to a higher wage depends on the employee selection system's ability to validly identify the best workers, may require the use of fewer supervisors

graphing marginal revenue product

the point on the graph where the incremental income generated by an additional employee equals the wage rate

compensating differentials explain what?

the presence of various pay rates in the market that are difficult to document

factors of external competitiveness

1) competition in the labor market for people with various skills 2) competition in the product/service market which will affect the financial condition in the organization 3) characteristics unique to each organization and its employees, and the productivity and experience of workflow

four basic assumptions of how labor markets work

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

second pay policy is expressed by

1) setting a pay that is above, below, or equal to competitors 2) determining pay mix relative to competitors

How many a specific employer hires requires what?

an analysis of labor demand

application of job competition theory

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

consider these factors when deciding job location

assure labor savings are not neutralized bylower productivity, devote resources to monitor output, consider customers' reactions, how long will the labor cost advantage last?

human capital

based on the premise that higher earnings flow to those that improve potential productivity by investing in themselves, assuming that people are in fact paid at the value of their marginal product

in both market types, employers are ______ and potential employees are _______

buyers; sellers

in the short term, an employer...

cannot change any other factor of production, such as technology, capital, or natural resources. thus, production can only change if it changes the level of human resources

employer of choice

corresponds to the brand the company projects as an employer

source of employees depends on

customer preferences, time schedules, and the nature of the work

sorting and signaling is

designing pay levels and mix as a strategy that signals to employees what is sought

managers using the marginal revenue product model must do two things

determine the pay level set by market forces and determine the marginal revenue generated by each new hire

people's preferences

difficult to measure

according to efficiency-wage theory, high wages may increase...

efficiency and actually lower labor

efficiency wage

efficiency increases by hiring better employees or motivating employees to work harder and smarter

data from product market competitors receives more weight when

employee skills are specific to product market, labor costs are a large share of total costs, product demand is responsive to price change, labor supply is unresponsive to pay changes

risks of employer of choice/shared choice

employees making the "wrong" choices and offering too many choices causes confusion, mistakes, and dissatisfaction

degree of competition

highly competitive markets re less able to raise prices

compensating differentials

if a job has negative characteristics, that is if the training is way expensive, job security is tenuous, working conditions are disagreeable, or chances of success are low

application of compensating differentials theory

job evaluation and compensable factors must capture negative characteristics

companies often set different pay level policies for different ____________

job families

job competition theory

job requirements may be fixed, workers compete for jobs based on qualifications and not how low of a wage they will accept. thus, wages are sticky downward

industry and technology

labor intense industries pay lower than tech intense industries, new tech influences pay level

pay below market

lag; (benefits, economic, nonprofit, etc)

employer size

large firms pay more than small firms

Manager's view of compensation

level of unemployment made no difference, profitability is considered when budgeting pay but not considered for individual pay adjustments, poor management disrupts attracting and keeping employees, not compensation

ex 7.4 compares the...

pay mix for the same job at two companies in the same geographic region, both offer same total compensation but with different percentage allocations

the supply side looks at...

potential employees, their qualifications, and the pay they are willing to accept in exchange for services

two key product market factors

product demand and degree of competition

other product market factors

productivity of labor, technology employed, and the level of production relative to capacity

although the four basic assumptions oversimplify, they do...

provide a framework for understanding the labor market

economic theories must be revised frequently to account for

reality

fairness consequences of pay-level decisions

satisfaction with pay is directly related to pay level, related to how others are paid

marginal revenue

the money generated by the sale of the marginal product

negative effects of lead pay-level

the need to increase current employees wages and it may mask negative job attributes

External Competitiveness

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

how a company compares to the markets depends on...

what competitors it compares to, what pay forms are included

compensating differentials theory

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