MGMT 623 Exam 2 (Chapter 7 & 8)

Different purposes to conduct/participate in survey:

- adjust pay level relative to competitors - set mix relative to competitors - establish or price a pay structure - to analyze pay-related problems - estimate the labor costs of competitors

Grades and ranges offer flexibility to deal with pressures from external markets and differences among organizations regarding:

- differences in quality of individuals applying for work - differences in productivity or value of these quality variations - differences in the mix of pay forms competitors use

Calculating Quartiles

- order the numbers - find the median - 1st quartile: middle of the #'s to the left of the median - 3rd quartile: middle of the #'s to the right of the median - position of the first quartile: 1/4(n+1) - position of median: 1/2(n+1) - position of 3rd quartile: 3/4(n+1)

What information to collect?

1. Information about organization 2. Information about total compensation system 3. Specific pay data on each job incumbent

Both pay level and pay mix decisions focus on two objectives:

1. control costs & increase revenues 2. attract and retain employees

4 basic assumptions of labor markets:

1. employers always seek to maximize profit 2. people are homogenous and therefore interchangeable 3. Pay rates reflect all costs associated with employment (base wage, bonuses, holidays, benefits, etc.) 4. Markets faced by employers are competitive, so there is no advantage for a single employer to pay above or below the market rate

3 factors used to determine the relevant labor markets are:

1. occupation 2. geography 3. competitors

Designing a survey requires answering the following questions:

1. who should be involved in the design? 2. How many employers should be included? 3. Which jobs should be included? 4. What information should be collected?

Median

1/2(n+1)

D = E - R (Lag pay-level policy):

Disappointment = Expectations - Reality

Efficiency wage theory

Higher 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" (employee finding another job that pays as well) 5. Reduce the need to supervise employees

Pay policies

Lag: company chooses a "match" policy but then updates survey data to the end of the current year/start of the plan year and keeps this rate in effect throughout the plan year Lead/lag: aging the market data to a point half-way through the plan year (original survey rates are updated to the end of the current year + half the projected amount for the plan year) Lead: age data to the end of the plan year and pay at this rate throughout the plan year

pay-with-competition policy

Policy that tries to ensure that a firm's labor costs are approximately equal to those of its competitors and that its ability to attract applicants will be approximately equal to its labor market competitors

Weighted mean

Takes into account each individual job's base pay and takes the average of all of them

Pay level

The average of the array of rates paid by an employer: (base + bonuses + benefits + value of stock holdings)/ number of employees

Reasons you would adjust pay level

ability to pay, turnover, attract top talent

Size of the range is based on judgement about how the ranges support:

career paths, promotions, and other organization systems

Broad banding

consolidates as many as four or five traditional grades into a single band with one minimum and one maximum - range midpoint not usually used - support redesigned, downsized, or boundary-less organizations that have eliminated layers of managerial jobs - use reference rates to distinguish between different functions - encourages moving cross-functionally (moves within bands are more common than between bands) - Take advantage of flexibility without increasing labor costs or leaving organization vulnerable to charges of illegal practices

Market pricing

emphasize external competitiveness and deemphasize internal alignment - sets pay structures almost exclusively on external market rates

Human capital theory

general and specific skills require an investment in firm-specific skills, but not general skills. Workers must pay for investment in general skills. - there must be a sufficient return on investment for the investment to take place

Lag Pay-Level Policy

if coupled with the promise of higher future returns (ex: stock ownership in a high-tech start-up firm), this combination might increase employee commitment and foster teamwork, which may increase productivity

Reservation wage

job seekers will not accept jobs with pay below a certain wage, no matter how attractive other job aspects

Market line

links a company's benchmark jobs on the horizontal axis with market rates paid by competitors on the vertical axis

Lead Pay-Level Policy

maximizes the ability to attract and retain quality employees and minimizes employee dissatisfaction with pay - may also offset less attractive features of the work

A grade range has 3 salient points:

midpoint, minimum, and maximum

Central tendency

reduces a large amount of data into a single number

Survey

systematic process of collecting and making judgements about the compensation paid by other employers

Marginal product of labor

the additional output associated with the employment of one additional person, with other production factors held constant - addition of more labor has diminishing returns (only increase when other factors also change)

Variation

the distribution of rates around a measure of central tendency - quartiles and percentiles are a common measure

Marginal revenue of labor

the additional revenue generated when the firm employs one additional person, with other production factors held constant - employer will continue to hire until the marginal revenue generated by the last hire is equal to the costs associated with employing that person --> demand that maximizes profit

A pay range provides managers with the opportunity to:

- recognize individual performance differences with pay - meet employee expectations that their pay will increase over time, even in the same job - encourage employees to remain with the organization

Major decisions in setting externally competitive pay and designing the corresponding pay structures:

- specify pay-level policy (match, lead, lag) - define purpose of survey - specify relevant market - design & conduct survey - interpret & apply result - design grades and ranges or bands

Approaches to selecting jobs for inclusion:

1. Benchmark-job approach 2. Low-high approach: identify the lowest and highest paid benchmark jobs for the relevant skills in the relevant market and to use these wages for these jobs as anchors for the skill-based structures 3. Benchmark conversion/survey leveling: differences are quantified when job content does not sufficiently match survey jobs

What shapes external competitiveness?

1. Labor Market Factors (demand and supply) 2. Product Market Factors (degree of competition and level of product demand) 3. Organization Factors (industry, strategy, size, individual manager)

Types of markets:

1. Quoted-price: stores that label each item's price or ads that list a job opening's starting wage (cannot name your own price) 2. Bourse: can name your own price, but there will be haggling over the terms and conditions until an agreement is reached

External competitiveness 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

Sorting & signaling

1. Sorting: the effect that pay strategy has on the composition of the workforce 2. signaling: employers deliberately design pay levels and mix as part of a strategy that signals to both prospective and current employees the kinds of behaviors that are sought

Typical size of ranges:

1. Top-level management: 30-60% above/below midpoint 2. Entry to mid-level manager: 15-30% 3. Office/production work: 5-15%

Pay forms

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

Segmented labor supply

using multiple sources of employees, from multiple locations, with multiple employment relationships - results in employees working the same jobs side by side in the same company/department for significantly different pay

compensating differentials

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