Chapter 7

Labour Demand THeories and Implications

Compensating Differentials Efficiency Wage Signalling

Dashboard

Exhibit 7.11

Pay Mix Policy Alternative

Exhibit 7.9

COnsequences of Pay Level and Pay mix Decisions

It affects (1) operating expenses and (2) employee attitudes and work behaviours.

Defining the Relevant Market

Managers look at both their competitors - their products, location, and size - and the jobs - the skills and knowledge required, and their importance to an organizations success.

Human Capital

The value of an individual's skills and abilities is a function of the time and expense required to acquire them. Higher pay is required to induce people to train for more difficult jobs. based on the premise that higher earnings flow to those who imptove their potential productivity by acquiring education, training, and experience.

Pay Level

the average of the array of rates paid by an employer: base + bonuses + benefits + stock options/number of employees

Labour Market Factors

Four Basic assumptions 1. employers always seek to maximie profits 2. people are homogeneous and therefore interchangeable 3. The pay rates reflect all costs associated with employment(base wage, bonuses, holidays, beenfits, training) 4. the markets faced by employers are competitive, so there is no advantage for a single employerr to pay above or below the market rate.

Lag Policy

Hinder ability to attract potential employees. If pay level is lagged in return for the promise of higher future returns, such promise may increase employee commitment and teamwork, leading to higher possibility. Possible to lag in pay level but lead on other returns

Labour Supply

If unemploymeent is low offers of high pay may not increase supply. Dominant emlpoyer has more ability to control wages.

Reservation Wage Theory

Job seekers will not accept jobs when pay is below a certain wage, no matter how attractive other job aspects are. Pay level will affect ability tot recruit. Reservation wage is the lowest wage someone will accept to take a job.

Compensation different Mixes

split between base pay, benefits, bonuses and options

What Managers Say

supervisors try to solve with money their difficulties with managing people.

Pay Forms

the mix of the various types of payments that make up total compensation.

Lead Policy

Able to attract and retain quality employees and minimizes employee dissatisfaction with pay. Offsets less attractive features of work. eas of attractioon, reduced vacancy rates, and trainng time and better quality employees.

What Shapes External Competitiveness?

COmepetiton in the labor market for people with various skills; Competition in the product and service markets, which afffect the financial ondition of the organization; and characteristics unique to each organization and its employees, such as biz strat, tech, and productivity/exp of workforce

Organizational Factors

Industry and Technology: labour intensive industries tend to pay lower than tech-intensive industries. The differences in tech across industries and within industries influence pay levels Employer Size: large organizations tend to pay more than small ones. This relationship between organization size, ability to pay, and pay level is consistent with economic theory. it says that talented individuals have a higher marginal value in a larger organizationbecause they can influence more people and decisions, leading to more profits, Employee Preferences: what pay forms do employees really value? Better understanding of employee preferences is increasingly important in determine external comp. Org Strat: Some employers adobt a low-wage, no-services strategy; the compete by producing goods and services with as little total compensation as possible.

Control Costs

Labour Costs = Pal Level X Number of Employees.

What shapes external competitvness model

Labour market factors: Nature of supply/demand Product market factors: level of product demand/degree of competition Organizational Factors: Industry and Tech, employer size, employees preferences, organization's strategy

Relevant Markets

Managers must define the markets that are relevant for pay purposes and establosh the appropriate competitve positions for their own markets. the three factors usually used to determine the relevant labour markets are the occupation, geogrpahy, and competitors.

Different pay levels for different job families

May pay some employees above market, some below market. this changes with total compensation base pay may be higher for certain employees, once including stock options and bonuses etc.

Product Market Factors

Product Demand: labour market conditions put a floor on thepay level required to attract sufficient employees, the product market puts a ceiling on the max pay level an employer can set. Degree of Competition: employers in high comp markets such as manufacturers of automobiles or generic drugs are less able to riase prices without loss of revenues. Single sellers of items such as Lambos or viagra can set whatever price they want.

Competitve Pay Policy Alternative

There are three convetional pay policies: to lead, to meet, or to follow competition. Newer policies emphasize lexibility: among policies for different employee groups, among pay forms for individual employees, and among element of the emlpoyee relationship they wish to emphasize in their external competitiveness policy.

Attract and Retain Talent

Why pay some people more? Better trained, more innovative, less likely to quit Why pay less? differentiating itself on non-financial - more challenging/interesting work, superior training, more rapid promotions, or greater job security.

Efficiency Wage Theory

high wages may increase efficiency and lower labour costs by attacting higher-quality applicants who will work harder. 1. Attract Higher Quality Applicants 2. Lower Turnover 3. Increase Worker effort 4. Reduce shirking (slacking off) 5. Reduce the need to supervise employees SO WHAT? staffing programs must have the capability of sleecting the ebst employees; work must be structured to take advantage of employees' greater efforts ALso attract more unqualified applcants, some research suggests allows organizations to operate with fewer supervisors

Pay with Competition (Match)

most common. pay equal or more to discourage unionization wants to be approximately as attractive as other competitors avoids disadvantage/advantage

Signalling Theory

pay policies signal the kinds of behaviour the employer seeks SO WHAT? pay practices must recognize desired behaviours with more pay, larger bonuses, and other forms of compensation Policy of paying lower base pay with more incentives would attract different people than high base pay no performance incentives. Risk takers vs less risky.

Work Flows to the People - on-site, off-site, offshore

reality is complex; theory abstracts. it is not that theories are useless. the simply abstract away the detail, clarifying the underlying factors that help us understand how reality works. The segmented sources of labour mean that determining pay levels and mix increasingly requires understanding market conditions in different locations worldwide. Managers also need to know the jobs required to do the work, the tasks to be performed, and the knowledge and behaviors required to perform them so that they can bundle the various tasks to send to different

External Competitiveness

refers to the pay relationshops among organizations - the organization's pay relative to its competitors. It is expressed in practice by (1) setting a pay level that is above, below, or equal to a competitors' and (2) by considering the mix of pay forms relative to those of competitors

Shared CHoice

shared choice approach begins the the traditional althernaties of lead, meet, or lag. the second part is to offer employees choices in the pay mix.

Marginal Product of Labour

the additional output associated with the employement of one additional human resources unit, with orther production factors held constant

Marginal Revenue of Labour

the additional revenue generated by each additional unit of HR, with other production factors held constant a manager using the marginal revenue product model mucst do only 2 things: 1 determine the pay level set up by market forces and 2, determining the marginal revenue generated by each new hire. this tells the manager how many people to hire.

COmpensating Differentials THeory

the idea that higher wages must be offered to compensate for negative features of the job. SO WHAT? job evaluation and compensable factors must capture these negative characteristics Hard to document due to the dificulties in measuring and controlling all the factors that go into a net-advantage calculation

People Flow to the work

they come to find work ratehr than being sent our to help check it out oage 149, nurses example