Compensation Ch. 7

What are the consequences of pay level and mix decisions?

Efficiency Fairness Compliance

Identify an accurate statement about the pay level in a company:

A company may have varying pay levels for different job families.

How is external competitiveness expressed in practice?

By establishing a pay level that is greater than, less than, or equal to that of competitors By setting the pay mix in relation to those of competitors

What are the only things that a manager using the marginal revenue product model must do?

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

Labor Costs =

(pay level) X (number of employees)

Pay level and pay mix focus on _____________ objectives

4

A lead policy can have negative effects:

It may force the employer to increase wages of current employees too. It may mask negative job attributes that contribute to high turnover.

_________________ is the dollar value created by increasing revenues and/or decreasing costs by changing one or more HR practices

Utility

The underlying assumption of efficiency-wage theory is that pay level determines _____.

effort

A _________ pay level policy maximizes the ability to attract and retain quality employees and minimizes employee pay dissatisfaction

lead

Pay mix is the various types of payments or pay forms, that make up

total compensation

What are they?

Control costs Increase revenues Attract employees Retain employees

Each job in the labor market has a fixed "going rate." T/F

False

What is the effect of the introduction of new technology within an industry that reduces the skills required of employees?

It causes the employees' average pay to decline.

two basic types of markets:

Quoted price (Amazon is a quoted price market, price is known) Bourse (eBay - allows haggling/negotiation)

Rent =

a return on activities in excess of the minimum

The amount each hire produces is the:

marginal product

In a study conducted to determine the effects of sorting and signaling strategies, it was determined that pay level held more significance for _____

materialists than for the risk-averse

Supply looks at...

potential employees

How a company compares to the market depends on...

what competitors are compared to what pay forms are included

The option of off-shoring to reduce labor expenses is also described as _____.

work flowing to the people

What are the observable results of increased wages? (Check all that apply.)

Greater employee attraction and retention Improved quality, effort, and performance Greater pay satisfaction

According to a study on managers' approaches to pay decisions under varying economic conditions, how did level of unemployment affect wage adjustment recommendations?

It had almost no impact on wage adjustment recommendations.

Three factors usually used to determine relevant labor markets:

Occupation (skill or knowledge required) Geography (willingness to relocate, commute, or become a virtual employee) Competitors (other employers in the same product or service and labor markets)

The two key product market factors that affect the ability of an organization to change what it charges for its products are:

Product demand Degree of competition

a return (profits) received from activities that are in excess of the minimum pay level needed to attract people to those activities.

RENT

The behavior (labor supply) model assumes potential employees are...

Seeking jobs Possess accurate information about all job openings Have no barriers to mobility

A reservation wage may be more than or less than the market wage.

TRUE

True or false: The marginal product and the marginal revenue of a new hire are not directly measurable quantities

TRUE - it is almost impossible to quantify the goods or services produced by an individual employee, since most production is through joint efforts of employees with a variety of skills.

marginal product of labor:

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

When will an employer face no increase in labor supply even after raising its pay level?

When competitors quickly meet the employer's higher offer

When are the data from product market competitors likely to be given greater weight than that of labor market competitors in defining a relevant market? (Check all that apply.)

When employee abilities are specific to the product market When labor expenses form a large share of total expenses When labor supply is not responsive to pay changes When demand for a product is responsive to price changes

External competitiveness is expressed in practice by setting a pay level that is

above, below, or equal to competitors.

The market rate is where labor demand and labor supply ___________

cross

An employer will keep hiring until the marginal revenue generated by the last hire equals the _____.

expenses associated with employing that person

Diminishing marginal productivity for each new employee added to a firm arises from the fact that each new employee _____.

has access to a progressively smaller portion of other factors of production

C

is the cost per applicant.

r

is the validity coefficient, the correlation between criterion, y, and one or more pre-employment assessments.

Until fixed production factors change, each new hire produces...

less than the previous hire.

the point at which the labor demand line and the labor supply line cross is called the _____

market rate

The most common policy is to _________ rates paid by competitors

match

Demand focuses on...

the actions of employers

One of the common cuts companies make in times of high unemployment is decreasing _____.

contributions to 401k retirement plans

Efficiency Wage theory

high wages INCREASE efficiency and lower labor costs

When is paying employees above market an efficient strategy for an organization?

When the organization's revenues exceed the strategy's expenses

The higher the pay level relative to competitors, the greater the...

relative costs to provide similar products or services

A study on how economic factors translated into wage decisions for managers found that the profitability of a company was viewed by managers as a factor for higher management in determining _____.

the general pay budget

Which of the following options reduces labor expenses when people flow to the work?

Segmenting the source of labor

How do managers choose their relevant labor markets? (Check all that apply.)

They look at the skills and knowledge required for a job. They consider the products, size, and location of their competitors. They evaluate the importance of a job to their organization's success

If a _______ pay level policy is coupled with the promise of higher future returns, this may increase employee commitment and foster teamwork, increasing productivity

lag

Greatly improved communication and software connectivity have accelerated _____.

the growth of offshoring

Pay level research focuses on __________ __________ and ignores bonuses, incentives, options, employment security, benefits, or other forms of pay

base pay

In the short term, an employer cannot change any factor of production except by

changing the level of human resources

The dashboard form of reporting the mix of pay forms of a company focuses on _____.

comparing each pay form to the market

According to agency theory, companies must allot resources to systems that track employee output, which becomes more costly and difficult when _____.

cultural or geographic distance is great

In both the quoted-price market and the bourse, _____ function as the buyers and _____ function as the sellers

employers / job applicants

What are Characteristics unique to each organization?

Business strategy, technology, and the productivity and experience of its work force.

Each organization operates in ____________ labor markets, each with unique demand and supply.

many

External competitiveness refers to the pay relationships among

organizations (pay relative to competitors)

Recently, unemployment is high and companies make...

pay cuts or They may also reduce 401k contributions. Or impose pay freezes.

Some believe job seekers take the first job offer whose pay meets their _____________ wage

reservation

External competitiveness is expressed in practice by determining the pay mix relative to those of

competitors

Compensating ________ is a reason for differing pay rates in the labor market and is difficult to document due to the inability to accurately measure and control the factors that go into a net-advantage calculation.

differentials

According to economic theory, a talented individual will have a higher marginal value when the individual is _____.

employed at a large organization

Human Capital theory:

higher earnings flow to those who improve their potential productivity by investing in themselves

Research has proven that in manufacturing, productivity has a positive correlation with _____.

hourly wage level

In the short term, a company's factors of production are _____, which causes each new hire to have lower marginal productivity than the previous hire.

inalterable

Employers in extremely competitive markets find it more difficult than other employers to _____.

increase prices without loss of revenues

Companies often set different pay level policies for different...

job families

Reservation wage theory:

job seekers have a wage level below which they will not accept a job, no matter how attractive the other attributes

Signaling holds that employers design pay levels and mix to signal the

kinds of behaviors they seek (Those better trained, better educated, and with more experience signal they are likely to be better performers)

Technology-intensive industries tend to _____ than labor-intensive industries.

pay higher

Evidence has consistently proven that large organizations tend to _____ than do small organizations.

pay higher wages

Z

the mean standard score of those hired.

SR

the selection ration, which is hires/applicants.

This happen IF...

they attract high quality applicants, lower turnover, increase worker effort, reduce shirking, and reduce the need for supervision

Utility formula:

u = r * SDy * Z - C/SR

Theories of labor markets begin with ________ basic assumptions:

4

What are they?

A single employer has no advantage to pays below or above the market rate. Employers always aim to maximize profit. All costs associated with employment are reflected in pay rates People are homogeneous and thus interchangeable.

Due to restrictions placed by the product market on an employer's pay level, what strategies must an employer use to compensate for paying above the maximum? (Check all that apply.)

Allocating a large share of total revenues to cover labor expenses Passing the higher pay level on to consumers by increasing prices

There are three pay level policies:

To lead To meet or match To follow competition, or lag

Pay level is is the average of the

array of rates an employer pays

SDy

is the standard deviation of the dollar value of different employee performance levels.

u

is the utility (revenue - cost) per hire per year.

A single employer's demand for labor coincides with the

marginal product of labor

The concept of upward sloping supply in theories of labor markets assumes that as wage rates increase...

more people are willing to take a job

Companies with higher profits than competitors can share this success with employees by leading competitors' pay levels and/or through bonuses that are tied to profitability. Academics view this as _____.

rent-sharing

Employers will hire until marginal _____________ equals the cost associated with ___________ that person.

revenue / employing

Labor markets work with ___________ and __________ of labor

supply / demand

One of the ways in which employers make pay cuts in times of high unemployment is by requiring employees to _____.

take furloughs without pay

marginal revenue of labor:

the additional revenue generated from employing one additional person (The money generated by the sale of the marginal product - the additional output of one additional person)

These factors act in concert to influence...

pay level and pay mix decisions

While _____ put a floor on the pay level needed to attract sufficient employees, _____ put a lid on the highest pay level than an employer can set.

labor market conditions / product market conditions

Sorting is the effect pay strategy has on who is ___________ to and ______________ in a job

attracted / retained

The level of demand that maximizes profits is that level where marginal revenue is ____________ to the wage rate for that hire

equal

An entire industry can pass high pay rates on to consumers if pay is a relatively ______ proportion of total operating expenses

low

Compensating Differentials occurs when...

Employers offer higher wages when a job has negative characteristics

Human Capital theory assumes people are paid at the value of their....

marginal product

_______________ _____________ begins with the traditional alternatives of lead, meet, or lag; it then adds a second part, which is to offer employees choices within limits in the pay mix.

shared choice

What are the factors that shape external competitiveness?

Competition in the labor market for applicants with various skills Attributes unique to each company Competition in the product and service markets