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
