External Competitiveness

Labor Costs =

(pay level) x (# of employees) *higher the pay level, greater the labor costs

Product demand

*Labor market* conditions (and legal requirements) put a *floor* on the pay level required to attract sufficient employees, the *product market puts a ceiling on the maximum* pay level

Match Pay-Level Policy

*Wage costs* Approximately equal to those of its product competitors *Ability to attract potential employees* Approximately equal to its labor market competitors Avoids placing an employer at a disadvantage in pricing products

Factors to consider w/ offshoring & outsourcing (4)

-Countries w/ *lower average labor costs also tend to have lower average productivity* i.e., a company must determine if labor costs savings will not be neutralized by lower productivity -Companies *must devote resources to systems that monitor worker effort or output* - this can be more difficult and more costly when geographic or cultural distance is great -*Customers' reactions* -*How long will the labor cost advantage hold and will sufficiently qualified employees continue to be available as other companies also tap into this pool of labor*

Characteristics of jobs that are thought to increase susceptibility to offshoring:

-Easily *routinized* -*Inputs/outputs easily transmitted electronically* -*Little need for interaction* with other workers -*Little need for local knowledge* such as unique social and cultural factors

To attract & retain the right employees...

-One company may pay more because it believes its higher-paid employees are *more productive* than those at other companies -Another company may pay less because it is *differentiating itself on non-financial returns*

Pay level & mix decisions focus on (2) objectives

1) Control costs and increase revenues 2) Attract and retain employees

Organization strategy

A variety of pay-level and mix strategies, between and within organizations -Some employers adopt a low-wage, no-service strategy; compete by producing goods/services with lowest total compensation possible (e.g., Nike and Reebok) -Others select a low-wage, high-services strategy (e.g., Marriot - room cleaners) -Others use a high-wage, high-services approach (e.g., Google)

Compensating differentials

Adam Smith - argued that individuals consider the "whole of the advantages and disadvantages of different employments" and make decisions based on the alternative with the greatest "net advantage" -If a job has negative characteristics, then employers must offer higher wages to compensate for these negative features -Explains the presence of various pay rates in the market

Three factors often used to determine the relevant labor markets are:

COG *Occupation* (skill/knowledge required) *Geography* (willingness to relocate, commute, or work as virtual employee) *Competitors* (other employers in the same product/service markets)

Degree of competition

Employers in highly competitive markets (e.g., manufacturers of automobiles or generic drugs) are less able to raise prices without loss of revenues

Compliance

Employers must pay at or above the legal minimum wage Prevailing wage laws and equal rights legislation must be met Pay forms are regulated (e.g., pensions and health care)

Higher the pay level relative to what competitors pay:

Greater the relative costs to provide similar products or services

Efficiency-wage theory

High 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" 5) reduce the need to supervise employees *efficiency increases by hiring better employees or motivating present employees to work smarter or harder*

Human capital

Higher earnings go to those who improve their potential productivity by investing in themselves (through additional education, training, and experience) In general, the value of an individual's skills and abilities is a function of the time, expense, and effort to acquire them

People's preferences

Increasingly important in determining external competitiveness e.g., preferences for base pay, health insurance, eye care, bonuses, etc. Some challenges in measuring preferences (e.g., social desirability - people sometimes care more about pay than they're willing to admit)

Reservation wage

Job seekers have a "reservation wage level," below which they will not accept a job offer, no matter how attractive the other job attributes i.e., may be above or below the market wage Seeks to explain differences in workers' responses to offers

What shapes external competitiveness? (3)

L-P-O 1) *Labor market factors* (nature of demand, nature of supply) 2) *Product market factors* (degree of competition, level of product demand) 3) *Organization factors* (industry, size, strategy, individual manager)

Employer size

Large organizations tend to pay more than small ones Consistent with economic theory - talented individuals have a higher marginal value in a larger organization because they can influence more people and decisions, thereby leading to more profits

Lead Pay-Level Policy

Maximizes the ability to attract and retain quality employees Minimizes employee dissatisfaction with pay May offset less attractive features of work

Lag Pay-Level Policy

May hinder a firm's ability to attract potential employees IF coupled with the promise of higher future returns (e.g., start-up firm): -May increase employee commitment -Foster teamwork -May possibly increase productivity

Efficiency

No research suggests under what circumstances managers should choose which pay-mix alternative Pay level may not gain any competitive advantage Wrong pay level may be a serious disadvantage

Fairness

Satisfaction with pay is directly related to pay level Sense of fairness is related to how others are paid

Defining the relevant market

Though people speak of "the market"...organizations often operate in many labor markets, each with unique demand and supply Managers must define the markets that are relevant for pay purposes and establish the appropriate competitive positions in these markets

Employers are __________, and potential employees are ____________

buyers, sellers

Modifications to the Demand Side:

compensating differentials, efficiency-wage theory

Hybrid policies

different policies regarding occupational groups, forms of pay, or business units

Industry & technology

e.g., labor-intensive industries (education) tend to pay lower than technology-intensive industries (petroleum or pharmaceuticals), whereas professional services (consulting firms) pay high The introduction of new technology within an industry can also influence pay levels (e.g., pay for grocery checkers has declined over time after the introduction of scanners, etc.)

Consequences of Pay-Level and Mix

efficiency, fairness, compliance

Labor Demand

how many new hires a company seeks and what they are willing and able to pay new employees

Additional factors

i.e., geographic barriers to mobility among jobs, union requirements, lack of information about job openings, degree of risk involved, degree of unemployment

Organization factors

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

Employer's demand for labor coincides with:

marginal *product* of labor & marginal *revenue* of labor

Competitive pay policy alternatives

match, lag, lead, hybrid

Globalization and relevant markets

offshoring & outsourcing

Labor supply

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

Signaling

process that underlies the sorting effect: -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 e.g., An employer that combines lower base pay with high bonuses may be signaling that it wants employees who are risk takers

Product market factors

product demand, degree of competition

Modifications to the Supply Side:

sorting & signaling, reservation wage, human capital, additional factors

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

Pay Level

the average of the array of rates paid by a company

Sorting

the effect that pay strategy has on the composition of the workforce (i.e., who is attracted and who is retained)

External Competitiveness

the organization's pay relative to its competitors

Pay Mix

the various types of payments that make up total compensation