Ch. 7 Defining Competitiveness

Labor costs =

(average pay level) x (# of employees)

Consequences of Pay-Level and -Mix Decisions

- efficiency - fairness - compliance

Three Pay-Level Policies

- to lead - to meet or match - to follow competition or lag

Labor Supply Behavior Model assumes potential employees

-Are seeking jobs -Possess accurate information about all job openings -Have no barriers to mobility

Labor Supply simplifying reality

-As the assumptions change, so does the supply -The upward sloping supply assumes that as pay increases, more people are willing to take a job -If unemployment is low, higher pay may not increase supply -Competitors may match offers of higher pay, keeping supply stable

Product Market Factors

-Degree of Competition -Level of product demand

Labor markets work with supply and demand of labor

-Demand focuses on the actions of employers -Supply looks at potential employees -The market rate is where labor demand and labor supply cross

•Job characteristics that can increase susceptibility to offshoring

-Easily routinized -Inputs or outputs easily transmitted electronically -Little need for interaction with other workers -Little need for local knowledge

•Data from product market competitors likely receive more weight when:

-Employee skills are specific to the product market -Labor costs are a large share of total costs -Product demand is responsive to price changes -The supply of labor is not responsive to changes in pay

Attract and Retain the Right Employees:

-How a company compares to the market depends on what competitors it compares to and what pay forms are included •Comparison of base wage may show one factor but a look at total compensation may show a different pattern

Organization Factors

-Industry -Strategy -Size -Individual manager

lead pay-level policy 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

•Two studies focus on how employers choose relevant markets

-Managers look at both competitors and the jobs -Depending on its location and size, a company may be a relevant comparison even if it is not a product market competitor

Consequences of Pay-Level and -Mix Decisions: Efficiency

-No research suggests when managers should choose which pay-mix -Beyond opinions, there is minimal evidence of the consequences of different policy alternatives

•If $40,000 is the market rate for business graduates, how many graduates will a specific employer hire?

-The answer requires an analysis of labor demand

Marginal Product of Labor

-is the additional output associated with the employment of one additional person, with other production factors held constant - a single employer's demand for labor coincides with this

Pay level and pay mix focus on two objectives:

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

4 basic assumptions of theories of labor markets

1. Employers always seek to maximize profits 2. People are interchangeable 3. Pay rates reflect all costs associated with employment 4. Competitive markets give no advantage in paying non-market rate

External Competitiveness: What shapes it

1. Labor Market Factors 2. Product Market Factors 3. Organization Factors

Relevant Labor Markets - 3 factors usually used to determine

1. Occupation - skill or knowledge required 2. Geography - willingness to relocate, commute, or become virtual employee 3. Competitors - other employers in the same product or service and labor markets

Basic types of markets (2)

1. Quoted Price 2. Bourse

External Competitiveness Expressed

1. Setting a Pay Level - above, below, or equal to competitors 2. Determining a mix of pay forms relative to those of competitors

effenciency wage

Above-market wages will improve efficiency by attracting workers who will perform better and be less willing to leave - staffing programs must have the capability of selecting the best employees. work must be structured to take advantage of employees' greater efforts

Bourse

Allows haggling - ex. eBay

Average Pay Level Includes

Base Pay + Increases + Benefits + Allowances + Perquisites

Labor Market Factors

Nature of demand Nature of supply

Signaling

Pay policies signal the kinds of behavior an employee seeks - pay practices must recognize these behaviors by better pay, larger bonuses, and other forms of compensation

Quoted price

Price is known - ex. Amazon

External Competitiveness

Refers to pay relationships among organizations - an organization's pay relative to its competitors

Human captial

The value of an individual's skills and abilities is a function of the 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

Relevant markets definition is..

a big part in figuring out how and how much to pay

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

by changing the level of human resources

Modifications to the demand side

compensating differentials, efficiency-wage theory

Employer of choice

corresponds to the brand or image a company projects as an employer

Degree of competition

employers in competitive markets are less able to raise prices

Consequences of Pay-Level and -Mix Decisions: Compliance

in addition to pay-level, various pay forms are regulated such as pension and healthcare plans

Pay level

is the average of the array of rates an employer pays

Marginal revenue

is the money generated by sale of the marginal product, the additional output from one additional person -Employers will hire until marginal revenue equals the cost associated with employing that person -The level of demand that maximizes profits is that level where marginal revenue is equal to the wage rate for that hire

Market rate

is where labor demand and labor supply cross

Reservation Wage

job seekers will not accept jobs with pay below a certain wage, no matter how attractive other job aspects - pay level will affect ability to recruit

lead pay-level policy

maximizes the ability to attract and retain quality employees and minimizes employee dissatisfaction with pay -no simple relationship between pay-level and financial performance

Lag

paying below market rates may hinder a firm's ability to attract potential employees - if coupled with the promise of higher future returns, this may increase employee commitment and foster teamwork, increasing productivity -How long this promise works, is unknown and unmet expectations can have negative effects

modifications to supply side

reservation wage, human capital

•Diminishing marginal productivity

results when each new worker has a progressively smaller share of production factors available -Until fixed production factors change, each new hire produces less than the previous hire -The amount each hire produces is the marginal product

Consequences of Pay-Level and -Mix Decisions: Fairness

satisfaction with pay is directly related to pay-level, more is better

Product demand

the product market caps the pay level an employer can set

pay-with-competition policy ...

tries to match wage costs to product competitors and attract applicants equal to the labor market competitors

compensating differentials

work with negative characteristics requires higher pay to attract/retain workers - job evaluation must collect compensable factors most capture these negative characteristics

Organizational Factors

•Industry and Technology •Employer Size •People's Preferences •Organization Strategy

Different Polices for Different Employee Groups

•Many employers go beyond a single choice and may: -Vary the policy for different occupational families -Vary the policy for different forms of pay -Adopt different policies for different business units facing different competitive conditions

Match (Pay at Competition Level)

•The most common policy is to match rates paid by competitors

Shared choice

•begins with the lead, meet, or lag alternatives -It adds a second part, to offer employees choices in the pay mix -The "employee-as-customer" is not new in the U.S. -Does offering people choices matter? •One risk is employees make the "wrong" choice •Offering too many choices may lead to confusion, mistakes, and dissatisfaction

Marginal Revenue of Labor

•is the additional revenue generated from employing one additional person. -With other production factors held constant

Pay mix

•is the various types of payments, or pay forms, that make up total compensation