Compensation Chapter 7

Pay levels

(base + bonuses+ benefits+ value of stocks)/number of employees

Product Demand

Caps a maximum pay level an employer can set

How is it expressed in practice, and why do different companies offer different pay for the same job?

Companies will offer a different pay based on value of the job and the pay policy they have chosen whether to be above at or below market of competitors. (size of pie) Also determine pay mix compared to competitors (pieces of the pie)

Relevant labor markets

Competitors based products, location and size. Jobs- skills and knowledge.

How does pay level affect costs?

Focus on controlling costs, attracting and retaining employees and maximizing productivity. The higher the pay levels the higher the labor costs.

Labor demand

How many employees will be hired by an employer. In short run employer can't change any factor of production except human resources.

Degree of Competition

In highly competitive markets employers are less able to raise prices without a loss of revenue.

Shapes external Competitiveness

Labor Market Factors (nature of supply and demand), Product Market Factors (Degree of Competition and level of product demand) Organizational Factors (industry, strategy, size, individual manager)

Pay policy alternatives - Lag Policy

May affect ability to attract potential employees if pay level is lagged in return for promise of higher future returns. (may increase employee commitment, teamwork, and increase productivity)

What is the rationale behind having different pay levels for different groups/types of employees?

Pay above market to attract more productive trained workers and reduce turnover cost. Pay below market to control costs and differentiate on nonfinancial returns.

Which pay policies achieve competitive advantage? What is the evidence?

Pay at market for non-strategic jobs and above market for strategic jobs. Or pay at higher levels with individual incentives.

Pay Mix

Pay for performance, benefits and base wages

Modifications to the demand side - Signaling

Pay policies signal the kinds of behavior the employer seeks.

What is external competitiveness

Pay relationships among organizations

Segmented labor markets

People flow to the work. Ex) St. Luke's Hospital involves multiple sources of employees from multiple locations with multiple employment relationships. High Base wages to compensate for travel expenses and low benefits.

Modifications to the demand side - Efficiency Wages

above market wages will attract better workers.

Marginal revenue of labor

additional revenue when firm employs one additional unit of HR. Decrease with new hires. Keep hiring until break-even point.

Explain product market factors & ability to pay

affect ability to change price of its products or services.

Pay policy alternatives - Lead Policy

maximize ability to retain quality employees and minimize employees' dissatisfaction with pay which might offset less attractive features of work.

Supply of labor

more people willing to take the job as pay increases. If unemployment rates are low offers of higher pay may not increase supply.

Pay policy alternatives - Pay with Competition

wage is similar to competitors and ability to attract potential employees is the same as competitors.

Marginal product of labor

with other factors held constant, additional output is associated with one additional HR unit. Decrease by new hires because new hires would have less fixed resources.

Modifications to the demand side - Compensating Differentials

work with poor working conditions requires higher pay to attract workers.