Assignment 6 Flashcards
1. Discuss the use of a compensation strategy to gain external competive advantage. 2. Explain labor market dynamics and their effects on compensation pricing. 3. Describe labor demand theories and their implications for compensation policy. 4. Summarize how organizational factors influence pay level and mix decisions. 5. Cite considerations in defining relevant labor markets. 6. Detail probable relationships between external pay policies and attaining various compensation objectives.
Two factors on which external competitiveness is expressed:
- Setting a pay level that is above, below, or equal to the competitors
- Determining the mix of pay forms relative to those of competitors
External Competitivness Refers to
the pay relationships among organizations or the organization’s pay relative to its competitors.
Pay level refers to
the average of the array of rates paid by an employer
Pay forms refer to
the mix of the various types of payments that make up total compensation.
Other things being equal, the higher the pay level
the higher the labor cost
Labor costs are equal to
the pay level times the number of employees
The higher the pay level relative to what competitors pay
the greater the relative costs to provide similar products or services.
Many companies use different pay levels
for different job families
How a company looks in comparison to the market depends on
the companies it compares to and the pay forms included in the comparison.
What influences external competitiveness?
1) Competition in the labor market for people with various skills
2) Competition in the product and service markets, which affects the financial condition of the organization
3. Characteristics unique to each organization and its employeees, such as its business strategy, technology, and the productivity and experience of its workforce.
2 basic types of markets:
1) Quoted Price
2) Bourse- negiotiating over terms and conditions until an agreement is reached.
In both markets the employers are the buyers and the employees are the sellers.
4 Basic assumptions that theories of labor markets usually begin with:
1) Employers always seek to maximize profits
2) People are homogeneous and therefore interchangeable
3) The pay rates reflect all costs associated with employment
4) The markets faced by employers are competitive, so there is no advantage for a single employer to pay above or below the market rate
Market Driven
Organizations pay competitvely with the market or even are the market leaders.
The demand side of the market focuses on:
the actions of the employer
The supply side of the market looks at:
potential employees
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
additional revenue generated when the firm employs one additional person, with other productions factors held constant
What must a manager do when he or she uses the marginal revenue product model to determine how many people to hire?
1) Determine the pay level set by market forces
2) Determine the marginal revenue generated by each new hire
Compensating differentials as a modification to the demand side:
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 advanatage”. Work with negative characteristics requires higher pay to attract workers
Efficiency wage theory says that sometimes high wages may increase efficiency and actually lower labor costs if they:
1) Attract higher quality applicants
2) Lower turnover
3) Reduce Shirking
4) Reduce the need to supervise
Efficiency increases through:
hiring better employees or motivating present employees to work smarter or harder. Pay level determines effort.
Signaling theory:
Employers deliberatley design pay levels and mix as a part of a strategy that signals to both prospective and current employees what kinds of behaviors are sought.
In signaling theory, a policy of paying below market for base pay yet offering generous bonuses or training opportunity sends a signal that
it wants employees that are risk takers
Characteristics of the applicants and the organization decisions about the pay level and mix act as signals that
help communicate
How does a reservation wage act as a modification to the supply side?
Job seekers will not accept jobs whose pay is below a certain wage, no matter how attractive other aspects of the job may be.
Human capital
Human capital is based on the premise that higher wages flow to those who improve their potential productivity be investing in themselves through additional education, training and expertise. The theory assumes that people are in fact paid at the value of their marginal product.
The value of an individual’s skills and abilities
is a function of the time, expense and resources expended to acquire them. Higher pay is required to induce people to train for more difficult jobs.
An employer’s pay level is constrained by:
its ability to compete in the product-and-service market. Any organization must, over time, generate enough revenue to cover expenses, including compensation.
Product demand
Product demand is a product market that sets the upper limit within which an employer’s pay level is set. If employers want to pay employees more than the maximum amount as dictated by their cost structure, they must be able to recover the costs either through passing higher prices to customers or holding prices steady and taking the cost of the higher wages from total revenues
Degree of competition
Comes into play when employers in highly competitive markets will be less able to raise prices without loss of revenues. With more competition, the consumer has a substitute effect in the event that one company charges more than another. Due to high competition, prices are usually held around those of the competitors and therefore, wages are held steady as well. If there are few to no competitors, higher prices can be passed to the consumer and and thus higher wages can be paid.
Individuals have a higher marginal value in a larger firm because
they can influence more people and decisions, which leads to more profits.
Factors to consider in defining markets
occupations, the geographic location of the organization and its competitors in the same product-and-service market.
The skills, knowledge and qualifications required in an occupation are important because
they tend to limit mobility among other occupations.
Qualficiations include not only training and educaiton but
licensing and certification requirements
If relevant markets are incorrectly defined
the estimates of competitor’s pay rates will be incorrect and the pay level mix inapproprately established
3 Competitive pay policies
1) Lead
2) Lag
3) Match– most common
Managers say that the failure to match competitors rates would
cause dissatifaction among present employees and limit the organization’s ability to recruit.
Many nonunionized companies tend to match or even lead competition to
discourage unions
A lead pay policy
maximizes the ability to attract and retain quality employees and minimizes employee dissatisfaction with pay. It can also offset less attractive features of work.
Negative aspects of a lead policy
1) can force employers to increase wages of current employees to avoid internal misalingment
2) May mask negative job attributes that contribute to high turnover later on.
Lag policy
pays below market rates and may hinder a firm’s ability to attract potential employees.
If pay level is lagged in return for a promise of higher future returns
such a promise may increse employee commitment and foster teamwork, which may increase productivity
Characteristics of an “employer of choice”
strong emphasis on performance, extensive training opportunities, challenging work assignments, and the like.
Calculation for pay level:
Pay/# of employees
Transacational work
routine tasks
Tactic work
complex tasks
