Chapter 7 Flashcards
Two aspects of pay translate external competitiveness into practice - what are those two aspects?
(1) how much to pay relative to competitors—whether to pay more than the competitors, to match what the competitor pay, or to pay less than whey they pay; and
(2) what mix of base, bonus, stock options and benefits to offer relative to what the competitors offer.
Why do organizations offer different pay rates for similar positions? aka what factors could affect this?
> Location - firms in cities have bigger offers
> Nature of the work
> And the industry to which the different firms belong has an effect: i.e. pharmaceutical / computer software
Are pay levels within organizations completely static?
> Pay levels within each organization are also not completely static.
> They can be adjusted over time to changing market conditions and/or business strategies.
With respect to external competitiveness - A major strategic decision when designing a compensation strategy is what?
> is whether to mirror what competitors are doing with pay
External competitiveness refers to what?
> refers to the pay relationships among organizations—the organization’s pay relative to its competitors.
> It also includeschoosing the mix of pay forms (i.e., bonuses, stock options, flexible benefits) that is right for the business strategy.
How is external competitiveness expressed in practice?
It is expressed in practice by:
(1) setting a pay level that is above, below, or equal to competitors’ and
(2) by considering the mix of pay forms relative to those of competitors.
Both pay level and pay forms focus on two objectives:
(1) to control costs and increase revenues
(2) to attract and retain employees.
Pay level decisions have a significant impact on expenses. Other things being equal, the higher the pay level, what else becomes higher?
> The higher the labour costs.
What is the formula for labour costs?
> labour costs = pay level x number of employees
Furthermore, the higher the pay level relative to what competitors pay, the greater the relative costs to what?
> the greater the relative costs to provide similar products or services.
Higher pay may facilitate what or result in what?
> Higher pay may facilitate the attraction and retention of talent, but it may also result in higher costs if higher productivity and higher revenues are not achieved.
Is there a single going rate in the labour market? If not, why?
> Different employers set different pay levels; that is, they deliberately choose to pay above or below what others are paying for the same work.
> That is why there is no single going rate in the labour market for a specific job
> companies often set different pay level policies for different job families.
> how a company compares to the market depends on the companies it compares to and the pay forms included in the comparison.
Not only do the rates paid for similar jobs vary between employers, but a single company may do what?
> may set a different pay level for different job families.
Is there a single “going mix” of pay forms?
> There is also no single “going mix” of pay forms
What factors affect a company’s decisions on pay level and pay forms?
(1) competition in the labour market for people with various skills;
(2) competition in the product and service markets, which affects the financial condition of the organization; and
(3) characteristics unique to each organization and its employees, such as its business strategy, technology, and the productivity and experience of its workforce.
What are labour market factors?
> nature of demand
nature of supply
What are product market factors?
> level of product demand
degree of competition
What are organizational factors?
> Industry and technology
employer size
employees’ preferences
organization’s strategy
Economic theories of labour markets usually begin with four basic assumptions:
1) Employers always seek to maximize profits.
2) People are homogeneous and therefore interchangeable; for example, a business school graduate is a business school graduate is a business school graduate.
3) The pay rates reflect all costs associated with employment (base wage, bonuses, holidays, benefits, even training).
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.
Organizations often claim to be what?
> often claim to be “market driven,” that is, they pay competitively with the market or are even market leaders.
What is on the demand side and what is on the supply side?
> The demand side focuses on the actions of the employer: how many employees they seek and what they are able and willing to pay them.
> The supply side looks at potential employees: their qualifications and the pay they are willing to accept in exchange for their services.
On a graph, what is the market point?
> The market rate is the point where the lines for labour demand and labour supply cross
Once we have the market-determined rate for graduates, how will an organization know how many graduates they can hire?
> an analysis of labour demand is required
In the short term, an employer cannot change any other factor of production (e.g., technology, capital, or natural resources). But - what can change? In this situation, what does the demand for labour coincide with?
> Thus, its level of production can change only if it changes the level of human resources. Under such conditions, a single employer’s demand for labour coincides with its marginal product of labour.
The marginal product of labour is:
> is the additional output associated with the employment of one additional person, with the other factors of production held constant.
When does the marginal product of labour decrease?
> The marginal product of labour decreases as number of new hires increases.
In the short term, factors of production such as office space, level of clerical support, etc. are considered what?
> are fixed
The marginal revenue of labour is the:
> is the money generated by the sale of the marginal product—the additional output from the employment of one additional person.
The level of demand that maximizes profits is that level at which what occurs?
> the level of demand that maximizes profits is that level at which the marginal revenue of the last hire is equal to the wage rate for that hire.
To utilize the labour market model, what must managers do?
> To utilize this model, a manager must do two things:
(1) determine the pay level set by market forces and
(2) determine the marginal revenue generated by each new hire.
What is a downsize to the labour market model?
> it oversimplifies the real world.
> In most organizations, it is almost impossible to quantify the goods or services produced by an individual employee, because most production is through joint efforts of employees with a variety of skills.
> Even in settings that use piece rates (e.g., $0.50 for each soccer ball sewn), it is hard to separate the contributions of labour from those of other resources (e.g., efficient machinery, sturdy materials, good lighting, ventilation).
Are marginal products and marginal revenues directly measurable?
So neither the marginal product nor the marginal revenue is directly measurable.
Economists also make assumptions about the behaviour of potential employees. The model assumes what:
> assumes that many people are seeking jobs,
> that they possess accurate information about all job openings,
> and that no barriers to mobility (discrimination, licensing provisions, or union membership requirements) exist
economic theories must frequently be revised to account for what?
> economic theories must frequently be revised to account for reality.
A particularly troublesome issue for economists is why an employer would pay more than what theory states is:
> more than what theory states is the market-determined rate
What is the ‘prediction’ and the ‘so what’ for the compensating differentials theory?
PREDICTION:
> Work with negative characteristics requires higher pay to attract/retain workers.
SO WHAT:
> Job evaluation and compensable factors must capture these negative characteristics.
What is the ‘prediction’ and the ‘so what’ for the efficiency wage theory?
PREDICTION:
> Above-market wages may improve efficiency by attracting workers with higher abilities, by discouraging shirking/quits, and may require less supervision.
SO WHAT:
> Staffing programs must be able to select the best employees; work must be structured to take advantage of employees’ greater abilities.
What is the ‘prediction’ and the ‘so what’ for the signalling theory?
PREDICTIONS:
> Pay policies signal to applicants the kinds of attributes/behaviours the employer seeks.
SO WHATS:
> Pay practices must recognize desired behaviours with higher pay, larger bonuses, and other forms of compensation.
More than 200 years ago, Adam Smith argued what about individuals?
> More than 200 years ago, 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.”
Breakdown the compensating differentials with a pertinent example:
> If a job has negative characteristics, that is, if the necessary training is very expensive (medical school, law school),
> job security is tenuous (stockbrokers, CEOs), working conditions are disagreeable (highway construction, garbage collectors),
> or the chances of success are low (professional sports—NBA, NFL, MLB, etc.), then:
- employers must offer higher wages to compensate for these negative features.
Efficiency wage theory suggests that:
suggests that sometimes high wages may increase efficiency and actually lower labour costs if they can:
1) Attract higher-quality applicants;
2) Lower turnover;
3) Increase worker effort;
4) Reduce “shirking” (what economists say when they mean “slacking off”); and
5) Reduce the need for supervision.
Research shows that higher wages actually do what?
> actually do attract more qualified applicants.
> But they also attract more unqualified applicants.
The higher the wage rate, the less likely it is that:
> the less likely it is that an employee would be able to find another job that pays as well.
> Thus, overall turnover is expected to be lower. The higher wages also motivate current employees to work harder and/or smarter.
> The underlying assumption is that pay level helps determine the level of effort.
There is also some research on shirking behaviour. One study looked at shirking behaviour by examining employee discipline and wages in several auto plants. What was found out about high wages?
> Higher wages were associated with lower shirking, measured as the number of disciplinary layoffs.
> So, although higher wages reduced shirking, the authors were unable to say whether it was reduced enough to offset the higher wage bill
Does an above-market wage allow an organization to operate with fewer supervisors?
> Some research evidence says yes. For example, a study of hospitals found that those that paid high wages to staff nurses employed fewer nurse supervisors.
> wages were not speculated though *
An organization’s ability to pay is related to what model?
> An organization’s ability to pay is related to the efficiency wage model.
Signalling theory is more useful in understanding what?
> the mix of pay forms.
Signalling theory holds that employers deliberately do what?
> employers deliberately design pay levels and pay forms as part of a strategy that signals to both prospective and current employees what kinds of behaviours are sought.
An employer who combines lower base with high bonuses may be signalling that what occurs:
> An employer who combines lower base with high bonuses may be signalling that it wants employees who are risk-takers. Its pay policy helps communicate expectations.
A study of university students approaching graduation found that what pay forms affected their job decisions?
> A study of university students approaching graduation found that both pay level and mix of pay forms affected their job decisions.
> Students wanted jobs that offered high pay, but they also showed a preference for individual-based (rather than team-based) pay, fixed (rather than variable) pay, job-based (rather than skill-based) pay, and flexible benefits.
What two theories are associated with the supply side of the model?
1) Reservation Wage
2) Human Capital
What is the ‘prediction’ and the ‘so what’ for the reservation wage theory?
PREDICTIONS:
> Job seekers will not accept jobs if pay is below a certain wage, no matter how attractive other job aspects are.
SO WHAT:
> Pay level will affect ability to recruit. Pay must meet some minimum level.
What is the ‘prediction’ and the ‘so what’ for the Human Capital theory?
PREDICTION:
> General and specific skills require an investment in human capital. The value of an individual’s skills and abilities is a function of the time and expense required to acquire them.
SO WHAT:
> Pay level needs to be high enough to offer sufficient return on investment for workers to attain these skills.
According to the reservation wage theory, job seekers have what?
> According to the reservation wage theory, job seekers have a reservation wage level below which they will not accept a job offer, no matter how attractive the other job attributes.
> If pay level does not meet their minimum standard, no other job attributes can make up (i.e., compensate) for this inadequacy.
A reservation wage may be what relative to the market wage?
> may be above or below the market wage.
What does the reservation wage theory seek to explain?
> The theory seeks to explain differences in workers’ responses to offers.
Human capital theory, perhaps the most influential economic theory for explaining pay level differences, is based on what premise?
What does it assume?
> Human capital theory, perhaps the most influential economic theory for explaining pay level differences, is based on the premise that higher earnings flow to those who improve their potential productivity by investing in themselves (acquiring additional education, training, and experience).
> The theory assumes that people are in fact paid at the value of their marginal product.
What can increase marginal product?
> Improving productive abilities by investing in training or even in one’s physical health will increase one’s marginal product.
The value of an individual’s skills and abilities is a function of:
> is a function of the time, expense, and resources expended to acquire them.
How does the curve increase with human capital theory?
> As pay level increases, the number of people willing to make that investment also increases, thereby creating an upward-sloping supply curve.
A number of additional factors affect the supply of labour. What are some?
> Geographic barriers to mobility between jobs, > union requirements,
lack of information about job openings,
the degree of risk involved,
and the degree of unemployment also influence labour markets.
What are non-monetary aspects important for?
> non-monetary aspects of jobs (e.g., flexibility) may be important aspects of the return on investment.
The supply and demand for labour are major determinants of:
> are major determinants of an employer’s pay level.
an employer’s pay level is constrained by its ability to:
> by its ability to compete in the product/service market.
What are the two key market factors?
> Product demand and the degree of competition are the two key product market factors.
> Both affect the ability of the organization to change what it charges for its products and services.
What puts on the “floor” and the “ceiling” for the pay level in respect to product demand?
> Although labour 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 that an employer can set.
Employers in highly competitive markets such as manufacturers of automobiles or generic drugs are less able to do what?
> are less able to raise prices without loss of revenues.
Other factors besides product market conditions affect pay level. What are some?
> The productivity of labour, the technology employed, the level of production relative to plant capacity available—all affect compensation decisions.
The industry in which an organization competes influences what?
> influences the technologies used.
How can technology affect pay levels?
In addition to differences in technology across industries, the introduction of new technology within an industry also influences pay levels.
There is consistent evidence that employer size affects pay levels. Describe this concept in simple terms:
> There is consistent evidence that large organizations tend to pay more than small ones
Markets, after all, involve what choices?
> Markets, after all, involve both employers’ and employees’ choices
Aside from organization size, what other factor causes higher wages?
> Similarly, evidence suggests that organizations making greater use of high-performance work practices (such as teams, quality circles, total quality management, job rotation) and having higher-skilled workers also pay higher wages.
The observable benefits of higher wages may include:
> higher pay satisfaction, improved attraction and retention of employees, and higher quality, effort and/or performance.
Ultimately, higher wages must do what?
> Ultimately, higher wages must bring something in return (e.g., higher productivity, quality, and/or innovation). Otherwise, a firm’s ability to compete and survive will be in question.
Do organizations operate in one market?
> Although the notion of a single homogeneous labour market may be an interesting analytical device, each organization operates in many labour markets, each with unique demand and supply.
The three factors usually used to determine the relevant labour markets are:
> The three factors usually used to determine the relevant labour markets are occupation (skill/knowledge required), geography (willingness to relocate and/or commute, or become virtual employees), and competitors (other employers in the same product/service and labour markets).
One thing is certain though: if the markets are incorrectly defined, what occurs?
> the estimates of competitors’ pay rates will be incorrect and the pay level and mix of pay forms inappropriately established.
Two studies do shed some light on this issue.27 They conclude that:
> Two studies do shed some light on this issue.
> They conclude that managers look at both their competitors (their products, location, and size) and the jobs (the skills and knowledge required), and their importance to the organization’s success (e.g., lawyers in law firms, software engineers at Microsoft).
The data from product market competitors (as opposed to labour market competitors) are likely to receive greater weight when:
1) Employee skills are specific to the product market;
2) Labour costs are a large share of total costs;
3) Product demand is responsive to price changes; and
4) The supply of labour is not responsive to changes in pay.
Compensation theories offer some help in understanding the variations in pay levels we observe between employers. However, they are less helpful in:
> understanding differences in the mix of pay forms.
Recall that pay level is:
> Recall that pay level is the average of the array of rates inside an organization.
There are three conventional pay level policies:
> to lead, to match, or to lag competition.
What do newer policies do?
> Newer policies emphasize flexibility: among policies for different employee groups, among pay forms for individual employees, and among elements of the employee relationship they wish to emphasize in their external competitiveness policy.
The basic premise is that the competitiveness of pay will affect:
> will affect the organization’s ability to achieve its compensation objectives, which in turn will affect the organization’s performance.
The problem with much pay level research is that it :
> focuses on base pay and ignores bonuses, incentives, stock options, employment security, benefits, and other forms of pay.
Comparisons based on just pay can be:
> Comparisons based on just pay can be misleading.
> In fact, managers seem to believe they get more bang for their buck by allocating dollars away from base pay and into variable forms that more effectively shape employee behaviour
Given the choice to match, lead, or lag, the most common policy is to do what? how is this justified?
> match rates paid by competitors.
> Managers historically justify this policy by saying that failure to match competitors’ rates would cause dissatisfaction among present employees and limit the organization’s ability to recruit.
Many non-unionized companies tend to match or even lead competition to do what?
> to discourage unionization.
A lead policy maximizes what?
> A lead policy maximizes the ability to attract and retain quality employees and minimizes employee dissatisfaction with pay.
A number of researchers have linked high wages to:
> have linked high wages to ease of attraction, reduced vacancy rates and training time, and better-quality employees
> Research also suggests that high pay levels reduce turnover and absenteeism.
Studies have also found that the use of variable pay (bonuses and long-term incentives) is related to an organization’s improved financial performance, but what is not?
> that pay level is not.
A lead policy can have negative effects, too. It may:
> It may force the employer to increase the wages of current employees to avoid internal misalignment and murmuring.
> Additionally, a lead policy may mask negative job attributes that contribute to high turnover later on (e.g., lack of challenging assignments or hostile colleagues).
A policy to pay below market rates may hinder what in an organization?
> may hinder a firm’s ability to attract potential employees.
If pay level is lagged in return for the promise of higher future returns (e.g., stock ownership in a high-tech start-up firm), such a promise may affect employees in what way?
> may increase employee commitment and foster teamwork, which may increase productivity.
Can you lag and lead competition at the same time?
> Additionally, it is possible to lag competition on pay level but to lead on other returns from work (e.g., meaningful work, desirable location, outstanding colleagues, cool tools, work/life balance).
Similarly to the lead, match, or lag options to pay level, there are various options to pay mix as well. Examples of some obvious alternatives are:
> performance-driven, market match, work/life balance, and security
> Market match simply mimics the pay mix competitors are paying.
Some companies compete on the basis of:
> on the basis of their overall reputation as a place to work, beyond pay level and pay mix.
The shared choice approach begins with the traditional alternatives of lead, match, or lag. But it then adds a second part - what is that?
> which is to offer employees choices (within limits) in the pay mix .
employees as customers
One risk of allowing employees’ choices is that :
> employees might make choices that jeopardize their well-being,
> Another is the “24 jars of jam” dilemma. Supermarket studies report that offering consumers a taste of just a few different jams increases sales. But offering a taste of 24 different jams decreases sales.
Some companies prefer to report the mix of pay forms using what?
> using a dashboard
The dashboard changes the focus from emphasizing the relative importance of each form within a single company to comparing each form by itself to the market (many companies).
The pay mix employees receive can also differ at different levels of:
> The pay mix employees receive can also differ at different levels of the internal job structure
What are some Consequences of an Effective Externally Competitive Pay Policy?
> contain operating expenses (labour costs)
increase pool of qualified applicants
increase quality and experience
reduce voluntary turnover
increase probability of union-free status
reduce pay-related work stoppages
No matter what the competitive pay policy, it needs to be translated into:
> needs to be translated into practice
