Chapter 7: Defining Competitiveness

Question 1

Define external competitiveness. In your definition, also define pay level and pay mix and explain how the terms are related (p.214)

Answer 1

• External competitiveness - refers to the pay relationships among organizations, the organizations pay relative to its competitors. External competitiveness is expressed in practice by 1. setting a pay level that is above, below, or equal to that of its competitors; and 2. determining the paid mix relative to those competitors:
• Pay levels: refers to the average of the array of rates paid by an employer. (Base + bonuses + benefits + value of stock holdings) / number of employees
• pay mix: refers to the various types of payments, or pay forms that make up the total compensation

Question 2

What are two common objectives of pay-level and pay-mix decisions (p.215)

Answer 2

• Pay level and pay mixed decisions both focus on two objectives 1. control cost and increase revenues and 2. attract and retain employees

Question 3

List (and discuss) the main factors shaping external competitiveness; these factors are summarized by Exhibit 7.5 but also discussed individually (pp.221-235).

Answer 3

• Factors that affect external competitiveness are
  1. Labor Market Forces competition in the labor market for people with various skills
  2. Product Market Forces competition in the product and service markets which affect the financial condition of the organization and
  3. Organizational Factorscharacteristics unique to each organization and its employees such as its business strategy, technology, and the product and experience of its workforce. These factors simultaneously influence payable and pay mix decisions.

Question 4

Discuss “relevant markets” –what is it and how do organizations define/choose it (p.236). *you do not need to review/study the sub-sections labeled “Globalization of Relevant Labor Markets: Offshoring and Outsourcing”

Answer 4

• Relevant markets are those employers with which an organization competes for skills and products or services. Three factors commonly used to determine the relevant markets are the occupation/skills required, the geography (willingness to relocate and/or commute), and employers that compete in the product market
• If the markets are incorrectly defined the estimates of competitors pay rates will be incorrect and the pay level and pay mix will be inappropriately established
• Studies conclude that managers look at both competitors, their products location and size, and the jobs, the skill and knowledge required, and their importance to the organization’s success. Depending on its location and size a company may be deemed a relevant comparison even if it’s not a product market competitor.

Question 5

Summarize the consequences of pay-level decisions (Exhibit 7.2, p.248).

Answer 5

• External competitiveness has two major consequences: it affects 1. operating expenses and 2. employee attitudes and work behaviors.
• Some consequences of pay levels: competitiveness of total compensation:
  o contain operating expenses (labor costs)
  o increase pool of qualified applicants
  o increase quality and experience
  o reduce voluntary turnover
  o increase probability of union free status
  o reduce pay related work stoppages