Part. Chapter 7 Defining Competitiveness Chapter 8 Designing Pay Levels, Mix, and Pay Structures. External Competitiveness: Determining the Pay Level

Transcription

1 Part II External Competitiveness: Determining the Pay Level 7-1 Chapter 7 Defining Competitiveness Chapter 8 Designing Pay Levels, Mix, and Pay Structures

2 7-2 STRATEGIC POLICIES TECHNIQUES STRATEGIC OBJECTIVES ALIGNMENT COMPETITIVENESS CONTRIBUTORS Work Descriptions Evaluation/ INTERNAL Analysis Certification STRUCTURE Market Surveys Policy PAY Definitions Lines STRUCTURE Seniority Performance Merit INCENTIVE Based Based Guidelines PROGRAMS EFFICIENCY Performance Quality Customers Stockholders Costs FAIRNESS COMPLIANCE ADMINISTRATION Planning Budgeting Communication EVALUATION

3 7-3 Chapter 7 Defining Competitiveness

4 Learning Objectives After studying Chapter 7, students should be able to: 1. Explain the importance of external competitiveness to the pay model. 2. Discuss the factors that influence external competitiveness. 3. Discuss the difference between labor market, product market, and organizational factors in determining external competitiveness. 4. Explain the different pay policy decisions and the consequences of using each. 7-4

5 7-5 External competitiveness External competitiveness refers to the pay relationships among organizations - the organization s pay relative to its competitors.

6 7-6 External competitiveness 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.

7 7-7 Pay level refers to the average of the array of rates paid by an employer. Σ Base + Bonuses + Benefits + Options / Σ Employees Pay forms Pay forms refer to the mix of the various types of payments that make up total compensation.

8 7-8 Pay level and mix focus attention on two objectives: Control Labor Costs Attract and Retain Employees

9 7-9 Pay Level Decisions Impact Labor Costs Labor Costs Number of Employees = x Pay Level

10 What Shapes External Competitiveness? LABOR MARKET FACTORS Nature of Demand Nature of Supply 7-10 PRODUCT MARKET FACTORS Degree of Competition Level of Product Demand EXTERNAL COMPETITIVENESS ORGANIZATION FACTORS Industry, Strategy, Size Individual Manager

11 7-11 Labor Demand! The marginal product of labor is the additional output associated with the employment of one additional human resource unit, with other production factors held constant.! The marginal revenue of labor is the additional revenue generated when the firm employs one additional unit of human resources, with other production factors held constant.

12 Supply and Demand at the Market and Individual Employer Level 7-12 Market level Employer level $100,000 $100,000 Pay for business graduates $50,000 Demand Demand Supply Supply Pay for business graduates $50,000 Marginal Marginal revenue revenue product product Supply to individual employer $25,000 $25, Number of business graduates available Number of business graduates available

13 7-13 Labor Demand Theories and Implications Theory Prediction So What? Compensating differentials Efficiency wage Signaling Work with negative characteristics requires higher pay to attract workers. Above-market wages will improve efficiency by attracting workers who will perform better and be less willing to leave. Pay policies signal the kinds of behavior the employer seeks. Job evaluation must collect and compensable factors most capture these negative characteristics. Staffing programs must have the capability of selecting the best employees. Work must be structured to take advantage of employees greater efforts. Pay practices must recognize these behaviors by better pay, larger bonuses, and other forms of compensation.

14 Labor Supply Theories and Implications 7-14 Theory Reservation wage Human capital Job competition Prediction Job seekers won t accept jobs whose pay is below a certain wage, no matter how attractive other job aspects. The value of an individual s skills and abilities is a function of the time and expense required to acquire them. Workers compete through qualifications for jobs with established wages. So What? Pay level will affect ability to recruit. Higher pay is required to induce people to train for more difficult jobs. As hiring difficulties increase, employers should expect to spend more to train new hires.

15 Competitive Pay Policy Alternatives 7-15 Pay with Competition (Match) Lead Policy Lag Policy Flexible Policies Shared Choice Employer of Choice

16 Pay Mix Policy Alternatives 7-16 Performance - Driven Market Match Options 16% Benefits 17% Base 50% Options 4% Bonus 6% Benefits 20% Base 70% Bonus 17% Options 10% Work - Life Balance Benefits 30% Bonus 10% Base 50% Security (Commitment) Benefits 20% Base 80%

17 Some Consequences of Pay Levels 7-17 Contain operating expenses (labor costs) Increase pool of qualified applicants Competitiveness of total compensation Increase quality and experience Reduce voluntary turnover Reduce pay-related work stoppages Increase probability of union-free status

18 Summary! There is no going rate, thus managers make conscious pay level and mix decisions influenced by several factors.! There are both product market and labor market factors that impact the pay level and mix decisions.! Alternative pay level and mix decisions have different consequences.! Pay policies need to be designed to achieve specific pay objectives.! To achieve the objectives stipulated for the pay system, both the pay level and mix must be properly positioned relative to competitors. 7-18

19 7-19 Review Questions 1. Distinguish policies on external competitiveness from policies on internal alignment. Why is external competitiveness so important? 2. What factors shape an organization s external competitiveness? 3. What does marginal revenue product have to do with pay? 4. What pay level does the efficiency wage theory predict? Does the theory accurately predict organization behavior? Why or why not?

20 7-20 Review Questions (continued) 5. What is a relevant market? What difference does it make when determining people s pay? 6. Can you think of any companies that follow a lag and/or lead policy? Why do they believe it pays to pay differently? Can you think of any companies that follow performance-driven and/or work-life balance policies?