- 1. 7-1External Competitiveness: DeterminingPartthe Pay
LevelIIChapter 7 Defining CompetitivenessChapter 8 Designing Pay
Levels, Mix,and Pay StructuresMcGraw-Hill/Irwin 2002 by The
McGraw-Hill Companies, Inc. All rights reserved.
2. 7-2 STRATEGIC STRATEGICTECHNIQUESPOLICIES OBJECTIVES Work
Descriptions
Evaluation/INTERNALALIGNMENTAnalysisCertificationSTRUCTUREEFFICIENCY
PerformanceCOMPETITIVENESS MarketSurveysPolicyPAY
QualityDefinitionsLines STRUCTURE Customers Stockholders Seniority
Performance Merit INCENTIVE Costs CONTRIBUTORSBased Based
GuidelinesPROGRAMSFAIRNESSCOMPLIANCEADMINISTRATIONPlanning
Budgeting Communication EVALUATION McGraw-Hill/Irwin 2002 by The
McGraw-Hill Companies, Inc. All rights reserved. 3. 7-3Chap
rte7Defining Competitiveness McGraw-Hill/Irwin 2002 by The
McGraw-Hill Companies, Inc. All rights reserved. 4. 7-4 Learning
ObjectivesAfter 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. McGraw-Hill/Irwin 2002 by The
McGraw-Hill Companies, Inc. All rights reserved. 5. 7-5External
competitivenessrefers to the pay relationshipsamong organizations -
theorganizations pay relative to itscompetitors.McGraw-Hill/Irwin
2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6.
7-6External competitiveness is expressed inpractice by:1. setting a
pay level that is above, below, or equal to competitors, and2. by
considering the mix of pay forms relative to those of competitors.
McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All
rights reserved. 7. 7-7Pay level refers to the average of the array
ofrates paid by an employer. Base + Bonuses + Benefits + Options /
EmployeesPay forms refer to the mix of the various types ofpayments
that make up total compensation.McGraw-Hill/Irwin 2002 by The
McGraw-Hill Companies, Inc. All rights reserved. 8. 7-8Pay level
and mix focus attentionon two objectives:Control Labor CostsAttract
and RetainEmployeesMcGraw-Hill/Irwin 2002 by The McGraw-Hill
Companies, Inc. All rights reserved. 9. 7-9Pay Level Decisions
Impact Labor Costs Number ofLabor Costs= xPay Level Employees
McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All
rights reserved. 10. 7 - 10What Shapes External
Competitiveness?LABOR MARKET FACTORSLABOR MARKET FACTORSNature of
DemandNature of DemandNature of SupplyNature of SupplyPRODUCT
MARKET FACTORSPRODUCT MARKET FACTORSDegree of CompetitionDegree of
Competition EXTERNALEXTERNALLevel of Product Demand
COMPETITIVENESSCOMPETITIVENESSLevel of Product DemandORGANIZATION
FACTORSORGANIZATION FACTORSIndustry, Strategy, SizeIndustry,
Strategy, SizeIndividual ManagerIndividual ManagerMcGraw-Hill/Irwin
2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11. 7
- 11 Labor Demand! The marginal product of labor is the
additionaloutput associated with the employment of oneadditional
human resource unit, with otherproduction factors held constant.!
The marginal revenue of labor is the additionalrevenue generated
when the firm employs oneadditional unit of human resources, with
otherproduction factors held constant. McGraw-Hill/Irwin 2002 by
The McGraw-Hill Companies, Inc. All rights reserved. 12. 7 - 12
Supply and Demand at the Market and Individual Employer Level
Market level Employer level Ma $100,000$100,000rg De in ma pr al r
nd od evuc ent uePay for business graduatesPay for business
graduates $50,000 $50,000Supply tolyindividualppSuemployer $25,000
$25,0000 510152025Number of business graduates availableNumber of
business graduates availableMcGraw-Hill/Irwin 2002 by The
McGraw-Hill Companies, Inc. All rights reserved. 13. 7 - 13 Labor
Demand Theories and ImplicationsTheoryPredictionSo
What?CompensatingWork with negativeJob evaluation must
collectdifferentials characteristics requires higher and
compensable factorspay to attract workers. most capture these
negativecharacteristics.Above-market wages will improve Staffing
programs must haveEfficiency wageefficiency by attracting
workersthe capability of selecting thewho will perform better and
bebest employees. Work mustless willing to leave.be structured to
takeadvantage of employeesgreater efforts.Pay policies signal the
kinds of Pay practices must recognizeSignalingbehavior the employer
seeks. these behaviors by better pay, larger bonuses, and other
forms of compensation.McGraw-Hill/Irwin 2002 by The McGraw-Hill
Companies, Inc. All rights reserved. 14. 7 - 14 Labor Supply
Theories and ImplicationsTheoryPrediction So What?Reservation
wageJob seekers wont accept jobs Pay level will affect ability
towhose pay is below a certainrecruit.wage, no matter how
attractiveother job aspects.Human capital The value of an
individuals skills Higher pay is required toand abilities is a
function of theinduce people to train fortime and expense required
tomore difficult jobs.acquire them.Job competition Workers compete
through As hiring difficulties increase,qualifications for jobs
withemployers should expect toestablished wages.spend more to train
new hires.McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc.
All rights reserved. 15. 7 - 15Competitive Pay Policy Alternatives
Pay with Competition Lead Policy(Match)Lag PolicyFlexible Policies
Employer of Choice Shared Choice McGraw-Hill/Irwin 2002 by The
McGraw-Hill Companies, Inc. All rights reserved. 16. 7 - 16Pay Mix
Policy AlternativesPerformance - DrivenMarket MatchBenefitsBenefits
17% 20%Options 4%Options Base 50% Base 70% 16% Bonus 6%Bonus
17%Work - Life BalanceSecurity (Commitment) Benefits20%Benefits
30%Base 50% Base 80%Options 10% Bonus10% McGraw-Hill/Irwin 2002 by
The McGraw-Hill Companies, Inc. All rights reserved. 17. 7 - 17Some
Consequences of Pay LevelsContain operating Increase pool
ofexpenses (labor costs) qualified applicantsIncrease quality
andexperienceCompetitiveness of total compensation Reduce
voluntaryturnover Increase probability of Reduce
pay-relatedunion-free status work stoppagesMcGraw-Hill/Irwin 2002
by The McGraw-Hill Companies, Inc. All rights reserved. 18. 7 -
18Summary! There is no going rate, thus managers make consciouspay
level and mix decisions influenced by severalfactors.! There are
both product market and labor market factorsthat impact the pay
level and mix decisions.! Alternative pay level and mix decisions
have differentconsequences.! Pay policies need to be designed to
achieve specific payobjectives.! To achieve the objectives
stipulated for the pay system,both the pay level and mix must be
properly positionedrelative to competitors.McGraw-Hill/Irwin 2002
by The McGraw-Hill Companies, Inc. All rights reserved. 19. 7 - 19
Review Questions1. Distinguish policies on external competitiveness
from policies on internal alignment. Why is external
competitiveness so important?2. What factors shape an organizations
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? McGraw-Hill/Irwin 2002 by The McGraw-Hill
Companies, Inc. All rights reserved. 20. 7 - 20Review Questions
(continued)5. What is a relevant market? What difference does it
make when determining peoples 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?
McGraw-Hill/Irwin 2002 by The McGraw-Hill Companies, Inc. All
rights reserved.
