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Part II

Defining CompetitivenessDesigning Pay Levels, Mix, and Pay Structures

Defining CompetitivenessDesigning Pay Levels, Mix, and Pay Structures

External Competitiveness: Determining the Pay Level

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STRATEGICPOLICIES

TECHNIQUESSTRATEGIC

OBJECTIVES

EFFICIENCY

Performance

Quality

Customers

Stockholders Costs

FAIRNESS

COMPLIANCE

ALIGNMENT

COMPETITIVENESS

CONTRIBUTORS

ADMINISTRATION

Work Descriptions Evaluation/ INTERNAL Analysis Certification STRUCTURE

Market Surveys Policy PAY Definitions Lines STRUCTURE

Seniority Performance Merit INCENTIVE Based Based Guidelines PROGRAMS

Planning Budgeting Communication EVALUATION

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7

Defining Competitiveness

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

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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.

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Pay level refers to the average of the array of rates paid by an employer.

Base + Bonuses + Benefits + Options / Employees

Pay forms refer to the mix of the various types of payments that make up total compensation.

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Pay level and mix focus attention on two objectives:

Control Labor Costs

Attract and Retain Employees

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Pay Level Decisions Impact Labor Costs

= xLabor CostsNumber of Employees

Pay Level

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What Shapes External Competitiveness?

EXTERNAL COMPETITIVENESSEXTERNAL COMPETITIVENESS

LABOR MARKET FACTORSNature of DemandNature of Supply

LABOR MARKET FACTORSNature of DemandNature of Supply

PRODUCT MARKET FACTORSDegree of CompetitionLevel of Product Demand

PRODUCT MARKET FACTORSDegree of CompetitionLevel of Product Demand

ORGANIZATION FACTORSIndustry, Strategy, SizeIndividual Manager

ORGANIZATION FACTORSIndustry, Strategy, SizeIndividual Manager

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Labour Market Factors

Economist describe two types of markets

1. Quoted Price

2. Bourse Price

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4 Assumptions of Labour Market

Employers seek to maximize profits

People are homogeneous and therefore interchangeable

Pay rates reflect all costMarkets faced by employers are

competitive

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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.

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Labour Supply

The assumption about employees is :People seeking job have adequate information

about job openingsNo barriers (discrimination, union membership)

to mobility among job exist.As assumptions changes the labour supply

changes.

Eg. As pay increases more people willing to take job BUT unemployment low means supply will be less.

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Supply

Demand

Number of business graduates available Number of business graduates available

0 5 10 15 20 25

Supply to individual employer

Marginal revenue

product

$25,000$25,000

$50,000$50,000

$100,000 $100,000

Pay

for b

usin

ess

grad

uate

s

Pay

for b

usin

ess

grad

uate

s

Supply and Demand at the Market and Individual Employer Level

Market level Employer level

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Modification to Demand & Supply Side

Economic theories must be frequently revised to account for reality.

A troublesome issue for economist is why an employer would pay more than the market determined price.

This can be understood by labour demand theories and implications.

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Labor Demand Theories and Implications

Theory Prediction So What?

Compensating differentials

Work with negative characteristics requires higher pay to attract workers.

Job evaluation must collect and compensable factors most capture these negative characteristics.

Efficiency wageAbove-market wages will improve efficiency by attracting workers who will perform better and be less willing to leave.

Staffing programs must have the capability of selecting the best employees. Work must be structured to take advantage of employees’ greater efforts.

Signaling Pay policies signal the kinds of behavior the employer seeks.

Pay practices must recognize these behaviors by better pay, larger bonuses, and other forms of compensation.

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Labor Supply Theories and Implications

Theory Prediction So What?

Reservation wage Job seekers won’t accept jobs whose pay is below a certain wage, no matter how attractive other job aspects.

Pay level will affect ability to recruit.

Human capital The value of an individual’s skills and abilities is a function of the time and expense required to acquire them.

Higher pay is required to induce people to train for more difficult jobs.

Job competition Workers compete through qualifications for jobs with established wages.

As hiring difficulties increase, employers should expect to spend more to train new hires.

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Competitive Pay Policy Alternatives

Pay with Competition (Match)

Lead Policy

Lag Policy

Flexible Policies

Employer of Choice

Shared Choice

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Pay Mix Policy Alternatives

Base 50%

Bonus 17%

Options 16%

Benefits 17%

Performance - Driven

Base 70%Bonus 6%

Options 4%

Benefits 20%

Market Match

Base 50%

Bonus 10%

Options 10%

Benefits 30%

Work - Life Balance

Base 80%

Benefits 20%

Security (Commitment)

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Some Consequences of Pay Levels

Competitiveness of total compensation

Contain operating expenses (labor costs)

Increase pool of qualified applicants

Increase quality and experience

Reduce voluntary turnover

Increase probability of union-free statusReduce pay-related

work stoppages

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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.