Upload
carl-gin-dizon-munsayac
View
213
Download
0
Embed Size (px)
DESCRIPTION
Chap007 CKSC
Citation preview
Chapter 7
Defining Competitiveness
McGraw-Hill/Irwin Copyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
7-2
Chapter Topics
Compensation Strategy: External Competitiveness
What Shapes External Competitiveness?
Labor Market Factors
Modifications to the Demand Side
Modifications to the Supply Side
Product Market Factors and Ability to Pay
7-3
Chapter Topics (cont.)
Organization Factors
Relevant Markets
Competitive Pay Policy Alternatives
Consequences of Pay-Level and Mix Decisions: Guidance from the Research
7-4
Compensation Strategy: External Competitiveness
External competitiveness is expressed by:
Setting a pay level that is above, below, or equal to that of competitors
Determining the mix of pay forms relative to those of competitors
External competitiveness refers to the pay relationships among organizationsthe organizations pay relative to its competitors
7-5
Compensation Strategy: External Competitiveness (cont.)
Pay level refers to the average of the array of rates paid by an employer:
(base + bonuses + benefits + value of stock holdings) / number of employees
Pay forms are the various types of payments, or pay mix, that make up total compensation
7-6
Compensation Strategy: External Competitiveness (cont.)
Objectives:
Control costs and increase revenues
Attract and retain employees
7-7
Control Costs and Increase Revenues
Labor costs = (pay level) times (number of employees)
Higher the pay level, the higher the labor costs
Higher the pay level relative to what competitors pay, the greater the relative costs to provide similar products or services
7-8
Labor Market Factors
Two basic types of markets:
Quoted price Example: Stores that label each items price
Bourse Example: eBay allows haggling over the
terms and conditions
7-9
Labor Market Factors (cont.)
In both markets, employers are the buyers and potential employees are the sellers
If inducements offered by the employer and skills offered by the employee are mutually acceptable, a deal is struck
7-10
How Labor Markets Work (cont.)
The market rate is where the lines for labor demand and labor supply cross
7-11
Labor Demand
Analysis of labor demand indicates how many employees will be hired by an employer
In the short run, an employer cannot change any factor of production except human resources
7-12
Labor Demand (cont.)
An employers level of production can change only if it changes the level of human resources
An employers demand labor coincides with the marginal product of labor
7-13
Marginal Product
Marginal product of labor is the additional output associated with employment of one additional person, with other production factors held constant
Diminishing marginal productivity Each additional employee has a progressively
smaller share of the other factors of production with which to work
7-14
Marginal Revenue
Marginal revenue of labor is the additional revenue generated when the firm employs one additional person, with other production factors held constant
A manager using the marginal revenue product model must:
Determine pay level set by market forces
Determine marginal revenue generated by each new hire
7-15
Labor Supply
This model assumes:
Many people are seeking jobs
They possess accurate information about all job openings
No barriers to mobility exist
These assumptions greatly simplify the real world
7-16
Modifications to the Demand Side
Economic theories must frequently be revised to account for reality
When focus changes from all the employers in an economy to a particular employer
Issue for economists:
Why would an employer pay more than what theory states is the market-determined rate?
7-17
Compensating Differentials
According to Adam Smith, If a job has negative characteristics then employers must offer higher wages to compensate for these negative features
For instance, if: Necessary training is very expensive
Job security is tenuous
Working conditions are disagreeable
Chances of success are low
7-18
Efficiency Wage
According to efficiency-wage theory, high wages may increase efficiency and actually lower labor costs if they:
Attract higher-quality applicants
Lower turnover
Increase worker effort
Reduce shirking
Reduce the need to supervise employees
7-19
Efficiency Wage (cont.)
Firms with greater profits than competitors are able to share success with employees via:
Leading competitors pay levels
Bonuses that vary with profitability
7-20
Signaling
Employers deliberately design pay levels and mix as part of a strategy that signals to both prospective and current employees kinds of behaviors sought
On the supply side of the model: Suppliers of labor signal to potential
employers
Characteristics of applicants and organization decisions about pay level and mix act as signals
7-21
Product Market Factors and Ability to Pay
Product Demand
Puts a lid on maximum pay level an employer can set
Degree of competition
In highly competitive markets, employers are less able to raise prices without loss of revenues
Single sellers are able to set whatever price they choose
7-22
Segmented Supplies of Labor and (Different) Going Rates
People flow to the work
A segmented labor supply involves:
Multiple sources of employees
From multiple locations
With multiple employment relationships
Level and mix of cash and benefits paid depends on the source
Work flows to the peopleon site, off-site, offshore
7-23
Segmented Supplies of Labor and (Different) Going Rates (cont.)
Reality is complex; theories abstracts
Segmented sources of labor means that determining pay levels and mix requires understanding market conditions in different locations
Managers need to know: Jobs required to do the work
Tasks to be performed
Knowledge and behaviors required to perform them
7-24
Organization Factors
Industry and technology
Labor-intensive industries tend to pay lower than technology-intensive industries;
New technology within an industry influences pay levels
Employer size
Large organizations tend to pay more than small ones
7-25
Relevant Markets
Three factors determine relevant labor markets:
Occupation
Geography
Competitors
7-26
Relevant Markets (cont.)
Employers choose their relevant markets based on:
Competitors Products, location, and size
Jobs Skills and knowledge required and their importance to organizational success
7-27
Globalization of Relevant Labor Markets:Offshoring and Outsourcing
Factors to consider in deciding where jobs will be:
Countries with lower average labor costs tend to have lower average productivity
Companies must devote resources to systems that monitor worker effort or output (Agency theory)
7-28
Globalization of Relevant Labor Markets:Offshoring and Outsourcing (cont.)
Customers reactions must be considered
How long the labor cost advantage will last
Whether qualified employees will continue to be available as other companies tap into this labor pool
7-29
Pay with Competition (Match) (cont.)
Attempts to ensure that an organizations:
Wage costs are approximately equal to those of its product competitors
Ability to attract potential employees will be approximately equal to its labor market competitors
7-30
Lead Pay-Level Policy
Maximizes the ability to attract and retain quality employees and minimizes employee dissatisfaction with pay
May also offset less attractive features of work
If used only to hire new employees, may lead to dissatisfaction of current employees
May mask negative job attributes that contribute to high turnover later on
7-31
Lag Pay-Level Policy
Paying below-market rates may hinder a firms ability to attract potential employees
Lag pay-level policy coupled with the promise of higher future returns:
May increase employee commitment
Foster teamwork
May possibly increase productivity
7-32
Exhibit 7.16: Some Consequences of Pay Levels
7-33
Consequences of Pay-Level and MixDecisions: Guidance from the Research (cont.)
Fairness
Satisfaction with pay is directly related to pay level
Sense of fairness is related to how others are paid
Compliance
Employers must pay at or above the legal minimum wage
Prevailing wage laws and equal rights legislation must be met
7-34
Consequences of Pay-Level and MixDecisions: Guidance from the Research (cont.)
Pay forms are also regulated
Caution must be exercised when sharing salary information to avoid antitrust violations