7-1

Chapter

7
Defining
Competitivene
ss

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 7-2

What Is External
Competitiveness?

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

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 7-3

How Is External Competitiveness

Expressed?
Setting a pay level
 Above,

 Below, or

 Equal to competitors, and

Determining mix of pay

forms relative to those
of competitors

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 7-4

What Is Pay Level? Pay

Forms?

Pay level refers to the average of the

array of rates paid by an employer

Pay forms refer to the mix of the

various types of payments that make
up total compensation.
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 7-5

Pay Level and Pay Mix: Two

Objectives

Control Labor Costs

Attract and Retain

Employees
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 7-6

Pay Level Decisions Impact

Labor Cost

Number of Average Pay

Labor Costs = x
Employees Level

Base Pay
+
Increases
+
Benefits
+
Allowances
+
Perquisites
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 7-7

Pay Level Decisions Affect Ability

to Attract and Retain Employees
Exhibit 7.1: One Company’s Market
Comparison: Base vs. Total Compensation

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 7-8

Pay Level Decisions Affect Ability

to Attract and Retain Employees
Exhibit 7.2: Two
Companies: Same
Total Compensation,
Different Mixes

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 7-9

Exhibit 7.3: What Shapes

External Competitiveness?
LABOR MARKET FACTORS
Nature of Demand
Nature of Supply

PRODUCT MARKET FACTORS

Degree of Competition EXTERNAL
Level of Product Demand COMPETITIVENESS

ORGANIZATION FACTORS
Industry, Strategy, Size
Individual Manager

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 7-10

How Labor Markets Work

Theories of labor markets begin with four
assumptions
 Employers always seek to maximize profits
 People are homogeneous and therefore
interchangeable
 Pay rates reflect all costs associated with
employment
 Markets faced by employers are competitive

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 Exhibit 7.4: Supply and Demand 7-11

for Business School Graduates in

the Short Run

$100,000
Pay for business graduates

De
ma p ly
n p
d Su

$50,000

$25,000

100 Number of business graduates available 1000

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 7-12

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
 An employer’s level of production can change only if it
changes the level of human resources
 An employer’s demand for labor coincides with the marginal
product of labor
 Marginal product of labor
 Additional output associated with employment of one
additional human resources unit, with other production
factors held constant
 Marginal revenue of labor
 Additional revenue generated when firm employs one
additional unit of human resources, with other production
factors held constant

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 Exhibit 7.5: Supply and Demand 7-13

at the Market
and Individual Employer Level
Market level Employer level

Ma
$100,00 $100,00 rg
De in
pr al r
0 0
ma od ev
nd uc en
t ue

Pay for business graduates

Pay for business graduates

$50,000 $50,000
Supply to
ly individual
p
S up employer

$25,000 $25,000
0 5 10 15 20
25
Number of business graduates Number of business graduates
available available
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 7-14

Labor Supply
Assumptions about behavior of potential
employees
 Many people are seeking jobs
 They possess accurate information about all job
openings
 No barriers to mobility among jobs exist
Upward sloping supply curve assumes that
as pay increases, more people are willing to
take a job
However, if unemployment rates are low,
offers of higher pay may not increase
supply
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Exhibit 7.6: Labor Demand
Theories and Implications
Theory Prediction
Compensating Work with negative
differentials characteristics requires higher
pay to attract workers.
Above-market wages will improve
Efficiency wage
efficiency by attracting workers
who will perform better and be
less willing to leave.
Pay policies signal the kinds of
Signaling
behavior the employer seeks.
McGraw-Hill/Irwin
7-15
So What?
Job evaluation must collect
and compensable factors
must 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.
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
 7-16

Exhibit 7.7: Supply Side

Theories and Implications

Theory Prediction So What?

Reservation wage Job seekers won’t accept jobs Pay level will affect ability to
whose pay is below a certain recruit.
wage, no matter how attractive
other job aspects.

Human capital The value of an individual’s skills Higher pay is required to

and abilities is a function of the induce people to train for
time and expense required to more difficult jobs.
acquire them.

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 7-17

Product Market Factors and

Ability to Pay
Two key product market factors affect
ability of a firm to change price of its
products or services
 Level of 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 revenue

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 7-18

Relevant Markets
 Three factors determine relevant labor
markets
 Occupation
 Geography
 Competitors
 Issues related to defining the relevant
market
 Competitors – Products, location, and size
 Jobs – Skills and knowledge required and their
importance to organizational success
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 Exhibit 7.8: Probable 7-19

Relationships Between External

Pay Policies and Objectives

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 7-20

Pay Policy Options: Match the

Competition
Attempts to ensure an organization’s
 Wage costs are approximately equal to those of its
product competitors
 Abilityto attract potential employees will be
approximately equal to its labor market
competitors
Avoids placing an employer at a
disadvantage in pricing products or in
maintaining a qualified work force
May not provide an employer with a
competitive advantage in its labor markets
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 7-21

Pay Policy Options: Lead

Policy
Maximizes ability to attract and retain
quality employees and minimizes
employee dissatisfaction with pay

May offset less attractive features of work

If used only to hire new employees, may

lead to dissatisfaction of current
employees

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 7-22

Pay Policy Options: Lag Policy

May hinder a firm’s ability to attract
potential employees

If pay level is lagged in return for promise

of higher future returns
 May increase employee commitment

 Foster teamwork

 May possibly increase productivity

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 7-23

Pay Policy Options: Flexible

Policies
Employers have more than one pay policy
Policy may vary for different occupational
families
 Above market for critical skill groups
 Below or at market for others
Policy may vary for different pay elements
 Above market in total compensation
 Below market in base pay
 Above market in incentives and rewards
 At or above market in benefits

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 7-24

Exhibit 7.9: Pay-Mix Policy

Alternatives
Performance - Driven Market Match

Benefits 17% Benefits 20%

Options 4%
Options 16% Base 50%
Bonus 6% Base 70%
Bonus 17%

Work - Life Balance Security (Commitment)

Benefits 30% Benefits 20%

Base 50%
Base 80%
Options
10% Bonus
10%

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 7-25

Pay Policy Options: Employer of

Choice
 Companies compete based on their
overall reputation as a place to work

 Defines compensation more broadly to

focus on all returns from employment

 Organization’s position based on total

returns of working for it

 Approach corresponds to brand or image

a company projects as an employer
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 7-26

Pay Policy Options: Shared

Choice
 Begins with traditional options of lead,
meet, or lag

 Adds a second part -- offer employees

choices (within limits) in the pay mix

 Similar to employer of choice in

recognizing importance of both pay level
and mix
 Employees have more say in forms of pay
received
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 Exhibit 7.10: Volatility of Stock 7-27

Value
Changes in Total Pay Mix

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 7-28

Exhibit 7.11: Dashboard: Total Pay

Mix Breakdown vs. Competitors’

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 7-29

Exhibit 7.12: Pay Mix Varies Within

the Structure

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 7-30

Exhibit 7.13: Some Consequences

of Pay Levels
Contain operating
Increase pool of
expenses (labor
qualified applicants
costs)

Increase quality and

experience
Competitiveness of
total compensation Reduce voluntary
turnover

Increase probability of
Reduce pay-related union-free status
work stoppages
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 7-31

Which Pay Policy Achieves

Competitive Advantage?
Involves assessing consequences of
different pay policy options
Evidence ???
 Pay level affects costs
 Effects on productivity
 Effects on ability to attract
and retain employees
Possibility of achieving competitive
advantage
 Message that pay level and mix signal to
people
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