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Chapter 7 - Defining Competitiveness

This document discusses factors that influence external competitiveness in compensation management. It explains that external competitiveness refers to an organization's pay relative to its competitors and is influenced by labor market factors like supply and demand as well as product market factors like competition levels. The document outlines different pay policy decisions around pay level and mix that can help control costs while attracting talent and discusses their potential consequences.

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2K views18 pages

Chapter 7 - Defining Competitiveness

This document discusses factors that influence external competitiveness in compensation management. It explains that external competitiveness refers to an organization's pay relative to its competitors and is influenced by labor market factors like supply and demand as well as product market factors like competition levels. The document outlines different pay policy decisions around pay level and mix that can help control costs while attracting talent and discusses their potential consequences.

Uploaded by

Anonymous Io54FfF0S
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
  • Introduction to Compensation Management: Introduces the topic of defining competitiveness in compensation management, aimed at students of HR.
  • Learning Objectives: Lists the key learning goals for understanding external competitiveness in compensation.
  • Understanding External Competitiveness: Defines external competitiveness and its importance in compensation strategies for organizations.
  • Expression of External Competitiveness: Explains how external competitiveness is expressed through pay levels and mix of pay forms.
  • Concepts of Pay Level and Pay Forms: Covers the definitions and components of pay level and pay forms, and how they impact compensation.
  • Objectives of Pay Level and Mix: Discusses the goals of managing pay levels and mix to control labor costs while attracting and retaining employees.
  • Impact of Pay Level Decisions: Details how decisions regarding pay levels directly affect labor costs within an organization.
  • Factors Influencing External Competitiveness: Explores the labor market, product market, and organizational factors that shape external competitiveness.
  • Theories of Labor Demand and Supply: Discusses theories and implications regarding labor demand, such as compensating differentials and efficiency wage theories.
  • Competitive Pay Policy Alternatives: Provides various strategies for competitive pay policies including lead, lag, and match policies.
  • Pay Mix Policy Alternatives: Explores alternative pay mix policies that organizations can adopt based on their strategic goals.
  • Consequences of Pay Levels: Analyzes the effects of different pay levels on overall compensation competitiveness and organizational outcomes.
  • Summary and Key Insights: Concludes with a synthesis of main points, highlighting key insights related to pay levels and mixes.
  • Review Questions: Provides questions to assess understanding and reinforce learning on external competitiveness and pay policy decisions.

COMPENSATION

MANAGEMENT
Brief Notes for Students
HRSB 353

Chapter 7: Defining
Competitiveness
LEARNING OBJECTIVES
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.
External competitiveness
refers to the pay relationships
among organizations - the
organization’s pay relative to its
competitors.
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.
Pay forms refer to the mix of the various types of
payments that make up total compensation.
Pay level and mix focus attention on
two objectives:

Control Labor Costs

Attract and Retain


Employees
Pay Level Decisions Impact Labor
Costs

Number of
Labor Costs = x Pay Level
Employees
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
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.
Supply and Demand at the Market and Individual
Employer Level
Labor Demand Theories and Implications

Theory Prediction So What?

Compensating Work with negative Job evaluation must collect


differentials characteristics requires higher and compensable factors
pay to attract workers. most capture these negative
characteristics.
Above-market wages will improve Staffing programs must have
Efficiency wage
efficiency by attracting workers the capability of selecting the
who will perform better and be best employees. Work must
less willing to leave. be structured to take
advantage of employees’
greater efforts.
Pay practices must recognize
Pay policies signal the kinds of
Signaling these behaviors by better pay,
behavior the employer seeks.
larger bonuses, and other
forms of compensation.
Labor Supply Theories and
Implications
Theory Prediction So What?
Reservation wage Job seekers won’t accept jobs
whose pay is below a certain Pay level will affect ability to
wage, no matter how attractive recruit.
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.

Job competition Workers compete through As hiring difficulties increase,


qualifications for jobs with employers should expect to
established wages. spend more to train new hires.
Competitive Pay Policy Alternatives

Pay with Competition


Lead Policy
(Match)

Lag Policy

Flexible Policies

Shared Choice Employer of Choice


Pay Mix Policy Alternatives
Performance - Driven Market Match
Benefits
17% Benefits
20%
Options Options 4%
Base 50%
16% Base 70%
Bonus 6%
Bonus
17%

Work - Life Balance Security (Commitment)

Benefits
Benefits 20%
30%
Base 50%
Base 80%
Options
10%
Bonus
10%
Some Consequences of Pay Levels
Contain operating Increase pool of
expenses (labor costs) qualified applicants

Increase quality and


experience
Competitiveness of total
compensation
Reduce voluntary
turnover

Increase probability of
Reduce pay-related union-free status
work stoppages
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.
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?
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?

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