7

Part

II

External Competitiveness: Determining

the Pay Level

Defining Competitiveness
Designing Pay Levels, Mix, and Pay
Structures

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STRATEGIC
POLICIES
ALIGNMENT

COMPETITIVENESS

CONTRIBUTORS

STRATEGIC
OBJECTIVES

TECHNIQUES

Work
Descriptions
Analysis

Market
Surveys
Definitions

Seniority
Based

Evaluation/
Certification

Policy
Lines

Performance
Based

INTERNAL
STRUCTURE

PAY
STRUCTURE

Merit
Guidelines

INCENTIVE
PROGRAMS

EFFICIENCY
Performance
Quality
Customers

Stockholders
Costs
FAIRNESS

ADMINISTRATION

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Planning Budgeting Communication EVALUATION

COMPLIANCE

2002 by The McGraw-Hill Companies, Inc. All

7
Defining Competitiveness

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

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External competitiveness is expressed in

practice by:

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.
1.

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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

Labor Costs

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Number of
Employees

Pay Level

2002 by The McGraw-Hill Companies, Inc. All

What Shapes External Competitiveness?

LABOR
LABOR MARKET
MARKET FACTORS
FACTORS
Nature
Nature of
of Demand
Demand
Nature
Nature of
of Supply
Supply

PRODUCT
PRODUCT MARKET
MARKET FACTORS
FACTORS
Degree
Degree of
of Competition
Competition
Level
Level of
of Product
Product Demand
Demand

EXTERNAL
EXTERNAL
COMPETITIVENESS
COMPETITIVENESS

ORGANIZATION
ORGANIZATION FACTORS
FACTORS
Industry,
Industry, Strategy,
Strategy, Size
Size
Individual
Individual Manager
Manager

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7-

Labour Market Factors

Economist describe two types of

markets
1. Quoted Price
2. Bourse Price

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7-

4 Assumptions of Labour Market

Employers

seek to maximize profits

People

are homogeneous and therefore

interchangeable

Pay

rates reflect all cost

Markets faced by employers are
competitive
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7-

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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7-

Labour Supply
The

assumption about employees is :

People

seeking job have adequate information

about job openings
No 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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7-

Supply and Demand at the Market and Individual

Employer Level
Market level
De
ma
nd

$50,000

ply
p
Su
$25,000

Ma
rg
in
pr al r
od ev
uc en
t ue

$100,000

Pay for business graduates

Pay for business graduates

$100,000

Employer level

$50,000

Supply to
individual
employer

$25,000
0
Number of business graduates available

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10

15

20

25

Number of business graduates available

2002 by The McGraw-Hill Companies, Inc. All

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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7-

7-

Labor Demand Theories and Implications

Theory
Compensating
differentials

Efficiency wage

Signaling

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Prediction

So What?

Work with negative

characteristics requires higher
pay to attract workers.

Job evaluation must collect

and compensable factors
most capture these negative
characteristics.

Above-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.

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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7-

Labor Supply Theories and Implications

Theory
Reservation wage

Human capital

Job competition

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Prediction

So What?

Job seekers wont accept jobs

whose pay is below a certain
wage, no matter how attractive
other job aspects.
The value of an individuals skills
and abilities is a function of the
time and expense required to
acquire them.
Workers compete through
qualifications for jobs with
established wages.

Pay level will affect ability to

recruit.

Higher pay is required to

induce people to train for
more difficult jobs.
As hiring difficulties increase,
employers should expect to
spend more to train new hires.

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7-

Competitive Pay Policy Alternatives

Pay with Competition
(Match)

Lead Policy

Lag Policy

Flexible Policies

Employer of Choice
Shared Choice
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7-

Pay Mix Policy Alternatives

Performance - Driven

Market Match

Benefits
17%

Benefits
20%
Options 4%

Options
16%

Base 50%

Base 70%

Bonus 6%

Bonus
17%
Work - Life Balance

Benefits
20%

Benefits
30%
Base 50%
Options
10%

Security (Commitment)

Base 80%

Bonus
10%

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7-

Some Consequences of Pay Levels

Contain operating
expenses (labor costs)

Competitiveness of total
compensation

Reduce pay-related
work stoppages
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Increase pool of
qualified applicants

Increase quality and

experience
Reduce voluntary
turnover

Increase probability of
union-free status

2002 by The McGraw-Hill Companies, Inc. All

7-

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.
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