How is external competitiveness achieved?
- Setting a pay level that is above,below or equal to that of competitors
- determine the mix of pay forms relative to those of competitors
What is pay level?
Pay level refers to the average of the array of pay rates paid by an employer.
Calculation: Base+incentive pay+benefits+ value of equity/# of employees.
What is a pay form?>
refers to the mix of various types of compensation, or pay mix that make up total compensation.
How to determine labour costs?
Number of employees X Pay level
What shapes external competitiveness?
Labour market factors, product market factors, organizational factors
what are the labour market factors?
Nature of demand
nature of supply
What are the product market factors?
Level of product demand
Degree of competition
Organizational factors are?
Industry and technology
How Labor Markets work
- employers always seek to maximize profits
- people are homogeneous and therefore interchangeable
- pay rates reflect all costs associated with employment
- the market faced by employers are competitive
- the market rate is where the lines for labor demand and labor supply cross.
What is marginal product of labour?
It is the additional output associated with employment of one additional person, with other production factors held constant.
What is diminishing marginal productivity?
Each additional employee has progressively smaller share of the other factors of production with which to work.
T or F: An employer’s demand for labor coincides with the marginal product of labor?
What is marginal revenue?
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 do what?
- determine pay level set by market forces.
2. determine marginal revenue generated by each new hire.
Economic theories must frequently be revised to account for reality when…
when focus changes from all the employers in an economy to a particular employer.
What is an issue for economists when modifying the demand side?
Question is posed: why would an employer pay more than what theory states is the market-determined rate?
What are the 5 labour demand theories?
- compensating differentials
- efficiency wage
- reservation wage
- human capital
what is the prediction for compensating differentials?
work with negative characteristics requires higher pay to attract workers.
what is the prediction of the efficiency wage?
above-market wages will improve efficiency by attracting workers who will perform better and be less willing to leave.
What is the prediction for signalling?
Pay policies signal the kind of behaviour the employer seeks.
what is the prediction for reservation wage?
Job seekers will not accept jobs when pay is below a certain wage, no matter how attractive other job aspects are.
what is the prediction for human capital?
The value of an individuals skills and abilities is a function of the time and expense required to acquire them.
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.
A segment labor supply involves what?
-Multiple sources of employees from multiple location with multiple relationships.
level and mix of cash and benefits paid depends on what?
T or F people flow to the work
What does segmented sources of labor mean?
that determining pay levels and mix requires understanding market conditions in different locations
what do managers need to know in segmented supplies of labor and going rates?
- Jobs required to do the work
- tasks to be performed
- knowledge and behaviors required to perform them.
What are the 4 organizational factors?
- industry and technology
- employer size
- employees’ preferences
- organizations’ strategy
T or F labor-intensive industries tend to pay lower than technology intensive industries?
T or F Large organizations tend to pay less than small ones
Large organizations tend to pay more.
T or F markets involve employers’ and employees’ choices
T or F higher pay levels may be well suited to particular strategies such as higher value-added customer segments
what are the 3 factors that determine relevant labor markets?
Occupation, geography and competitors
How do employers choose their relevant markets?
- competitors (products,location and size)
- jobs (skills and knowledge required and their importance to org success)
Data from market competition are likely to receive greater weight when:
- Employee skills are specific to the product market
- labor costs are a large share of total costs
- product demand is responsive to price changes
- supply of labor is not responsive to changes in pay
What are the three conventional pay-level policies?
to meet (match)
to follow competition (lag)
New policies emphasize flexibility among:
policies for different employee groups
4 pay-mix strategies
- performance driven
- market match
- work/life balance
Employees may vary policies for:
- different occupational families
- different forms of pay
- different business units
T or F: There is no going rate, conscious pay decisions are made by managers