Chapter 7

Question 1

Two aspects of pay translate external competitiveness into practice - what are those two aspects?

Answer 1

(1) how much to pay relative to competitors—whether to pay more than the competitors, to match what the competitor pay, or to pay less than whey they pay; and

(2) what mix of base, bonus, stock options and benefits to offer relative to what the competitors offer.

Question 2

Why do organizations offer different pay rates for similar positions? aka what factors could affect this?

Answer 2

> Location - firms in cities have bigger offers

> Nature of the work

> And the industry to which the different firms belong has an effect: i.e. pharmaceutical / computer software

Question 3

Are pay levels within organizations completely static?

Answer 3

> Pay levels within each organization are also not completely static.

> They can be adjusted over time to changing market conditions and/or business strategies.

Question 4

With respect to external competitiveness - A major strategic decision when designing a compensation strategy is what?

Answer 4

> is whether to mirror what competitors are doing with pay

Question 5

External competitiveness refers to what?

Answer 5

> refers to the pay relationships among organizations—the organization’s pay relative to its competitors.

> It also includeschoosing the mix of pay forms (i.e., bonuses, stock options, flexible benefits) that is right for the business strategy.

Question 6

How is external competitiveness expressed in practice?

Answer 6

It 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.

Question 7

Both pay level and pay forms focus on two objectives:

Answer 7

(1) to control costs and increase revenues

(2) to attract and retain employees.

Question 8

Pay level decisions have a significant impact on expenses. Other things being equal, the higher the pay level, what else becomes higher?

Answer 8

> The higher the labour costs.

Question 9

What is the formula for labour costs?

Answer 9

> labour costs = pay level x number of employees

Question 10

Furthermore, the higher the pay level relative to what competitors pay, the greater the relative costs to what?

Answer 10

> the greater the relative costs to provide similar products or services.

Question 11

Higher pay may facilitate what or result in what?

Answer 11

> Higher pay may facilitate the attraction and retention of talent, but it may also result in higher costs if higher productivity and higher revenues are not achieved.

Question 12

Is there a single going rate in the labour market? If not, why?

Answer 12

> Different employers set different pay levels; that is, they deliberately choose to pay above or below what others are paying for the same work.

> That is why there is no single going rate in the labour market for a specific job

> companies often set different pay level policies for different job families.

> how a company compares to the market depends on the companies it compares to and the pay forms included in the comparison.

Question 13

Not only do the rates paid for similar jobs vary between employers, but a single company may do what?

Answer 13

> may set a different pay level for different job families.

Question 14

Is there a single “going mix” of pay forms?

Answer 14

> There is also no single “going mix” of pay forms

Question 15

What factors affect a company’s decisions on pay level and pay forms?

Answer 15

(1) competition in the labour market for people with various skills;

(2) competition in the product and service markets, which affects the financial condition of the organization; and

(3) characteristics unique to each organization and its employees, such as its business strategy, technology, and the productivity and experience of its workforce.

Question 16

What are labour market factors?

Answer 16

> nature of demand
nature of supply

Question 17

What are product market factors?

Answer 17

> level of product demand
degree of competition

Question 18

What are organizational factors?

Answer 18

> Industry and technology
employer size
employees’ preferences
organization’s strategy

Question 19

Economic theories of labour markets usually begin with four basic assumptions:

Answer 19

1) Employers always seek to maximize profits.

2) People are homogeneous and therefore interchangeable; for example, a business school graduate is a business school graduate is a business school graduate.

3) The pay rates reflect all costs associated with employment (base wage, bonuses, holidays, benefits, even training).

4) The markets faced by employers are competitive, so there is no advantage for a single employer to pay above or below the market rate.

Question 20

Organizations often claim to be what?

Answer 20

> often claim to be “market driven,” that is, they pay competitively with the market or are even market leaders.

Question 21

What is on the demand side and what is on the supply side?

Answer 21

> The demand side focuses on the actions of the employer: how many employees they seek and what they are able and willing to pay them.

> The supply side looks at potential employees: their qualifications and the pay they are willing to accept in exchange for their services.

Question 22

On a graph, what is the market point?

Answer 22

> The market rate is the point where the lines for labour demand and labour supply cross

Question 23

Once we have the market-determined rate for graduates, how will an organization know how many graduates they can hire?

Answer 23

> an analysis of labour demand is required

Question 24

In the short term, an employer cannot change any other factor of production (e.g., technology, capital, or natural resources). But - what can change? In this situation, what does the demand for labour coincide with?

Answer 24

> Thus, its level of production can change only if it changes the level of human resources. Under such conditions, a single employer’s demand for labour coincides with its marginal product of labour.

Question 25

The marginal product of labour is:

Answer 25

> is the additional output associated with the employment of one additional person, with the other factors of production held constant.

Question 26

When does the marginal product of labour decrease?

Answer 26

> The marginal product of labour decreases as number of new hires increases.

Question 27

In the short term, factors of production such as office space, level of clerical support, etc. are considered what?

Answer 27

> are fixed

Question 28

The marginal revenue of labour is the:

Answer 28

> is the money generated by the sale of the marginal product—the additional output from the employment of one additional person.

Question 29

The level of demand that maximizes profits is that level at which what occurs?

Answer 29

> the level of demand that maximizes profits is that level at which the marginal revenue of the last hire is equal to the wage rate for that hire.

Question 30

To utilize the labour market model, what must managers do?

Answer 30

> To utilize this model, a manager must do two things: (1) determine the pay level set by market forces and (2) determine the marginal revenue generated by each new hire.

Question 31

What is a downsize to the labour market model?

Answer 31

> it oversimplifies the real world. > In most organizations, it is almost impossible to quantify the goods or services produced by an individual employee, because most production is through joint efforts of employees with a variety of skills. > Even in settings that use piece rates (e.g., $0.50 for each soccer ball sewn), it is hard to separate the contributions of labour from those of other resources (e.g., efficient machinery, sturdy materials, good lighting, ventilation).

Question 32

Are marginal products and marginal revenues directly measurable?

Answer 32

So neither the marginal product nor the marginal revenue is directly measurable.

Question 33

Economists also make assumptions about the behaviour of potential employees. The model assumes what:

Answer 33

> assumes that many people are seeking jobs, > that they possess accurate information about all job openings, > and that no barriers to mobility (discrimination, licensing provisions, or union membership requirements) exist

Question 34

economic theories must frequently be revised to account for what?

Answer 34

> economic theories must frequently be revised to account for reality.

Question 35

A particularly troublesome issue for economists is why an employer would pay more than what theory states is:

Answer 35

> more than what theory states is the market-determined rate

Question 36

What is the 'prediction' and the 'so what' for the compensating differentials theory?

Answer 36

PREDICTION: > Work with negative characteristics requires higher pay to attract/retain workers. SO WHAT: > Job evaluation and compensable factors must capture these negative characteristics.

Question 37

What is the 'prediction' and the 'so what' for the efficiency wage theory?

Answer 37

PREDICTION: > Above-market wages may improve efficiency by attracting workers with higher abilities, by discouraging shirking/quits, and may require less supervision.  SO WHAT: > Staffing programs must be able to select the best employees; work must be structured to take advantage of employees’ greater abilities.

Question 38

What is the 'prediction' and the 'so what' for the signalling theory?

Answer 38

PREDICTIONS: > Pay policies signal to applicants the kinds of attributes/behaviours the employer seeks. SO WHATS: > Pay practices must recognize desired behaviours with higher pay, larger bonuses, and other forms of compensation.

Question 39

More than 200 years ago, Adam Smith argued what about individuals?

Answer 39

> More than 200 years ago, Adam Smith argued that individuals consider the “whole of the advantages and disadvantages of different employments” and make decisions based on the alternative with the greatest “net advantage.”

Question 40

Breakdown the compensating differentials with a pertinent example:

Answer 40

> If a job has negative characteristics, that is, if the necessary training is very expensive (medical school, law school), > job security is tenuous (stockbrokers, CEOs), working conditions are disagreeable (highway construction, garbage collectors), > or the chances of success are low (professional sports—NBA, NFL, MLB, etc.), then: * employers must offer higher wages to compensate for these negative features.

Question 41

Efficiency wage theory suggests that:

Answer 41

suggests that sometimes high wages may increase efficiency and actually lower labour costs if they can: 1) Attract higher-quality applicants; 2) Lower turnover; 3) Increase worker effort; 4) Reduce “shirking” (what economists say when they mean “slacking off”); and 5) Reduce the need for supervision.

Question 42

Research shows that higher wages actually do what?

Answer 42

> actually do attract more qualified applicants. > But they also attract more unqualified applicants.

Question 43

The higher the wage rate, the less likely it is that:

Answer 43

> the less likely it is that an employee would be able to find another job that pays as well. > Thus, overall turnover is expected to be lower. The higher wages also motivate current employees to work harder and/or smarter. > The underlying assumption is that pay level helps determine the level of effort. 

Question 44

There is also some research on shirking behaviour. One study looked at shirking behaviour by examining employee discipline and wages in several auto plants. What was found out about high wages?

Answer 44

> Higher wages were associated with lower shirking, measured as the number of disciplinary layoffs. > So, although higher wages reduced shirking, the authors were unable to say whether it was reduced enough to offset the higher wage bill

Question 45

Does an above-market wage allow an organization to operate with fewer supervisors?

Answer 45

> Some research evidence says yes. For example, a study of hospitals found that those that paid high wages to staff nurses employed fewer nurse supervisors. > wages were not speculated though *

Question 46

An organization’s ability to pay is related to what model?

Answer 46

> An organization’s ability to pay is related to the efficiency wage model.

Question 47

Signalling theory is more useful in understanding what?

Answer 47

> the mix of pay forms.

Question 48

Signalling theory holds that employers deliberately do what?

Answer 48

> employers deliberately design pay levels and pay forms as part of a strategy that signals to both prospective and current employees what kinds of behaviours are sought.

Question 49

An employer who combines lower base with high bonuses may be signalling that what occurs:

Answer 49

> An employer who combines lower base with high bonuses may be signalling that it wants employees who are risk-takers. Its pay policy helps communicate expectations.

Question 50

A study of university students approaching graduation found that what pay forms affected their job decisions?

Answer 50

> A study of university students approaching graduation found that both pay level and mix of pay forms affected their job decisions. > Students wanted jobs that offered high pay, but they also showed a preference for individual-based (rather than team-based) pay, fixed (rather than variable) pay, job-based (rather than skill-based) pay, and flexible benefits.

Question 51

What two theories are associated with the supply side of the model?

Answer 51

1) Reservation Wage 2) Human Capital

Question 52

What is the 'prediction' and the 'so what' for the reservation wage theory?

Answer 52

PREDICTIONS: > Job seekers will not accept jobs if pay is below a certain wage, no matter how attractive other job aspects are. SO WHAT: > Pay level will affect ability to recruit. Pay must meet some minimum level.

Question 53

What is the 'prediction' and the 'so what' for the Human Capital theory?

Answer 53

PREDICTION: > General and specific skills require an investment in human capital. The value of an individual’s skills and abilities is a function of the time and expense required to acquire them. SO WHAT: > Pay level needs to be high enough to offer sufficient return on investment for workers to attain these skills. 

Question 54

According to the reservation wage theory, job seekers have what?

Answer 54

> According to the reservation wage theory, job seekers have a reservation wage level below which they will not accept a job offer, no matter how attractive the other job attributes.  > If pay level does not meet their minimum standard, no other job attributes can make up (i.e., compensate) for this inadequacy.

Question 55

A reservation wage may be what relative to the market wage?

Answer 55

> may be above or below the market wage.

Question 56

What does the reservation wage theory seek to explain?

Answer 56

> The theory seeks to explain differences in workers’ responses to offers.

Question 57

Human capital theory, perhaps the most influential economic theory for explaining pay level differences, is based on what premise? What does it assume?

Answer 57

> Human capital theory, perhaps the most influential economic theory for explaining pay level differences, is based on the premise that higher earnings flow to those who improve their potential productivity by investing in themselves (acquiring additional education, training, and experience). > The theory assumes that people are in fact paid at the value of their marginal product.

Question 58

What can increase marginal product?

Answer 58

> Improving productive abilities by investing in training or even in one’s physical health will increase one’s marginal product.

Question 59

The value of an individual’s skills and abilities is a function of:

Answer 59

> is a function of the time, expense, and resources expended to acquire them.

Question 60

How does the curve increase with human capital theory?

Answer 60

> As pay level increases, the number of people willing to make that investment also increases, thereby creating an upward-sloping supply curve.

Question 61

A number of additional factors affect the supply of labour. What are some?

Answer 61

> Geographic barriers to mobility between jobs, > union requirements, > lack of information about job openings, > the degree of risk involved, > and the degree of unemployment also influence labour markets.

Question 62

What are non-monetary aspects important for?

Answer 62

> non-monetary aspects of jobs (e.g., flexibility) may be important aspects of the return on investment.

Question 63

The supply and demand for labour are major determinants of:

Answer 63

> are major determinants of an employer’s pay level.

Question 64

an employer’s pay level is constrained by its ability to:

Answer 64

> by its ability to compete in the product/service market.

Question 65

What are the two key market factors?

Answer 65

> Product demand and the degree of competition are the two key product market factors. > Both affect the ability of the organization to change what it charges for its products and services.

Question 66

What puts on the "floor" and the "ceiling" for the pay level in respect to product demand?

Answer 66

> Although labour market conditions (and legal requirements) put a floor on the pay level required to attract sufficient employees, the product market puts a ceiling on the maximum pay level that an employer can set.

Question 67

Employers in highly competitive markets such as manufacturers of automobiles or generic drugs are less able to do what?

Answer 67

> are less able to raise prices without loss of revenues.

Question 68

Other factors besides product market conditions affect pay level. What are some?

Answer 68

> The productivity of labour, the technology employed, the level of production relative to plant capacity available—all affect compensation decisions.

Question 69

The industry in which an organization competes influences what?

Answer 69

> influences the technologies used.

Question 70

How can technology affect pay levels?

Answer 70

In addition to differences in technology across industries, the introduction of new technology within an industry also influences pay levels.

Question 71

There is consistent evidence that employer size affects pay levels. Describe this concept in simple terms:

Answer 71

> There is consistent evidence that large organizations tend to pay more than small ones

Question 72

Markets, after all, involve what choices?

Answer 72

> Markets, after all, involve both employers’ and employees’ choices

Question 73

Aside from organization size, what other factor causes higher wages?

Answer 73

> Similarly, evidence suggests that organizations making greater use of high-performance work practices (such as teams, quality circles, total quality management, job rotation) and having higher-skilled workers also pay higher wages.

Question 74

The observable benefits of higher wages may include:

Answer 74

> higher pay satisfaction, improved attraction and retention of employees, and higher quality, effort and/or performance.

Question 75

Ultimately, higher wages must do what?

Answer 75

> Ultimately, higher wages must bring something in return (e.g., higher productivity, quality, and/or innovation). Otherwise, a firm's ability to compete and survive will be in question. 

Question 76

Do organizations operate in one market?

Answer 76

> Although the notion of a single homogeneous labour market may be an interesting analytical device, each organization operates in many labour markets, each with unique demand and supply.

Question 77

The three factors usually used to determine the relevant labour markets are:

Answer 77

> The three factors usually used to determine the relevant labour markets are occupation (skill/knowledge required), geography (willingness to relocate and/or commute, or become virtual employees), and competitors (other employers in the same product/service and labour markets).

Question 78

One thing is certain though: if the markets are incorrectly defined, what occurs?

Answer 78

> the estimates of competitors’ pay rates will be incorrect and the pay level and mix of pay forms inappropriately established.

Question 79

Two studies do shed some light on this issue.27 They conclude that:

Answer 79

> Two studies do shed some light on this issue. > They conclude that managers look at both their competitors (their products, location, and size) and the jobs (the skills and knowledge required), and their importance to the organization’s success (e.g., lawyers in law firms, software engineers at Microsoft).

Question 80

The data from product market competitors (as opposed to labour market competitors) are likely to receive greater weight when:

Answer 80

1) Employee skills are specific to the product market; 2) Labour costs are a large share of total costs; 3) Product demand is responsive to price changes; and 4) The supply of labour is not responsive to changes in pay.

Question 81

Compensation theories offer some help in understanding the variations in pay levels we observe between employers. However, they are less helpful in:

Answer 81

> understanding differences in the mix of pay forms.

Question 82

Recall that pay level is:

Answer 82

> Recall that pay level is the average of the array of rates inside an organization.

Question 83

There are three conventional pay level policies:

Answer 83

> to lead, to match, or to lag competition.

Question 84

What do newer policies do?

Answer 84

> Newer policies emphasize flexibility: among policies for different employee groups, among pay forms for individual employees, and among elements of the employee relationship they wish to emphasize in their external competitiveness policy.

Question 85

The basic premise is that the competitiveness of pay will affect:

Answer 85

> will affect the organization’s ability to achieve its compensation objectives, which in turn will affect the organization’s performance.

Question 86

The problem with much pay level research is that it :

Answer 86

> focuses on base pay and ignores bonuses, incentives, stock options, employment security, benefits, and other forms of pay.

Question 87

Comparisons based on just pay can be:

Answer 87

> Comparisons based on just pay can be misleading. > In fact, managers seem to believe they get more bang for their buck by allocating dollars away from base pay and into variable forms that more effectively shape employee behaviour

Question 88

Given the choice to match, lead, or lag, the most common policy is to do what? how is this justified?

Answer 88

> match rates paid by competitors. > Managers historically justify this policy by saying that failure to match competitors’ rates would cause dissatisfaction among present employees and limit the organization’s ability to recruit.

Question 89

Many non-unionized companies tend to match or even lead competition to do what?

Answer 89

> to discourage unionization. 

Question 90

A lead policy maximizes what?

Answer 90

> A lead policy maximizes the ability to attract and retain quality employees and minimizes employee dissatisfaction with pay.

Question 91

A number of researchers have linked high wages to:

Answer 91

> have linked high wages to ease of attraction, reduced vacancy rates and training time, and better-quality employees > Research also suggests that high pay levels reduce turnover and absenteeism.

Question 92

 Studies have also found that the use of variable pay (bonuses and long-term incentives) is related to an organization’s improved financial performance, but what is not?

Answer 92

> that pay level is not.

Question 93

A lead policy can have negative effects, too. It may:

Answer 93

> It may force the employer to increase the wages of current employees to avoid internal misalignment and murmuring. > Additionally, a lead policy may mask negative job attributes that contribute to high turnover later on (e.g., lack of challenging assignments or hostile colleagues). 

Question 94

A policy to pay below market rates may hinder what in an organization?

Answer 94

> may hinder a firm’s ability to attract potential employees.

Question 95

If pay level is lagged in return for the promise of higher future returns (e.g., stock ownership in a high-tech start-up firm), such a promise may affect employees in what way?

Answer 95

> may increase employee commitment and foster teamwork, which may increase productivity.

Question 96

Can you lag and lead competition at the same time?

Answer 96

> Additionally, it is possible to lag competition on pay level but to lead on other returns from work (e.g., meaningful work, desirable location, outstanding colleagues, cool tools, work/life balance).

Question 97

Similarly to the lead, match, or lag options to pay level, there are various options to pay mix as well. Examples of some obvious alternatives are:

Answer 97

> performance-driven, market match, work/life balance, and security >Market match simply mimics the pay mix competitors are paying.

Question 98

Some companies compete on the basis of:

Answer 98

> on the basis of their overall reputation as a place to work, beyond pay level and pay mix.

Question 99

The shared choice approach begins with the traditional alternatives of lead, match, or lag. But it then adds a second part - what is that?

Answer 99

> which is to offer employees choices (within limits) in the pay mix . > employees as customers

Question 100

One risk of allowing employees' choices is that :

Answer 100

> employees might make choices that jeopardize their well-being, > Another is the “24 jars of jam” dilemma. Supermarket studies report that offering consumers a taste of just a few different jams increases sales. But offering a taste of 24 different jams decreases sales.

Question 101

Some companies prefer to report the mix of pay forms using what?

Answer 101

> using a dashboard > The dashboard changes the focus from emphasizing the relative importance of each form within a single company to comparing each form by itself to the market (many companies).

Question 102

The pay mix employees receive can also differ at different levels of:

Answer 102

> The pay mix employees receive can also differ at different levels of the internal job structure

Question 103

What are some Consequences of an Effective Externally Competitive Pay Policy?

Answer 103

> contain operating expenses (labour costs) > increase pool of qualified applicants > increase quality and experience > reduce voluntary turnover > increase probability of union-free status > reduce pay-related work stoppages

Question 104

No matter what the competitive pay policy, it needs to be translated into:

Answer 104

> needs to be translated into practice