chapter 7 - defining competitveness Flashcards
Labor Market
Definition:
The labor market is the industry, the size of the organization (revenue, market cap and/or # employees), and the location where you compete to hire employees. Also called the Talent Market.
Why it matters:
Companies often talk about paying fairly to “market” but neglect defining what “market” actually means. Many companies make the mistake of defining their market based on their business competitors – the reality is we recruit from and for employees that are broader than our immediate competitors.
What are the criteria for defining the relevant labor market?
External Competitiveness:
External competitiveness is expressed by:
1. Pay Level: the average rates paid by an employer (is it above, below or equal to that of competitors) – SIZE of PIE → blue part of pie
2. Pay Mix: various forms of pay (cash, benefits, equity, other rewards) that make up total compensation– SLICES of PIE
There is no “going mix” in the labor market for a specific job
(look at image)
Pay Levels and Labor Costs
Pay levels have a significant impact on expenses (what % of operating expenses are attributed to pay?)
60-70%
PAY LEVELS * # OF EES = LABOR COSTS
As pay level increases, labor costs increase
Greater pay, greater relative costs to provide similar products or services
Pay strategy should translate into revenues exceeding the cost of the strategy
Higher labor cost can be overcome by increased productivity
forms of pay
benefits
base pay
incentives
equity
Compensating Differentials
According to Adam Smith “if a job has negative characteristics then employers must offer higher wages to compensate for these negative features”
For instance, if:
Necessary training is very expensive – med school
Job security is tenuous – stock brokers, CEOs
Working conditions are disagreeable - laborers
Chances of success are low – professional sports
Employers must offer higher wages to overcome these negative features
Efficiency Wage
According to efficiency-wage theory, high wages may increase efficiency and lower labor costs if they:
1. Attract higher-quality applicants (greater pool, but do we select the higher quality candidates)
2. Lower turnover
3. Increase worker effort
4. Reduce “shirking”
5. Reduce the need to supervise employees (monitor) (enough to offset higher wages?)
Sorting and Signaling
Sorting is the effect that pay strategy has on the composition of the workforce—who is attracted and who is retained
Signaling theory says employers design pay levels and mix as a strategy that signals to prospective/current employees the behaviors sought (a type of “compensation branding”)
An employer that combines lower base pay with high bonuses may be signaling that it wants employees who are risk takers
A study of college students approaching graduation found that pay level and pay mix affect their job decisions
Types and mix of pay attract (or not) different types of employees
Organization Factors Influencing Pay
Product & Industry :
Labor-intensive industries tend to pay lower than technology-intensive industries
Product demand and degree of competition also impact wages
New technology within an industry influences pay levels
Employer size :
Large organizations tend to pay more than small ones
Organization Factors Influencing Pay
Employee preferences
Very difficult to measure
With 5 generations in the workplace, choice more important
Relevant Labor Markets
Defining the relevant (labor) markets is a big part of figuring out how and how much to pay
- Every organization operates in many labor markets, each with unique demand and supply
- Managers must define the markets that are relevant for pay purposes and establish the appropriate competitive positions in these markets
Three factors are commonly used to determine the relevant labor markets
- Occupation (skill/knowledge required)
- Geography (willingness to relocate, commute, or be a virtual employee)
- Competitors (other employers in the same product/service and labor markets)
Competitive Pay Policy Alternatives
Three conventional pay-level policies:
1) lead: pay above market/competition
2) match: pay at market
3) pay less than market
look at image
Competitive Pay Policy Alternatives… newer policies emphasize
flexibility
Alternative Pay Policies
How organizations position pay against competitors is changing
Different policies:
- Occupations/Jobs
- Forms of Pay
- Business units
Pay-mix strategies:
- Performance driven
- Work/life balance
- Market Match
- Security
Some consequences of Pay Levels
External competitiveness affects:
1) Operating expenses
2) Employee attitudes and behavior
(higher pay produces image)
Research Shows,,, Consequences of Pay-Level and Mix Decisions
Which pay policy achieves competitive advantage?
Generally hard to measure competitive advantage of a lead philosophy, but some evidence of negative effective of lag philosophy
Also difficult to measure effect of pay mix, though there is significant evidence that pay-for-performance increases productivity and improves performance
Pay level may not gain any competitive advantage, but the wrong pay level may be a serious disadvantage
There is messaging in pay mix and levels – sorting effect
Employee satisfaction with pay and perceived fairness is directly tied to pay level (not mix) and comparisons with others
