Defining Competitiveness Chapter 8

Contents…. External competitiveness is expressed in practice by (1) setting a pay level that is above, below or equal to that of competitors; and (2) determining the mix of pay forms relative to those of competitors. Both pay level and pay mix decisions focus on two objectives: (1) control costs and (2) attract and retain employees.

What shapes external competitiveness? Labour market forces Nature of demand Nature of supply Product market factors Degree of competition Level of product demand Organization factors Industry, strategy, size Individual manager

Theories of labor markets (assumptions) Labor market factors Quoted-price Bourse Theories of labor markets (assumptions) Employers always seek to maximize profits People are homogeneous and therefore interchangeable Pay rates reflect all costs associated with employment Markets faced by employers are competitive

Supply and demand for business school graduates in the short run Rs. 100,000 Demand Pay for business graduates Supply Rs. 50,000 Rs. 25,000 100 1000 Number of business school graduates available

Labor demand Marginal product of labor Marginal revenue of labor The additional output associated with the employment of one additional person, with other production factors held constant Marginal revenue of labor It is the additional revenue generated when the firm employs one additional person, with other production factors held constant.

Labor demand theories and implications Theory Prediction So what? Compensating differentials Work with negative characteristics requires higher pay to attract workers Above market wages will improve efficiency by attracting workers who will perform better and be less willing to leave Pay policies signal the kinds of behavior the employer seeks Job evaluation and compensable factors must capture these negative characteristics. Staffing programs must have the capability of selecting the best employees; work must be structured to take advantage of employees’ greater efforts Pay practices must recognize desired behaviors with more pay, larger bonuses, and other forms of compensation Efficiency wage Signaling

Supply Theories and Implications Prediction So What? Job seekers will not accept jobs whose pay is below a certain wage, no matter how attractive other job aspects The value of an individual’s skills and abilities is a function of the time and expense required to acquire them. Pay level will affect ability to recruit. Higher pay is required to induce people to train for more difficult jobs. Reservation wage Human capital

Product market factors and ability to pay Product demand Degree of competition

Organization factors Industry and technology Employer size People’s preferences Organization strategy

Relevant markets Three factors used to determine relevant markets Occupations (skill/knowledge required) Geography (willingness to relocate, commute, or become virtual employees) Competitors (other employers in the same product/service and labor markets)

Competitive pay policy alternatives Lead Meet or Follow competition

Pay above market (lead) + ? Policy Ability to attract Ability to retain Contain labor costs Reduce pay dissatisfaction Increase productivity Pay above market (lead) + ? Pay with market (match) = Pay below market (lag) _ Hybrid policy Employer of choice Probable relationships between external pay policies and objectives