© 2010 McGraw Hill Ryerson 7-1 COMPENSATION Third Canadian Edition Milkovich, Newman, Cole

© 2010 McGraw Hill Ryerson 7-2 STRATEGIC POLICIES TECHNIQUES STRATEGIC OBJECTIVES EFFICIENCY  Performance  Quality  Customers  Stockholders  Costs FAIRNESS COMPLIANCE ALIGNMENT COMPETITIVENESS CONTRIBUTORS MANAGEMENT INTERNAL STRUCTURE PAY STRUCTURE INCENTIVE PROGRAMS EVALUATION THE PAY MODEL

© 2010 McGraw Hill Ryerson 7-3  refers to the pay relationships among organizations - the organization’s pay relative to its competitors  shaped by three factors: 1.labour market (supply and demand) 2.product/service market (competition) 3.organizational factors (e.g., size) External Competitiveness

© 2010 McGraw Hill Ryerson 7-4 Pay level Pay level refers to the average of the array of pay rates paid by an employer.  ( Base + Bonuses + Benefits + Options) # of Employees Pay forms Pay forms refer to the mix of the various types of payments that make up total compensation. Pay Level and Pay Forms

© 2010 McGraw Hill Ryerson 7-5 External Competitiveness Policies 1.pay level that is above, below, or equal to competitors, and 2.the mix of pay forms relative to those of competitors.

© 2010 McGraw Hill Ryerson 7-6 External Competitiveness Objectives Control Labour Costs Attract and Retain Employees

© 2010 McGraw Hill Ryerson 7-7 Pay Level Decisions Impact Labour Costs = x Labour Costs Number of Employees Pay Level

© 2010 McGraw Hill Ryerson 7-8 Labour Demand  The marginal product of labour is the additional output associated with the employment of one additional human resource unit, with other production factors held constant.  The marginal revenue of labour is the additional revenue generated when the firm employs one additional unit of human resources, with other production factors held constant.

© 2010 McGraw Hill Ryerson 7-9 Supply Demand Number of business graduates available Number of business graduates hired Supply to individual employer Marginal revenue product $25,000$25,000 $50,000 $50,000 $100,000$100,000 Pay for business graduates Supply and Demand at the Market and Individual Employer Level Market level Employer level

© 2010 McGraw Hill Ryerson 7-10 Labour Demand Theories and Implications Theory Prediction So What? Compensating differentials Work with negative characteristics requires higher pay to attract workers. Job evaluation and compensable factors most capture these negative characteristics. Efficiency wageAbove-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. SignalingPay policies signal the kinds of behaviour the employer seeks. Pay practices must recognize these behaviours by better pay, larger bonuses, and other forms of compensation.

© 2010 McGraw Hill Ryerson 7-11 Labour Supply Theories and Implications Theory Prediction So What? Reservation wageJob seekers won’t accept jobs whose pay is below a certain wage, no matter how attractive other job aspects. Pay level will affect ability to recruit. Human capitalThe value of an individual’s skills and abilities is a function of the time and expense required to acquire them. Higher pay is required to induce people to train for more difficult jobs.

© 2010 McGraw Hill Ryerson 7-12 Product Market Factors and Ability to Pay  Two key product market factors affect ability of a firm to change price of its products or services Level of product demand – 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 revenue

© 2010 McGraw Hill Ryerson 7-13 Organization Factors  Industry and technology  Employer size  Employee preferences  Organization strategy

© 2010 McGraw Hill Ryerson 7-14 Competitive Pay Policy Alternatives Lag Policy Flexible Policies Lead Policy Pay with Competition (Match)

© 2010 McGraw Hill Ryerson 7-15 Pay Mix Policy Alternatives Base 50% Bonus 17% Options 16% Benefits 17% Performance - Driven Base 70% Bonus 6% Options 4% Benefits 20% Market Match Base 50% Bonus 10% Options 10% Benefits 30% Work - Life Balance Base 80% Benefits 20% Security (Commitment)

© 2010 McGraw Hill Ryerson 7-16 Some Consequences of Pay Levels Competitiveness of total compensation 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

© 2010 McGraw Hill Ryerson 7-17 Conclusion  there is no ‘going rate’, conscious pay decisions are made by managers  both product/service market and labour market competitors 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  the pay level and mix must be properly positioned relative to competitors