1. Unit 5 Seminar Topics Compensation Strategy: External Competitiveness
What Shapes External Competitiveness?
Labor and Product Market Factors
Organization Factors
Specify Competitive Pay Policy
The Purpose of a Survey
Balancing Internal and External Pressures: Adjusting the Pay Structure

2. Unit 5 To Do’s Read Chapters 7 and 8 Participate in the Discussion
Complete the Web Field Trip
Complete the Unit Assignment - write a two to three page paper that provides pay recommendations for a manager's position in the organization that you have chosen for your final project
Review Extra! Extra!

3. Compensation Strategy: External Competitiveness
External competitiveness refers to the pay relationships among organizations—the organization’s pay relative to its competitors
External competitiveness is expressed by:
Setting a pay level that is above, below, or equal to that of competitors.
Determining the mix of pay forms relative to those of competitors (base + bonuses + benefits + value of stock holdings

4. Compensation Strategy related to External Competitiveness
Attract and retain employees
Control costs and increase revenue
Labor costs = (pay level) times (number of employees)
The higher the pay level, the higher the labor costs
The higher the pay level relative to what competitors pay, the greater the costs to provide similar products or services

5. Attract and Retain the Right Employees
Companies often set different pay-level policies for different job families
How a company compares to the market depends on what competitors it compares to and what pay forms are included
Organizations vary in how closely they match the “going rate”
There is no single “going mix” of pay forms

6. How Labor Markets Work Employers seek to maximize profits
People are homogeneous and therefore interchangeable
Pay rates reflect all costs associated with employment
Markets faced by employers are competitive
The market rate is where the lines for labor demand and labor supply cross

7. Labor Demand
Analysis of labor demand indicates how many employees will be hired by an employer
In the short run, an employer cannot change any factor of production except human resources
An employer’s level of production can change only if it changes the level of human resources

8. Labor Demand Theories

9. 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
Job security is tenuous
Working conditions are disagreeable
Chances of success are low

10. Efficiency Wage Theory
Based on the belief that high wages may increase efficiency and lower labor costs if they:
Attract higher-quality applicants
Lower turnover
Increase worker effort
Reduce “shirking”
Reduce the need to supervise employees
Firms with greater profits than competitors are able to share success with employees via:
“Leading” competitors’ pay levels
Bonuses that vary with profitability

11. Signaling
Employers deliberately design pay levels and mix as part of a strategy that signals to both prospective and current employees kinds of behaviors sought
On the supply side of the model:
Suppliers of labor signal to potential employers
Characteristics of applicants and organization decisions about pay level and mix act as signals

12. Supply Side Theories

13. Organization Factors Employer size People’s preferences
Industry and technology
Labor-intensive industries tend to pay lower than technology-intensive industries;
New technology within an industry influences pay levels
Employer size
Large organizations tend to pay more than small ones
People’s preferences
Markets involve employers’ and employees’ choices
Organization strategy
Higher pay levels may be well-suited to particular strategies such as higher value-added customer segments

14. Relevant Markets Three factors determine relevant labor markets:
Occupation
Geography
Competitors
Employers choose their relevant markets based on:
Competitors – Products, location, and size
Jobs – Skills and knowledge required and their importance to organizational success

15. Competitive Pay Policy Alternatives
Three conventional pay-level policies:
To lead
To meet
To follow competition
Newer policies emphasize flexibility among:
Policies for different employee groups

16. Relationships Between External Pay Policies and Objectives

17. Lead Pay-Level Policy
Maximizes the ability to attract and retain quality employees and minimizes employee dissatisfaction with pay
May also offset less attractive features of work
If used only to hire new employees, may lead to dissatisfaction of current employees
May mask negative job attributes that contribute to high turnover later on

18. Lag Pay-Level Policy
Paying below-market rates may hinder a firm’s ability to attract potential employees
Lag pay-level policy coupled with the promise of higher future returns:
May increase employee commitment
Foster teamwork
May possibly increase productivity

19. Different Policies for Different Employee Groups
Employers may vary the policy for:
Different occupational families
Different forms of pay
Different business units
Pay-mix strategies:
Performance driven
Market match
Work/life balance
Security

20. Some Consequences of Pay Levels

21. Consequences of Pay-Level and Mix Decisions: Guidance from the Research
Fairness
Satisfaction with pay is directly related to pay level
Sense of fairness is related to how others are paid
Compliance
Employers must pay at or above the legal minimum wage
Prevailing wage laws and equal rights legislation must be met

22. Specify Competitive Pay Policy
A survey is the systematic process of collecting and making judgments about the compensation paid by other employers
Surveys provide the data for translating policy into pay levels, pay mix, and structures

23. The Purpose of a Survey Adjust pay level—how much to pay?
Based on overall movement of pay rates caused by competition in the market
Adjust pay mix—what forms?
Base, bonus, stock, benefits
Adjust pay structure?
Market surveys are used to validate job evaluation results; establish internal structures
Study special situations
Specific pay-related problems
Estimate competitors’ labor costs
“Competitive intelligence”
Employment Cost Index measures quarterly changes in employer costs for compensation

24. Select Relevant Market Competitors
Relevant labor market includes employers who compete:
For same occupations or skills
For employees in same geographic area
With same products and services
Fuzzy markets
Organizations with unique jobs and structures find it hard to get comparable market data
Place more emphasis on external market data

25. Design the Survey Who should be involved? How many employers?
Compensation manager, managers, and employees
Outside consulting firms
How many employers?
No firm rules
Publicly available data – Bureau of Labor Statistics
Which jobs to include?
Benchmark-job approach
To price the entire structure
Low-high approach
Wages of lowest- and highest-paid benchmark jobs for the relevant skills in the relevant market are used as anchors for skill-based structures

26. Design the Survey (cont.)
What information to collect?
Organization data
Financial data and reporting relationships
Turnover and revenues
Total compensation data
Base pay
Total cash
Total compensation

27. Exhibit 8.9: Advantages and Disadvantages of Measures of Compensation

28. Interpret Survey Results and Construct a Market Line
Verify data
Accuracy of match
Benchmark conversion/survey leveling
Anomalies
Does any one company dominate?
Do all employers show similar patterns?
Outliers?
Statistical analysis
Frequency distribution
Unusual shapes may reflect:
Problems with job matches
Widely dispersed pay rates
Employers with widely divergent pay policies

29. Combine Internal Structure and External Market Rates
Two parts of the total pay model have merged:
Internally aligned structure - Horizontal axis
External competitive data - Vertical axis
Two aspects of pay structure:
Pay-policy line
Pay ranges
Develop Pay Grades

30. From Policy to Practice: Grades and Ranges
Why bother with grades and ranges?
Offers flexibility to deal with pressures from external markets and differences among firms
Differences in quality among individuals applying for work
Differences in the productivity or value of these quality variations
Differences in the mix of pay forms competitors use

31. From Policy to Practice: Grades and Ranges
A pay range exists whenever two or more rates are paid to employees in the same job
Recognize individual performance differences with pay
Meet employees' expectations that their pay will increase over time, even in the same job
Encourage employees to remain with the organization
Develop grades
Grades enhance an organization's ability to move people among jobs with no change in pay
Each grade will have its own pay range
All the jobs within a single grade will have the same pay range

32. From Policy to Practice: Grades and Ranges (cont.)
Establish range midpoints, minimums, and maximums
What size should the range be?
Based on judgment about how ranges support career paths, promotions, and other organization systems
Some compensation managers use the actual survey rates, particularly the 75th and 25th percentiles, as maximums and minimums

33. Overlap Promotion increases matter
Size of differentials between grades should support career movement through the structure
Overlap ought to be large enough to induce employees to seek promotion into a higher grade
Skill-based plans establish single flat rates for each skill level regardless of performance or seniority

34. From Policy to Practice: Broad Banding
Involves collapsing salary grades into a few broad bands, each with a sizable range
One minimum and one maximum
Range midpoint often not used

35. Contrasts Between Ranges and Bands
See Exhibit 8.19, page 267

36. Balancing Internal and External Pressures: Adjusting the Pay Structure
A job structure orders jobs on the basis of internal factors
Reflected in job evaluation or skill certification
Pay structure is anchored by the organization’s external competitive position
Reflected in its pay-policy line
Reconciling differences
May entail a review of :
Job analysis
Evaluation of the job
Market data