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8/17/2021 1 Unit 5 Defining Competitiveness Instructor Associate Prof Dr Pham Thi Bich Ngoc National Economics University Outlines • Compensation Strategy External Competitiveness • What Shapes Extern[.]
8/17/2021 Unit 5: Defining Competitiveness Instructor: Associate Prof Dr Pham Thi Bich Ngoc National Economics University Outlines • Compensation Strategy: External Competitiveness • What Shapes External Competitiveness? • Labor Market Factors • Modifications to the Demand Side • Modifications to the Supply Side • Product Market Factors and Ability to Pay • Organization Factors • Relevant Markets • Competitive Pay Policy Alternatives • Consequences of Pay-Level and -Mix 8/17/2021 COMPENSATION STRATEGY: EXTERNAL COMPETITIVENESS • External competitiveness refers to the pay relationships among organizations—the organization’s pay relative to its competitors • Pay level refers to the average of the array of rates paid by an employer: (base + bonuses + benefits + value of stock holdings) / number of employees • Pay forms are the various types of payments, or pay mix, that make up total compensation COMPENSATION STRATEGY: EXTERNAL COMPETITIVENESS • 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 increase revenues and (2) attract and retain employees 8/17/2021 Control Costs and Increase Revenues • Pay level decisions have a significant impact on expenses Labor costs = (pay level) x (number of employees) • Paying employees above market: an effective or ineffective strategy? Attract and Retain the Right Employees • Pay rate vs non-financial compensation • Base salary vs total rewards • 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 labor market for a specific job 8/17/2021 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 Market-competitive pay systems • Market-competitive pay systems represent companies’ compensation policies that fit the imperatives of their competitive advantage • These systems play a significant role in attracting and retaining the most qualified employees • Based on four activities • Conducting strategic analyses which entails an examination of a company’s external market factors • Assessments of competitors’ pay practices with compensation surveys • Integrating the internal job structure with external market pay rates • Determining compensation policies 8/17/2021 What Shapes External Competitiveness? LABOR MARKET FACTORS • How Labor Markets Work four basic assumptions: • Employers always seek to maximize profits • People are homogeneous and therefore interchangeable • The pay rates reflect all costs associated with employment (e.g., base wage, bonuses, holidays, benefits, even training) • The markets faced by employers are competitive, so there is no advantage for a single employer to pay above or below the market rate 10 8/17/2021 LABOR MARKET FACTORS • How Labor Markets Work four basic assumptions: • Employers always seek to maximize profits • People are homogeneous and therefore interchangeable • The pay rates reflect all costs associated with employment (e.g., base wage, bonuses, holidays, benefits, even training) • The markets faced by employers are competitive, so there is no advantage for a single employer to pay above or below the market rate 11 LABOR MARKET FACTORS • The demand side focuses on the actions of the employers: how many new hires they seek and what they are willing and able to pay new employees • The supply side looks at potential employees: their qualifications and the pay they are willing to accept in exchange for their services • The market rate is where the lines for labor demand and labor supply cross 12 8/17/2021 LABOR MARKET FACTORS 13 LABOR MARKET FACTORS • Labor Demand: In short run, a single employer’s demand for labor coincides with the marginal product of labor • The marginal product of labor is the additional output associated with the employment of one additional person, with other production factors held constant • The marginal revenue of labor is the additional revenue generated when the firm employs one additional person, with other production factors held constant 14 8/17/2021 LABOR MARKET FACTORS 15 LABOR MARKET FACTORS • Labor Supply • upward sloping supply assumes that as pay increases, more people are willing to take a job But if unemployment rates are low, offers of higher pay may not increase supply— everyone who wants to work is already working • If competitors quickly match a higher offer, the employer may face a higher pay level but no increase in supply • The result was that the supermarket was paying more for the employees it already had but was still shorthanded Although some firms find lowering the job requirements and hiring less-skilled workers a better choice than raising wages, this choice incurs increased training costs 16 8/17/2021 MODIFICATIONS TO THE DEMAND SIDE • compensating differentials: explain the presence of various pay rates in the market Although the notion is appealing, it is hard to document, due to the difficulties in measuring and controlling all the factors that go into a netadvantage calculation • efficiency wage: • signaling 17 MODIFICATIONS TO THE DEMAND SIDE 18 8/17/2021 MODIFICATIONS TO THE DEMAND SIDE 19 MODIFICATIONS TO THE SUPPLY SIDE 20 10 8/17/2021 PRODUCT MARKET FACTORS AND ABILITY TO PAY • Degree of Competition Employers in highly competitive markets are less able to raise prices without loss of revenues • The productivity of labor, the technology employed, the level of production relative to plant capacity available—all affect compensation decisions • These factors vary more across than within industries 23 ORGANIZATION FACTORS • Industry and Technology • Employer Size • People’s Preferences • Organization Strategy 24 12 8/17/2021 RELEVANT MARKETS • Defining the Relevant Market • The data from product market competitors (as opposed to labor market competitors) are likely to receive greater weight when: Employee skills are specific to the product market Labor costs are a large share of total costs Product demand is responsive to price changes The supply of labor is not responsive to changes in pay (recall the earlier low-wage, low-skill example) 25 COMPETITIVE PAY POLICY ALTERNATIVES • Pay level is the average of the array of rates inside an organization • There are three conventional pay-level policies: to lead, to meet, or to follow competition • Newer policies emphasize flexibility: among policies for different employee groups, among pay forms for individual employees, and among elements of the employee relationship that the company wishes to emphasize in its external competitiveness policy 26 13 8/17/2021 What Difference Does the PayLevel Policy Make? • Probable Relationships Between External Pay Policies and Objectives 27 COMPETITIVE PAY POLICY ALTERNATIVES • Pay with Competition (Match) • Lead Pay-Level Policy • Lag Pay-Level Policy • Different Policies for Different Employee Groups • Not by Pay Level Alone: Pay-Mix Strategies 28 14 8/17/2021 COMPETITIVE PAY POLICY ALTERNATIVES • Pay with Competition (Match) • A pay-with-competition policy tries to ensure that an organization’s wage costs are approximately equal to those of its product competitors and that its ability to attract applicants will be approximately equal to its labor market competitors • Lead Pay-Level Policy • A lead pay-level policy maximizes the ability to attract and retain quality employees and minimizes employee dissatisfaction with pay • A lead policy can also have negative effects: It may force the employer to increase wages of current employees too, to avoid internal misalignment; a lead policy may mask negative job attributes that contribute to high turnover later on (e.g., boring assignments or hostile colleagues) 29 COMPETITIVE PAY POLICY ALTERNATIVES • Lag Pay-Level Policy • A policy of paying below-market rates may hinder a firm’s ability to attract potential employees • But if a lag pay-level policy is coupled with the promise of higher future returns (e.g., stock ownership in a hightech start-up firm) may increase employee commitment and foster teamwork, which may increase productivity • Different Policies for Different Employee Groups • Not by Pay Level Alone: Pay-Mix Strategies • Some obvious alternatives include performance driven, market match, work/life balance, and security 30 15 8/17/2021 Pay-Mix Policy Alternatives 31 Pay-Mix Policy Alternatives 32 16 8/17/2021 Pay-Mix Policy Alternatives 33 CONSEQUENCES OF PAY-LEVEL AND -MIX DECISIONS • It affects • (1) operating expenses and • (2) employee attitudes and work behaviors • Efficiency: A variety of theories make assumptions about the effects of relative pay levels on an organization’s efficiency • Fairness: Satisfaction with pay is directly related to the pay level • Compliance: It’s not enough to say that an employer must pay at or above the legal minimum wage Provisions of prevailing wage laws and equal rights legislation must also be met 34 17 8/17/2021 CONSEQUENCES OF PAY-LEVEL 35 18 Báo cáo giải pháp công tác quản lý Mầm non tài liệu mầm non mẫu giáo Kỹ sống cho trẻ mầm non sáng kiến kinh nghiệm thư viện kiến thức tổng hợp mầm non mẫu giáo để chăm sóc ni dạy ngày tốt Báo cáo giải pháp công tác quản lý Mầm non tài liệu mầm non mẫu giáo Kỹ sống cho trẻ mầm non sáng kiến kinh nghiệm thư viện kiến thức tổng hợp mầm non mẫu giáo để chăm sóc ni dạy ngày tốt ... balance, and security 30 15 8/17/2021 Pay-Mix Policy Alternatives 31 Pay-Mix Policy Alternatives 32 16 8/17/2021 Pay-Mix Policy Alternatives 33 CONSEQUENCES OF PAY-LEVEL AND -MIX DECISIONS • It affects... earlier low-wage, low-skill example) 25 COMPETITIVE PAY POLICY ALTERNATIVES • Pay level is the average of the array of rates inside an organization • There are three conventional pay-level policies:... rights legislation must also be met 34 17 8/17/2021 CONSEQUENCES OF PAY-LEVEL 35 18 Báo cáo giải pháp công tác quản lý Mầm non tài liệu mầm non mẫu giáo Kỹ sống cho trẻ mầm non sáng kiến kinh nghiệm