External Competitiveness:
Determining the Pay Level
Chapter 7 Defining Competitiveness
Chapter 8 Designing Pay Levels
and Pay Structures
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STRATEGIC
ISSUES
CONSISTENCY
COMPETITIVENESS
CONTRIBUTORS
TECHNIQUES
Work
Descriptions
analysis
Evaluation
certification
Market
Surveys
definitions
Seniority
based
Performance
based
Policy
lines
Merit
guidelines
STRATEGIC
OBJECTIVES
INTERNAL
STRUCTURE
PAY
STRUCTURE
INCENTIVE
PROGRAMS
EFFICIENCY
Performance
Quality
Customer
Cost
EQUITY
COMPLIANCE
ADMINISTRATION
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Planning Budgeting Communication EVALUATION
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Chapter 7
Defining Competitiveness
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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.
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External Competitiveness:
Determining the Pay Level
• Varies in importance by country. In the
USA and UK, it’s a primary factor as
employees/managers are hired at all
levels.
• In Japan and other Asian countries, most
hiring is done at entry level, so external
market is less important.
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External Competitiveness
The two key decisions regarding
external competitiveness are:
• Determining what competitors are
paying
• Setting pay levels relative to
competitors
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Pay level focuses attention on
two objectives:
Control Labor Costs
Attract and Retain
Employees
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Relevant Markets
• Each organization operates in many labor
markets with unique demand and supply;
Three factors:
– Occupations – qualifications may limit
mobility (e.g. licensing,)
– Geography – local or national scope?
– Product Market Competitors – industry in
which employer competes
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Pay Level Decision Impacts
Labor Cost
Labor Costs
=
Number of
Employees
x
Average Pay
Level
Base Pay
+
Increases
+
Benefits
+
Allowances
+
Perquisites
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What Shapes External
Competitiveness?
PRODUCT
MARKET FACTORS
Degree of Competition
Level of Product Demand
EXTERNAL
COMPETITIVENESS
LABOR MARKET
FACTORS
Nature of Supply
Nature of Demand
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ORGANIZATION
FACTORS
Industry
Strategy
Size
Manager
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Labor Market
• Basic assumptions:
– Employers want to maximize profits
– Pay rates reflect all costs associated with
employment (holidays, benefits, training)
– Markets faced by employers are
competitive, so there is no firm advantage
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Labor Demand Theories and Implications
Theory
Prediction
So What?
Compensating
differentials
Work with negative characteristics requires higher pay to
attract workers.
Job evaluation must collect
and compensable factors
most capture these
negative characteristics.
Efficiency wage
Above-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.
Signaling
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Pay policies signal the kinds
of behavior the employer
seeks.
Pay practices must recognize these behaviors by
better pay, larger bonuses,
and other forms of
compensation.
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Labor Supply Theories and Implications
Theory
Prediction
So What?
Reservation wage
Job 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 capital
The 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.
Job competition
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Workers compete through
qualifications for jobs with
established wages.
As hiring difficulties
increase, employers should
expect to spend more to
train new hires.
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Competitive Pay Policy Options: Pay
With the Competition (Match) [1 of 2]
• attempts to ensure that an organization’s
wage costs are approximately equal to
those of its product competitors; and
• that its ability to attract people for
employment will be approximately equal
to its labor market competitors;
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Competitive Pay Policy Options: Pay
With the Competition (Match) [2 of 2]
• avoids placing an employer at a
disadvantage in pricing products or in
maintaining a qualified work force;
• may not provide an employer with a
competitive advantage in its labor
markets.
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Competitive Pay Policy Options: Lead
Policy
• maximizes the ability to attract and retain
quality employees and minimizes employee
dissatisfaction with pay;
• may offset less attractive features of the
work;
• a lead policy only when hiring new
employees may lead to dissatisfaction of
current employees.
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Competitive Pay Policy Options:
Lag Policy
• Setting a lag policy to follow competitive
rates may hinder a firm’s ability to attract
potential employees.
• If pay level is lagged in return for the
promise of higher future returns, this may
increase employee commitment and
foster teamwork; this may possibly
increase productivity.
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Hybrid Pay Policies (1 of 2)
• Employers have more than one pay
policy.
• Policy may vary for different occupational
families
above market for critical skill groups
below or at market for others
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Hybrid Pay Policies (2 of 2)
• Policy may vary for different pay
elements
above market in total compensation
below market in base pay
above market in incentives & rewards
at or above market in benefits
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Product Market Factors and
Ability to Pay
• Product Demand – the labor market
creates the minimum level but the product
market puts a maximum on the pay level.
Prices otherwise must be increased or
profits decreased.
• Degree of Competition – employers in
highly competitive industries are less able
to raise prices than monopolists.
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Organization Factors
influencing Pay
• Industry – labor intensive industries and
services tend to pay lower overall
• Employer size – large firms tend to pay
more (about 5-10% more for same jobs)
• Organization strategy – may be low
cost/low wage or mutual commitment of
higher wages/greater quality and service.
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Employer of Choice
• An employer of choice policy is more
complex than the other options.
• It defines compensation more broadly to
include all forms of returns.
• Thus, an organization’s position is based
on total returns of working for it.
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Consequences of Pay Level Decisions
•
•
•
•
•
•
Contain labor costs
Increase pool of qualified applicants
Increase quality and experience
Reduce voluntary turnover
Increase probability of union-free status
Reduce pay-related work stoppages
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