COMPENSATION

MANAGEMENT
Brief Notes for Students
HRSB 353

Chapter 7: Defining
Competitiveness
LEARNING OBJECTIVES
1. Explain the importance of external
competitiveness to the pay model.
2. Discuss the factors that influence
external competitiveness.
3. Discuss the difference between labor
market, product market, and
organizational factors in determining
external competitiveness.
4. Explain the different pay policy
decisions and the consequences of
using each.
External competitiveness
refers to the pay relationships
among organizations - the
organization’s pay relative to its
competitors.
External competitiveness is
expressed in practice by:
1. setting a pay level that is above,
below, or equal to competitors,
and
2. by considering the mix of pay
forms relative to those of
competitors.
Pay forms refer to the mix of the various types of
payments that make up total compensation.
Pay level and mix focus attention on
two objectives:

Control Labor Costs

Attract and Retain

Employees
Pay Level Decisions Impact Labor
Costs

Number of
Labor Costs = x Pay Level
Employees
What Shapes External Competitiveness?
LABOR MARKET FACTORS
Nature of Demand
Nature of Supply

PRODUCT MARKET FACTORS

Degree of Competition EXTERNAL
Level of Product Demand COMPETITIVENESS

ORGANIZATION FACTORS
Industry, Strategy, Size
Individual Manager
Labor Demand
 The marginal product of labor is the
additional output associated with the
employment of one additional human
resource unit, with other production
factors held constant.
 The marginal revenue of labor is the
additional revenue generated when the
firm employs one additional unit of
human resources, with other production
factors held constant.
Supply and Demand at the Market and Individual
Employer Level
Labor Demand Theories and Implications
Theory Prediction
Compensating Work with negative
differentials characteristics requires higher
pay to attract workers.
Above-market wages will improve
Efficiency wage
efficiency by attracting workers
who will perform better and be
less willing to leave.
Pay policies signal the kinds of
Signaling
behavior the employer seeks.
So What?
Job evaluation must collect
and compensable factors
most 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
these behaviors by better pay,
larger bonuses, and other
forms of compensation.
Labor Supply Theories and
Implications
Theory Prediction So What?
Reservation wage Job seekers won’t accept jobs
whose pay is below a certain Pay level will affect ability to
wage, no matter how attractive recruit.
other job aspects.

Human capital The value of an individual’s skills Higher pay is required to

and abilities is a function of the induce people to train for
time and expense required to more difficult jobs.
acquire them.

Job competition Workers compete through As hiring difficulties increase,

qualifications for jobs with employers should expect to
established wages. spend more to train new hires.
Competitive Pay Policy Alternatives

Pay with Competition

Lead Policy
(Match)

Lag Policy

Flexible Policies

Shared Choice Employer of Choice

Pay Mix Policy Alternatives
Performance - Driven Market Match
Benefits
17% Benefits
20%
Options Options 4%
Base 50%
16% Base 70%
Bonus 6%
Bonus
17%

Work - Life Balance Security (Commitment)

Benefits
Benefits 20%
30%
Base 50%
Base 80%
Options
10%
Bonus
10%
Some Consequences of Pay Levels
Contain operating Increase pool of
expenses (labor costs) qualified applicants

Increase quality and

experience
Competitiveness of total
compensation
Reduce voluntary
turnover

Increase probability of
Reduce pay-related union-free status
work stoppages
Summary
 There is no “going rate,” thus managers make
conscious pay level and mix decisions
influenced by several factors.
 There are both product market and labor
market factors that 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.
 To achieve the objectives stipulated for the pay
system, both the pay level and mix must be
properly positioned relative to competitors.
Review Questions
1. Distinguish policies on external
competitiveness from policies on internal
alignment. Why is external
competitiveness so important?
2. What factors shape an organization’s
external competitiveness?
3. What does marginal revenue product
have to do with pay?
4. What pay level does the efficiency wage
theory predict? Does the theory
accurately predict organization behavior?
Why or why not?
Review Questions (continued)
5. What is a relevant market? What
difference does it make when
determining people’s pay?
6. Can you think of any companies that
follow a lag and/or lead policy? Why do
they believe it pays to pay differently?
Can you think of any companies that
follow performance-driven and/or work-
life balance policies?