Defining Competitiveness

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Defining Competitiveness Door Mind Map: Defining Competitiveness

1. Compensation Strategy: External Competitiveness

1.1. External competitiveness includes choosing a mix of pay forms (i.e. bonuses, stick options, flexible benefits) that is right for the business strategy

1.2. External competitiveness - Pay relationships among organizations, pay relative to competitiors

1.2.1. Expressed in practice by 1. Setting a PAY LEVEL above, below, or equal to competitors - The average of the array of rates paid by an employer: base + bonuses + benefits + stock options/number of employees 2. By considering the mix of PAY FORMS relative to competitors - The average of the array of rates paid by an employer: base + bonuses + benefits + stock options/number of employees PAY FORMS - The mix of the various types of payments that make up total compensation

1.2.2. Two objectives of pay level & forms 1. To control costs Labour costs = pay level x number of employees The higher the pay relative to competitors, the greater the relative costs to provide similar products & services 2. To attract & retain employees/talent No single "going rate" for specific job b/c different employers set different pay levels Pay rates differ b/w employes and even different job families within same company Companies often set different pay policies for different job families How a company compares to the market depends on the companies they compare to and the pay forms included in comparison No single "going mix" for pay forms either

2. What Shapes External Competitiveness?

2.1. 1. Labour market factors - Competition in the labour market for people w/ various skills

2.1.1. Nature of demand

2.1.2. Nature of supply

2.2. 2. Product Market Factors - Competition in the product & service markets, which affects the financial condition of the orgnization

2.2.1. Level of product demand

2.2.2. Degree of competition

2.3. 3. Organizational factors - Characteristics unique to each organization & its employees ex. business strategy, technology, productivity & experience in workfore

2.3.1. Industry and technlology

2.3.2. Employer size

2.3.3. Employees' preferences

2.3.4. Organization's strategy

3. Labour Market Factors

3.1. Economic theories of labour markets begin w/ four basic assumptions - Oversimplify reality, but provide framework for understanding labour markets - Look at supply and demand - The market rate = the point where the lines of labour demand & supply cross

3.1.1. 1. Employers always seek to maximize profits

3.1.2. 2. People are homogenous & therefore interchangeable

3.1.3. 3. The pay rates reflect all costs associated w/ employment (base, wage, bonuses, holidays, benefits, even training)

3.1.4. 4. The markets faced by employers are competitive, so there is no advantage for a single employer to pay above or below the market rate

3.2. Labour demand

3.2.1. Employer cannot change technology, capital, or natural resources

3.2.2. Only thing it can change is level of human resources Demand for labour coincides w/ marginal product of labour

3.3. Marginal product of labour

3.3.1. MARGINAL PRODUCT OF LABOUR - The additional output associated w/ the employment of one additional human resources unit, with other production factors held constant - The amount each new hire produces (each additional new hire produces less than previous) Increase of marginal product of labour results in diminishing marginal productivity Each employee has a progressively smaller share of the other factors of production ex. office space, number of computers

3.3.2. MARGINAL REVENUE OF LABOUR - The additional revenue generated by each additional unit of human resources, w/ other production factors held constant First labour market theory assumption = maximize profits Consulting firm will continue to hire until the marginal revenue generated by lats hire = equal to the costs of employment Because other potential costs will not change in short term, the level of demand that maximizes profits is = level at which marginal revenue is equal to wage rate of hire Marginal revenue of labour = the point on the graph at which the incremental income generated from an additional employee equals the wage rate Employer using marginal revenue product model must only do two things to tell how many people to hire 1. Determine the pay level set by market forces 2. Determine the marginal revenue generated by each new hire Valuable analytical tool, but oversimplifies Almost impossible to quantify the goods or services produced by individual employee b/c production = joint effort of people w/ variety of skills Marginal product nor revenue is directly measurable

3.4. Labour supply

3.4.1. Assumptions about behaviour of potential employees shows that this model ignores barriers to mobility (discrimination, licensing provisions, union membership requirements, etc.) & assumes everyone possesses accurate info Oversimplifies As assumptions change, so does supply

3.4.2. Raising wages doesn't necessarily attract more applicants if supply has dried up Induce labour supply entry ex. from schools, more distant areas, retirement Dominant employer has a relatively free hand in determining pay levels b/c few local labour market competitors exist

3.4.3. Lowering job requirements & hiring less-skilled as alternative to raising wages - Incurs increased training costs

4. Modifications to the Demand Side

4.1. COMPENSATING DIFFERENTIALS THEORY - The idea that higher wages must be offered to compensate for negative features of jobs

4.1.1. Adam Smith - individuals consider the whole of advantages & disadvantages of different employments Negative characteristics ex. expensive, low job security, poor working conditions or low changes of success, employer must offer higher wages to compensate

4.1.2. Explains the presence of various pay rates in the market

4.1.3. Notion is hard to document b/c of difficulties in measuring & controlling factors of net-advantage calculation

4.1.4. Focuses on pay level, ignores forms & mix

4.2. EFFICIENCY WAGE THEORY - High wages may increase efficiency & lower labour costs by attracting higher quality applicants who will work harder - Efficiency increases by hiring better employees or motivating present ones to work smarter or harder

4.2.1. High wages may increase efficiency & lower labour costs if they 1. Attract higher-quality applicants 2. Lower turnover 3. Increase worker effort 4. Reduce "shrinking" aka slacking off 5. Reduce the need to supervise employees

4.2.2. Underlying assumption that pay level determines effort

4.2.3. Higher wages attract more qualified but also more unqualified Above-market wage does not guarantee more productive workforce

4.2.4. Organization's ability to pay related to efficiency of wage model Greater profits = can share success w/ employees through higher pay levels

4.2.5. Focuses on pay level, ignores forms & mix

4.3. SIGNALLING THEORY - The idea that pay levels & pay mix are designed to signal desired employee behaviours

4.3.1. Marketing lens

4.3.2. Amount and forms of pay establishes "brand" that sends message to prospective employees Different combinations send different messages

4.3.3. Pay level & mix affect job decisions Pay level more important to materialists & less important to the risk-averse

4.3.4. Applicants select on the basis of the perceived match b/w personal dispositions & nature of organization as signalled by pay system's level & mix

4.3.5. Works on supply side of the model too as suppliers of labour signal to potential employers Ex. high grades in relevant courses = more likely to be better performers

4.3.6. Characteristics of both applicants & organization decisions about pay level & mix act as signals that help communicate

5. Modifications to the Supply Side

5.1. RESERVATION WAGE THEORY - The idea that job seekers have a reservation wage level below which they will not accept a job, no matter how attractive the other job attributes

5.1.1. Pay as "non-compensatory"

5.1.2. If pay does not meet their minimum standard, no other job attributes can compensate

5.1.3. Some go as far to say that job seekers (satisfiers) take the first job offer where pay meets reservation wage

5.1.4. Reservation wage may be above or below market wage

5.1.5. Seeks to explain differences in workers' responses to offers

5.2. HUMAN CAPITAL THEORY - The idea that higher earnings are made by people who improve their potential

5.2.1. Most influential economic theory for explaining pay level differences

5.2.2. Assumes people paid at value of their marginal product Investments increase marginal product

5.2.3. Value of skills & abilities is a function of time, expense & resources expended to acquire them The more = higher pay Ex. Doctors should make more than clerical workers

5.3. Additional factors that affect supply of labour

5.3.1. Geographic barriers to mobility

5.3.2. Union requirements

5.3.3. Lack of info abour openings

5.3.4. Degree of risk involved

5.3.5. Degree of unemployment

6. Product Market Factors

6.1. Organization must generate enough revenue to cover expensese

6.1.1. Employers' pay level constrained by its ability to compete in the product/service market Product market conditions largely determine what organization can afford to pay If prices cannot be changed w/o decreasing sales, the ability of employer to set higher pay level is constrained

6.2. Key product market factors

6.2.1. Product demand Labour market conditions & legal requirements = floor on pay level, product market = ceiling on maximum pay level Higher pay levels requires passing it on to consumers though prices increases or hold prices fixed & allocate a greater share of total revenues to cover labour costs

6.2.2. Degree of competition Employers in highly competitive markets less able to raise prices w/o loss of revenues On the other end = top sellers ex. Lamborghini & Viagra can set whatever price they want Too high a price invites eye of government regulators Other factors besides product market conditions affect pay level Productivity of labour Technolgoy employed Level of production relative to plant capacity

6.3. A dose of reality: what managers say

6.3.1. Discussions w/ managers provide insight into how economic factors translate into pay decisions

6.3.2. Company's profitability considered a factor for higher management in setting overall pay budged bot not something managers consider for individual pay adjustments Boils down to what chief financial officer can aford

6.3.3. Direct contradiction to efficiency wage theory, manager believed that problems in attracting and keeping people resulted from poor management rather than inadequate compensation

6.4. More reality: segmented supply of labour

6.4.1. SIgnificant differences in wages paid around the work & the ease of outsourcing work overseas led many companies to cut pay

6.5. People flow to work

6.5.1. Segmented labour supply means using multiple sources from multiple locations w/ multiple employment relationships ex. nurses Level and mix of pay depends on source Ex. regular employees - pay & benefits, part-time - pay & no benefits, agency -pay, benefits & living expenses from agency (company pays fee to agency in addition to compensation) Results in people working same jobs side by side but earning different pay Case of people flowing to work because a hospital cannot send its nursing tasks off-site or offshore

6.6. Work flows to people - on-site, off-site, offshore

6.6.1. Ex. Computer software design company can staff on-site (in Canadian head office), off-site (ex. contract employees throughout Canada), or offshore (workers in India) Need to know pay levels in other locations, not just Canada

6.6.2. Three important points 1. Reality is complex; theory abstracts. It is not that our theories are useless. They simply abstract away the detail, clarifying the underlying factors that help us understand how reality works. Theories of market dynamics, the interaction of supply & demand, form a useful foundation. 2. The segmented sources of labour mean that determining pay levels & mix increasingly requires understanding market conditions in different locations worldwide 3. Managers also need to know the job required to do the work, the tasks to be performed & the knowledge & behaviours required to perform them

7. Organizational Factors - Also influence pay level & mix decisions along w/ product & labour market conditions

7.1. Industry & technology

7.1.1. Industry influences technologies used

7.1.2. Labour-intensive ex. education & services pay less that technology intensive ex. petroleum or pharmaceuticals

7.1.3. In addition to differences in tech across industries, intro of new tech within industry influences pay levels Ex. Self-checkout has reduced average pay

7.1.4. Importance of qualifications & experience tailored to particular technologies often overlooked in theoretical analysis of labour markets These are very industry/company specific

7.2. Employer size

7.2.1. Large organizations tend to pay more Relationship b/w organization size, ability to pay & pay level = consistent w/ econcomic theory Talented individuals have higher marginal value in larger organization b/c the can influence more people & decisions >>> more profits

7.3. Employees' preferences

7.3.1. Better understanding of employee preferences important in determining external competitiveness Markets involve both employers' & employees' choices

7.3.2. Difficulties in reliably measuring preferences People put more importance on pay than they are willing to admit

7.4. Organization's strategy

7.4.1. Variety of pay level & mix strategies ex. low-wage & no services, low-base & high-services, high-base & high services

8. Relevant Markets

8.1. When determining pay, you need to define the relevant market

8.1.1. Each organization operates in may labour markets, each w./ unique demand & supply

8.1.2. Managers must define which are relevant for pay purposes & establish appropriate competitive positions for own markets

8.2. Three factors used to determine relevant labour markets

8.2.1. 1. Occupation (skill/knowledge required)

8.2.2. 2. Geography (willingness to relocate and/or commute?

8.2.3. 3. Competitors (other employers in the same product/service & labour markets)

8.3. Defining the relevant market

8.3.1. Incorrectly defining >>> incorrect estimates of competitors' pay & pay level & mix inappropriately established

8.3.2. Managers look at both competitors & the jobs Depending on location & size, a company may be deemed a relevant comparison even if it is not a product market competitor

8.3.3. Data from product market competitors (as opposed to labour market competitors) are likely to receive greater weight when 1. Employee skills are specific to he product market (recall the difference b/w General motors & Bombardier millwrights) 2. Labour costs are a large share of total costs 3. Product demand is responsive to price changes 4. The supply of labour is not responsive to changes in pay (jobs that are low-wage & require low skill)

8.3.4. Compensation theories offer help in understanding variations in pay levels b/w employers but are less helpful in understanding differences mix of pay forms

8.3.5. Relevant markets shaped by pressures from labour & product markets & the organization

9. Competitive Pay Policy Alternatives

9.1. Pay level - The average of the array of rates inside an organization

9.2. New policies emphasize flexibility

9.3. Basic premise: competitiveness of pay affects organization's ability to achieve compensation objectives >>> affects organization's performance

9.4. Problem w/ pay level research = focuses on base pay only and does't look at total compensation

9.4.1. Base pay = only portion of compensation

9.4.2. In fact, managers believe they get more bang for their buck by allocation dollars away from base pay and into variable forms that more effectively shape behaviour

9.5. Three conventional pay policies

9.5.1. Match - Pay w/ competition Most common Historically seen, failing to match >>> dissatisfaction & limited recruiting ability Non-unionized match or lead to discourage unionization Tries to ensure that pay equal w/ competitors >>> attracting ability = to competitors Although avoids placing employer at a disadvantage in pricing products, it my nor provide employer w/ competitive advantage in labour markets

9.5.2. Lead - Pay above market rates Positive effects Maximizes ability to attract & retain quality & minimizes dissatisfaction Offsets less attractive workplace features Can pass high rates onto consumers if pay is low portion of total operating expenses or if industry is highly regulated If all firms in industry have similar operating expenses, then the lead policy must provide competitive advantage that offsets higher costs Linked to ease of attraction, reduced vacancy rates & training time, better quality workers Reduce turnover & absenteeism Variable pay (bonuses & long-term incentives) related to organization's improved financial performance, but pay level isnot Negative effects May force employer increase wages of current employees to avoid internal misalignment and murmuring among employees May mask negative job attributes that contribute to turnover later on

9.5.3. Lag - Pay below market rates May hinder ability to attract However if pay level lagged in return for promise of higher future returns (ex. stock ownership in a high-tech start-up firm), such a promise may increase EE commitment & teamwork >>> increase productivity Possible to lag on pay but lead on other returns (ex. hot assignments, desirable location, cool tools, work/life balance)

9.6. Different Policies for DIfferent Employee Groups

9.6.1. Many ERs go beyond single policy choice May vary policy for different occupational families or forms of pay May adapt different policies from different business units that face different competitive conditions

9.6.2. Various options to mix pay Performance-driven Market match Mimics pay mix competitors are using Work/life balance Security

9.6.3. How managers positon pay against competitors is changing Alternatives: focus on total returns (beyond financial returns & offering people choices among - fuzzy/flexible policies

9.7. Employee of Choice/Shared Choice

9.7.1. Employee of choice Some compete on basis of overall reputation as a place to work, beyond pay level & mix Claim to strongly differentiate on business & individual results ex. IBM w/ extensive training, challenging work, etc. "Employer of choice" brand/image

9.7.2. Shared choice Begins w/ traditional alternatives of lead, meet, lag Then adds second part: offer employees choices (within limits0 in pay mix Employee as customer, customization Risks Employees might make choices that jeopardize financial well-being ex. inadequate health insurance Overwhelmed by too many choices >>> confusions, mistakes, dissatisfaction

9.8. Pitfalls of Pies

9.8.1. Thinking in pie charts has its limits

9.8.2. Possible volatility in value of different pay forms needs to be anticipate

9.8.3. Alternative to pies: dashboard Changes focus from emphasizing relative importance of each form to comparing each form by itself to the market

9.8.4. Pies & dashboards have different focus both recognize importance of pay mixes

9.8.5. The mix employees receive can differ at different levels of internal job structure

9.8.6. Although percentages vary across organizations, greater emphasis on performance through incentives & stocks at higher levels is common Based on belief that higher = greater influence

10. Consequences of Pay Level & Pay Mix Decisions

10.1. External competitiveness has two major consequences, it affects

10.1.1. 1. Operating expenses

10.1.2. 2. Employee attitudes & behaviours

10.2. Competitiveness policy directly affects compensation objectives of efficiency, fairness & compliance

10.3. No matter what the competitive pay policy, it needs to be translated into practice

10.3.1. Starting point for assessing the market = salary survey