© 2010 mcgraw hill ryerson 7-1 compensation third canadian edition milkovich, newman, cole
TRANSCRIPT
© 2010 McGraw Hill Ryerson
7-1
COMPENSATIONThird Canadian Edition
Milkovich, Newman, Cole
© 2010 McGraw Hill Ryerson
7-2
STRATEGICPOLICIES
TECHNIQUES STRATEGICOBJECTIVES
EFFICIENCY
Performance
Quality
Customers
Stockholders Costs
FAIRNESS
COMPLIANCE
ALIGNMENTALIGNMENT
COMPETITIVENESSCOMPETITIVENESS
CONTRIBUTORSCONTRIBUTORS
MANAGEMENTMANAGEMENT
INTERNAL STRUCTURE
PAY
STRUCTURE
INCENTIVE
PROGRAMS
EVALUATION
THE PAY MODEL
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7-3
refers to the pay relationships among organizations - the organization’s pay relative to its competitors shaped by three factors:
1. labour market (supply and demand) 2. product/service market (competition) 3. organizational factors (e.g., size)
External Competitiveness
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Pay levelPay level refers to the average of the array of pay rates paid by an employer.
( Base + Bonuses + Benefits + Options) # of Employees
Pay formsPay forms refer to the mix of the various types of payments that make up total compensation.
Pay Level and Pay Forms
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7-5
External Competitiveness Policies
1. pay level that is above, below, or equal to competitors, and
2. the mix of pay forms relative to those of competitors.
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7-6
External Competitiveness Objectives
Control Labour CostsControl Labour Costs
Attract and Retain Attract and Retain EmployeesEmployees
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7-7
Pay Level Decisions Impact Labour Costs
= xLabour CostsNumber of Employees
Pay Level
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Labour Demand
The marginal product of labour is the additional output associated with the employment of one additional human resource unit, with other production factors held constant.
The marginal revenue of labour is the additional revenue generated when the firm employs one additional unit of human resources, with other production factors held constant.
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SupplySupply
Demand
Demand
Number of business graduates availableNumber of business graduates available Number of business graduates hiredNumber of business graduates hired
0 5 10 15 20 250 5 10 15 20 25
Supply to Supply to individual individual employeremployer
Marginal revenue
Marginal revenue
product
product
$25,000$25,000$25,000$25,000
$50,000$50,000$50,000$50,000
$100,000$100,000 $100,000$100,000
Pay
for b
usin
ess
grad
uate
sPa
y fo
r bus
ines
s gr
adua
tes
Pay
for b
usin
ess
grad
uate
sPa
y fo
r bus
ines
s gr
adua
tes
Supply and Demand at the Market and Individual Employer Level
Market levelMarket level Employer levelEmployer level
100 1000
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7-10
Labour Demand Theories and Implications
Theory Prediction So What?
Compensating differentials
Work with negative characteristics requires higher pay to attract workers.
Job evaluation 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 Pay policies signal the kinds of behaviour the employer seeks.
Pay practices must recognize these behaviours by better pay, larger bonuses, and other forms of compensation.
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7-11
Labour 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.
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7-12
Product Market Factors and Ability to Pay
Two key product market factors affect ability of a firm to change price of its products or services
Level of product demand – Puts a lid on maximum pay level an employer can set
Degree of competition – In highly competitive markets, employers are less able to raise prices without loss of revenue
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7-13
Organization Factors
Industry and technology
Employer size
Employee preferences
Organization strategy
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Competitive Pay Policy Alternatives
Lag Policy
Flexible Policies Lead Policy
Pay with Competition (Match)
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Pay Mix Policy Alternatives
Base 50%
Bonus 17%
Options 16%
Benefits 17%
Performance - Driven
Base 70%
Bonus 6%Options 4%
Benefits 20%
Market Match
Base 50%
Bonus 10%
Options 10%
Benefits 30%
Work - Life Balance
Base 80%
Benefits 20%
Security (Commitment)
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Some Consequences of Pay Levels
Competitiveness of total compensation
Contain operating expenses (labour 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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Conclusion
there is no ‘going rate’, conscious pay decisions are made by managers
both product/service market and labour market competitors 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
the pay level and mix must be properly positioned relative to competitors