© 2010 McGraw Hill Ryerson 7-1 COMPENSATION Third Canadian Edition Milkovich, Newman, Cole

© 2010 McGraw Hill Ryerson

7-1

COMPENSATIONThird Canadian Edition

Milkovich, Newman, Cole


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


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


7-4

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


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.


7-6

External Competitiveness Objectives

Control Labour CostsControl Labour Costs

Attract and Retain Attract and Retain EmployeesEmployees


7-7

Pay Level Decisions Impact Labour Costs

= xLabour CostsNumber of Employees

Pay Level


7-8

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.


7-9

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


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.


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.


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


7-13

Organization Factors

Industry and technology

Employer size

Employee preferences

Organization strategy


7-14

Competitive Pay Policy Alternatives

Lag Policy

Flexible Policies Lead Policy

Pay with Competition (Match)


7-15

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)


7-16

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


7-17

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

Documents

© 2010 McGraw Hill Ryerson 7-1 COMPENSATION Third Canadian Edition Milkovich, Newman, Cole