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Lesson: 7

Compensation Strategy: External Competitiveness

 Learning Objectives:
 Understanding External Competitiveness
 Pay Level & Pay Forms
 Labour Market Factor
 Product Market Factors and Ability to Pay
 Organization Factors
 Relevant Market
 Competitive Pay Policy Alternatives
 Consequences of Pay-level and Mix
Decision: Guidance from the Research

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Understanding External Competitiveness

External competitiveness refers to pay

relationships among organizations. It
denotes an organization’s pay relative
to its competitors.

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Understanding External Competitiveness

 External competitiveness is expressed in

practice by:
 Setting a pay level that is above, below, or
equal to that of competitors
 Determining mix of pay forms relative to those
of competitors
 Pay level and pay mix decisions focus on:
 Controlling costs
 Attracting and retaining employees
 Pay Level & Pay Forms

Pay Level
Pay level refers to the average of the array
of rates paid by an employer: (base +
bonuses + benefits + value of stocks) /
number of employees).

Pay Forms
Pay forms are the various types of
payments, or pay mix, that make up total
compensation.
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What Shapes External
Competitiveness

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What Shapes External Competitiveness

EXHIBIT 7.3 What Shapes External Competitiveness12

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 Labour Market Factors
How Labor Markets Work
 Theories of labor markets begin with four
assumptions
 Employers always seek to maximize profits
 People are homogeneous and therefore
interchangeable
 Pay rates reflect all costs associated with
employment
 Markets faced by employers are competitive

 Understanding how the market works requires

an analysis of the demand and supply of labor

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 Labour Market Factors
How Labor Markets Work
 Demand: focuses on the actions of the
employers- How many new hires they seek and
what they are willing and able to pay new
employees
 Supply: looks at potential employees, their
qualifications and the pay they are willing to
accept in exchange for their services

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 Labour Market Factors

Market
demand

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 Labour Market Factors
Labor demand
 Analysis of labor demand indicates how
many employees will be hired by an
employer
 In the short run, an employer cannot
change any factor of production except
human resources
 An employer’s level of production can
change only if it changes the level of human
resources
 An employer’s demand labor coincides with
the marginal product of labor
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 Labour Market Factors
Labor demand
 Marginal product of labor
Additional output associated with employment
of one additional human resources unit, with
other production factors held constant
[In economics, the marginal product of labor (MPL) is the change in output that results
from employing an added unit of labor. It is a feature of the production function, and
depends on the amounts of physical capital and labor already in use.]

 Marginal revenue of labor

 Additional revenue generated when firm
employs one additional unit of human
resources, with other production factors
held constant
 A manager using the marginal revenue
product model must:
o Determine pay level set by market forces
o Determine marginal revenue generated by each
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new hire 166

Labour Market Factors

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 Labour Market Factors
Labor Supply
 Assumptions on behavior of potential
employees
 Several job seekers
 Possess accurate information about
all job openings
 No barriers exist to mobility among
jobs
 Upward sloping supply curve:
 More people willing to take a job as
pay increases

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 Labour Market Factors
Labor Supply
 If unemployment rates are low, offers
of higher pay may not increase supply.
Everyone who wants to work is already
working. If competitors quickly match a
higher offer, the employer may face a
higher pay level but no increase in
supply

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 Labour Market Factors
Modifications to the Demand Side
 Economic theories must frequently be
revised to account for reality
 When focus changes from all the
employers in an economy to a
particular employer, employer,
models must be modified to help
understand what actually occurs
 Issue for economists:
 Why would an employer pay more
than what theory states is the
market-determined rate
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 Labour Market Factors
Modifications to the Demand Side

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 Labour Market Factors
Modifications to the Demand Side
 Labour Market Factors
Modifications to the Demand Side

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 Labour Market Factors
Modifications to the Demand Side
 Labour Market Factors
Modifications to the Demand Side
 Labour Market Factors
Modifications to the Supply Side

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Product Market Factors and Ability to
Pay
Product Market Factors and Ability to
Pay
Product Market Factors and Ability to
Pay

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Product Market Factors and Ability to
Pay
Organization Factors

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Relevant Market
Relevant Market
Competitive Pay Policy Alternatives
Competitive Pay Policy Alternatives
Pay with Competition
Competitive Pay Policy Alternatives
Competitive Pay Policy Alternatives
Competitive Pay Policy Alternatives
Competitive Pay Policy Alternatives
Flexible Policies
Competitive Pay Policy Alternatives
Competitive Pay Policy Alternatives

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 Consequences of Pay-level and Mix
Decision: Guidance from the Research

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 Consequences of Pay-level and Mix
Decision: Guidance from the Research

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 Summary of the Contents
 Understanding External Competitiveness
 Pay Level & Pay Forms
 Labour Market Factor
 Product Market Factors and Ability to Pay
 Organization Factors
 Relevant Market
 Competitive Pay Policy Alternatives
 Consequences of Pay-level and Mix
Decision: Guidance from the Research

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Thank You