Management and Organizational Studies 3342A/B Chapter Notes - Chapter 7: Reservation Wage, Signalling Theory, Product Market

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MOS 3342 Textbook Notes
Chapter 7 Defining Competitiveness
Compensation strategy: external competitiveness
o Pay level the average of the array of rates paid by an employer: base + bonuses + benefits +
options/number of employees
o Pay forms the mix of the various types of payments that make up total compensation
o Comparisons outside the org are reviewed comparisons with other employers
o Competitiveness includes choosing the mix of pay forms that is right for the business strategy org’s pay
relative to its competitors
o Setting a pay level that is above, below, or equal to competitors AND by considering the mix of pay forms
relative to those of competitors
o Pay level and forms focus on: controlling costs AND attracting and retaining employees
o Control costs
The higher the pay level, the higher the labour costs
Labour costs = pay level x number of employees
Same work IS paid differently
o Attract and retain employees
Different employers set different pay levels deliberately no “single going rate” for a job
A single company may set diff pay level policies for different job families
How a company looks in comparison to the market depends on the companies they compare to and
the pay forms included in the comparison
What shapes external competitiveness?
o Competition in the labour market for people with various skills
o Competition in the product and service markets which affects the financial condition of the org
o Characteristics unique to each org and its employees such as its business strategy, technology
Labour market factors
o 4 basic assumptions:
Employers always seek to maximize profits
People are homogenous and therefore, interchangeable
The pay rates reflect all costs associated with employment
The markets faced by employers are competitive
o Must analyze the supply and demand of labour demand focuses on the actions of the employer and supply
side looks at potential employees
o Labour demand Look at PPT Notes
o Labour supply assumes that people are seeking jobs, that they possess accurate info about all job openings,
and that no barriers to mobility exists (discrimination, union membership requirements) between jobs
As pay increases, more people will be willing to take a job
BUT if unemployment rates are low, offers of higher pay may not increase supply everyone who
wants to work is already working
An employer who dominated the local labour market may also find that rising wages doesn’t
necessarily attract more applicants simply because supply has dried up
Thus to attract new people to join the labour force the supply line on the graph may the take the
shape of a “step” function due to the large pay increases needed
OR company can lower job requirements and hire less skilled workers increasing training costs
Modifications to the demand side
o Economic theories must be frequently revised to account for reality 3types of modifications:
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Compensating differentials theory higher wages must be offered to compensate for negative
features of jobs
Adam Smith individuals consider the “whole of the advantages and disadvantages of
different employments” – take alternative with best net advantage
If the necessary training is very expensive (medical school), job security is tenuous
(stockbrokers), working conditions are disagreeable (construction), or chances of success are
low (professional sports) offer HIGHER wages
Explain the presence of various pay rates in the market
Efficiency wage theory high wages may increase efficiency and lower labour costs by attracting
higher-quality applicants who will work harder
Lower turnover, increase worker effort, reduce slacking off (shirking), and reduce the need
to supervise employees
Pay level determines effort difficult to document
Research higher wages do attract more qualified applicants but also attract unqualified
STUDY of hospitals pay nurses higher wages and hired less nurse supervisors
Firms with greater profits than competitors are able to share this success with employees
Does not discuss may mix
Signalling theory pay levels and pay mix are designed to signal desired employee behaviours
An employer who combines lower base with high bonuses may be signalling that he wants
employees who are risk takers
Pay level and mix affect students’ job decisions showed a preference for individual based-
pay, fix-based pay, job-based pay, and flexible benefits
Pay level is most important to materialists and less important to those who are risk averse
Select job opportunities based on the perceived match between their personal dispositions
and the nature of the org as signalled by the pay system
Suppliers of labour signal to potential employers as well about their fit in the org so
characteristics of applicants and org decisions about pay levels and mix act as signals
Modifications of the supply side
o Reservation wage theory job seekers have a reservation wage level below which they will not accept a job
no matter how attractive the other job attributes
Will not accept a job if it does not meet their minimum pay standard and will take the first job offer
they get where the pay meets their reservation wage
o Human capital theory higher earnings are made by people who improve their potential productivity by
acquiring education, training, and experience (investing in themselves)
Thus jobs that require long and expensive training should receive higher pay levels than jobs that
require less investment
Product market factors and ability to pay
o An employer’s pay level is constrained by its ability to compete in the product/service market
o Product demand and degree of competition affect the ability of orgs to change what it charges for products
o Product demand
Puts a lid on the maximum pay level that an employer can set
If employer pays above maximum must pass on this high level to consumers through prices OR hold
prices fixed and allocate a higher % to labour costs from the budget
o Degree of competition
Companies in highly competitive markets are less able to raise prices without loss of revenues
o Productivity of labour, technology used, level of production relative to plant capacity affect comp decisions
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