1. Defining Competitiveness
Chapter 8

2. Contents…. External competitiveness is expressed in practice by
(1) setting a pay level that is above, below or equal to that of competitors; and
(2) determining the mix of pay forms relative to those of competitors.
Both pay level and pay mix decisions focus on two objectives:
(1) control costs and
(2) attract and retain employees.

3. What shapes external competitiveness?
Labour market forces
Nature of demand
Nature of supply
Product market factors
Degree of competition
Level of product demand
Organization factors
Industry, strategy, size
Individual manager

4. Theories of labor markets (assumptions)
Labor market factors
Quoted-price
Bourse
Theories of labor markets (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

5. Supply and demand for business school graduates in the short run
Rs. 100,000
Demand
Pay for business graduates
Supply
Rs. 50,000
Rs. 25,000
100
1000
Number of business school graduates available

6. Labor demand Marginal product of labor Marginal revenue of labor
The additional output associated with the employment of one additional person, with other production factors held constant
Marginal revenue of labor
It is the additional revenue generated when the firm employs one additional person, with other production factors held constant.

7. Labor demand theories and implications
Theory
Prediction
So what?
Compensating
differentials
Work with negative characteristics requires higher pay to attract workers
Above market wages will improve efficiency by attracting workers who will perform better and be less willing to leave
Pay policies signal the kinds of behavior the employer seeks
Job evaluation and compensable factors must capture these negative characteristics.
Staffing programs must have the capability of selecting the best employees; work must be structured to take advantage of employees’ greater efforts
Pay practices must recognize desired behaviors with more pay, larger bonuses, and other forms of compensation
Efficiency wage
Signaling

8. Supply Theories and Implications
Prediction
So What?
Job seekers will not accept jobs whose pay is below a certain wage, no matter how attractive other job aspects
The value of an individual’s skills and abilities is a function of the time and expense required to acquire them.
Pay level will affect ability to recruit.
Higher pay is required to induce people to train for more difficult jobs.
Reservation
wage
Human
capital

9. Product market factors and ability to pay
Product demand
Degree of competition

10. Organization factors Industry and technology Employer size
People’s preferences
Organization strategy

11. Relevant markets Three factors used to determine relevant markets
Occupations (skill/knowledge required)
Geography (willingness to relocate, commute, or become virtual employees)
Competitors (other employers in the same product/service and labor markets)

12. Competitive pay policy alternatives
Lead
Meet or
Follow competition

13. Pay above market (lead) + ?
Policy
Ability to attract
Ability to retain
Contain labor costs
Reduce pay dissatisfaction
Increase productivity
Pay above market (lead) + ?
Pay with market (match) =
Pay below market (lag) _
Hybrid policy
Employer of choice
Probable relationships between external pay policies and objectives