External Competitiveness PDF

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Summary

Learning Objectives:
1. Discuss the importance of External Competitive in Compensation
Administration.
2. Identify the factors that influence external competitiveness.
3. Identify the purpose and uses of salary surveys.
4. Identify the main characteristics of Pay Struct...

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Module 5

External Competitiveness: Determining the Pay

Level Learning Objectives: 1. Discuss the importance of External Competitive in Compensation Administration. 2. Identify the factors that influence external competitiveness. 3. Identify the purpose and uses of salary surveys. 4. Identify the main characteristics of Pay Structures. 5. Determine the role of performance appraisal in compensation decision 6. Discuss the Performance Appraisal and its purpose.

In a competitive market, they use their compensation package to attract and To keep the company updated to their salary structure and other benefits they use external competitiveness as a means of their compensation strategy. External competitiveness is important in compensation because it helps employees get fair compensation. As long as a business knows that there is another firm willing to pay a worker more for their services, they will adjust the salary accordingly. The corporation will try as much as possible to match the compensation offered by other employers in the market so as to attract and retain the best workers. If the company cannot offer the same benefits as their competitors, they will give the employee non-financial incentives. External competitiveness refers to the pay relationships among organizationsthe organizations pay relative to its competitors. It is expressed in practice by: 1. setting a pay level that is above, below or equal to competitors and 2. by considering the mix of pay forms relative to those of competitors. What is Pay Level? Pay Level is fundamental unit in compensation structure of an organization, which is used to denote difference in compensation due to smallest possible change in job specification. Pay level generally rises along with the rise in hierarchy of an organization. The pay is determined by the level of job, accountability, responsibility, position, experience etc. in the company. Pay Level Types Basic approach to design pays structure by using pay level

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1. Close Pay Levels: When pay level are close, then difference in two job level in terms of job specification becomes very thin. Due to this people gets promotion very easily as there are less differentiation in two job levels. This structure acts as motivation to retain staff. 2. Wide Pay level: In this pay structure, pay levels are separated by wide difference in job specification. Due to this person tend to be in same level for longer time period. People might be given increments but changing level will require specific performance as required by job specification.

Pay Levels and Equity Theory of Motivation Pay Level are created to distinguish between skill to perform same job and readiness for next level. At the same time perceived equity of work and corresponding pay level play important role in performance of task. If person does not see equity in effort put in by him /her with corresponding pay level, it may lead to demotivation towards work. Hence while designing any pay structures, it is important to keep equity between efforts by occupant of that role and pay level in consideration. If there is very less difference in effort then pay levels should not be different just because person has more experience. Pay mix. the ratio of base salary and target incentives that makes up target total cash compensation is a common pain point for growing companies wanting to maintain competitive and consistent sales compensation structures. While it's sensible for similar job roles to have dissimilar mix levels, managing such dissimilarities can get complex and contentious. The purpose of pay mix is to help establish a motivating risk/reward proposition for employees with influence over sales outcomes. The higher the job's influence, the higher the incentive portion of the pay mix should be. Mix works in conjunction with the plan's payout curve to determine leverage the rate of target cash earned at various levels of performance. High leverage means an opportunity for higher pay variability relative to target pay. What shapes external competitiveness? The factors include (1) competition in the labor market for people with various skills; (2) competition in the product and service markets, which affects the financial condition of the organization; and (3) characteristics unique to each organization and its employees, such as its business strategy, technology and productivity and experience of tis workforce.

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LABOR MARKET FACTORS Nature of Demand Nature of Supply

PRODUCT MARKET FACTORS Degree of Competition Level of Product Demand

EXTERNAL COMPETITIVENESS

ORGANIZATION FACTORS Industry, Strategy, Size Individual Manager

How Labor Markets Work Theories of labor markets usually begin with four basic assumptions: 1. Employers always seek to maximize profits 2. People are homogeneous and therefore interchangeable; a business school graduate is a business school graduate is a business school graduate. 3. The pay rates reflect all costs associated with employment (e.g., base wage, bonuses, holidays, benefits, even training). 4. The markets faced by employers are competitive, so there is no advantage for a single employer to pay above or below the market rate.

Understanding how markets work requires analysis of the demand and supply of labor. The demand side focuses on the actions of the employers: how many employees they seek and what they are able and willing to pay those employees. The supply side looks at potential employees: their qualifications and the pay they are willing to accept in exchange for their services.

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Labor Demand How many people will a specific employer hire? The answer requires an analysis of labor demand. In the short term, an employer cannot change any other factor of production (i.e., technology, capital, or natural resources. Under such conditions, a single labor. The marginal product of labor is the additional output associated with the employment of one additional human resource unit, with other production factors held constant. The marginal revenue of labor is the additional revenue generated when the firm employs one additional unit of human resources, with other production factors held constant. Marginal Product Diminishing marginal productivity results from the fact that each additional employee has a progressively smaller share of the other factors of production with which to work. In the short term, other factors of production (e.g., office space, number of computers, telephone lines) are fixed. As more business graduates are brought into the firm without changing other production factors, the marginal productivity must eventually decline. Marginal Revenue Marginal revenue is the money generated by the sale of the marginal product, the additional output from the employment of one additional person. Therefore, the employer will continue to hire graduates until the marginal revenue generated by the last hire is equal to the costs associated with employing that graduate. Because other potential costs will not change in the short run, the level of demand that maximized profits is that level at which the marginal revenue of the last hire is equal to the wage rate for the hire. A manager using the marginal revenue product model must do only two things: (1) determine the pay level set by market forces, and (2) determine the marginal revenue generated by each new hire. This will tell the manager how many people to hire. The model provides a valuable analytical framework, but it oversimplifies the real world. In most organizations, it is almost impossible to quantify the goods or services produced by an individual employee, since most production is through joint efforts of employees with a variety of skills. So neither the marginal product nor the marginal revenue is directly measurable. However, if compensable factors define what organizations value, then job evaluation reflects the contribution and may be viewed as a proxy for marginal revenue product.

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Labor Supply This model assumes that many people are seeking jobs, that they possess accurate information about all job openings, and that no barriers to mobility (discrimination, licensing provisions, or union membership requirements) among jobs exist. 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.

For further information please click here http://hr-southflorida.blogspot.com/2006/05/chapter -7-compensation strategy.html

Product market Factors and Ability to Pay Product demand and the degree of competition are the two key product market factors. Both affect the ability of the organization to change what is charges for its product and services 1. Product demand Puts a lid on maximum pay level an employer can set 2. Degree of competition in highly competitive markets, employers are less able to raise prices without loss of revenue.

Organization Factors 1. Industry and Technology 2. Employer size 3. Preference 4. Organization Strategy

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Competitive Pay Policy Alternatives The three competitive pay policy alternatives generally attributed to the decisions that organizations make for market positioning are to: 1. Match: paying with the competition 2. Lead: paying more than the competition 3. Lag: paying below-market rates. Pay with Competition (Match). A pay with competition policy tries to ensure that an Lead Pay level Policy. Maximizes the ability to attract and retain quality employees and minimizes employee satisfaction with pay. Lag Pay level Policy is coupled with the promise of higher future returns, this combination may increase employee commitment and foster teamwork, which may increase productivity. Consequence of Pay level and Mix Decisions 1. Efficiency 2. Fairness 3. Compliance Designing Pay levels, Mix, and Pay Structures The major decisions in setting externally competitive pay and designing the corresponding pay structures are: 1. 2. 3. 4. 5. 6. 7.

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policy, Define the purpose of the survey, Select relevant market competitors, Design the survey, Interpret survey results and construct the market line. Construct a pay policy line that reflects external pay policy, and Balance competitiveness with internal alignment through the use of ranges, flat rates, and/ or bands.

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Determining Externally Competitive Pay Levels Structures

Pay Relationships Competitiveness

Select Policy

Draw Policy

Market

Mix and

Some Major Decisions in Pay-Level Determination Specify pay-level policy. Define purpose of survey. Specify relevant market. Design and conduct survey. Design grades and ranges or bands.

Specify Competitive Pay Policy Surveys provide the data for translating that policy into pay levels, pay mix, and structures. A survey is the systematic process of collecting and making judgments about the compensation paid by other employers. Tools used to determine the median or average compensation paid to employees in one or more jobs. Compensation data, collected from several employers, is analyzed to develop an understanding of the amount of compensation paid. Surveys may focus on one or more job titles, geographic regions, employer size, and or industries. The Purpose of Survey 1. 2. 3. 4. 5.

To adjust pay level in response to changing rates paid by competitors. To set the mix of pay forms relative to that paid by competitors, To establish or price a pay structure, To analyze pay-related problems, or To estimate the labor cost of product service market competitors.

Design the Survey Designing a survey answering the following questions:

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Who should be involved in the survey design? How many employers should be included? Which jobs should be included? What information should be collected?

What are Pay Structures or Salary Structures? A pay structure is a system that defines what each individual and job role is paid based upon their value to the business and effectiveness in their role. Pay structures, also known as salary structures, set out the different levels of pay for jobs, or groups of jobs, by reference to: Their relative internal value, as established by job evaluation external relativities, via market rate surveys where appropriate, negotiated rates for the job Main characteristics of Pay Structures indicate rates of pay for different jobs provide scope for pay progression via performance, competence, contribution, skill or service contain pay ranges for jobs grouped into grades, individual jobs or job families.

The most important types of pay structure, or salary structure, are: Graded structures a sequence of overlapping job grades into which jobs of broadly equivalent size are allocated. Each grade has a range, the maximum of which is usually 20 to 50% above the minimum. Broadband similar to conventional graded structures, but with far fewer and far wider bands. The maximum of the band can be 100% or more above the minimum. Job Family Structures Each job family has a different graded structure. Jobs are allocated to a job family based on activities carried out; skills and competencies e.g. Information Technology is a perfect example of a job family for which there is usually a separate grade structure.

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What is Appraisal? A performance appraisal is an evaluation of employees by supervisors. Most employees wish to have feedback on their job performances. Appraisals are helpful in many human resource decisions: selection, training, promotion, transfer, wage,

Objectives of Performance Appraisal To maintain records for compensation packages, wage structure, salaries, pay raises, or restructuring. To identify the strengths and weaknesses of employees. To assess and maintain the potential each person has for further growth and development. To provide feedback to employees regarding their performance To serve as a basis for improving working habits of employees To review and retain promotional and other training programs.

Advantages of Performance Appraisal It is said that performance appraisal is an investment for the company which can be justified by following advantages: Promotion: Performance Appraisal helps the supervisors to chalk out the promotion programs for efficient employees. In this regards, inefficient workers can be dismissed or demoted in case. Compensation: Performance Appraisal helps in chalking out compensation packages for employees. Merit rating is possible through performance appraisal. Performance Appraisal tries to give worth to a performance. Compensation packages which includes bonus, high salary rates, extra benefits, allowances and pre-requisites are dependent on performance appraisal. The criteria should be merit rather than seniority. Employees Development: The systematic procedure of performance appraisal helps the supervisors to frame training policies and programs. It helps to analyze strengths and weaknesses of employees so that new jobs can be designed for efficient employees. It also helps in framing future development programs. Selection Validation: Performance Appraisal helps the supervisors to understand the validity and importance of the selection procedure. The supervisors come to know the validity and thereby the strengths and weaknesses

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of selection procedure. Future changes in selection methods can be made in this regard. Communication: For an organization, effective communication between employees and employers is very important. Through performance appraisal, communication can be sought for in the following ways: a. Through performance appraisal, the employers can understand and accept skills of subordinates. b. The subordinates can also understand and create a trust and confidence in superiors. c. It also helps in maintaining cordial and congenial labor management relationship. d. It develops the spirit of work and boosts the morale of employees. Motivation: Performance appraisal serves as a motivation tool. Through if the targets are achieved. This very well motivates a person for better job and helps him to improve his performance in the future. Following are the tools used by the organizations for Performance Appraisals of their employees. Ranking Paired Comparison Forced Distribution Confidential Report Essay Evaluation Critical Incident Checklists Graphic Rating Scale BARS Forced Choice Method MBO Field Review Technique Performance Test

For further understanding please click here https://www.managementstudyguide.com/performance-appraisal-tools.htm

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References Book Milkovich M., Newman J., & Gerhart B., (2014) Compensation Eleventh Edition, Mc Graw Hill International, New York Zarate Cynthia A. (2014)., Human Resource Management, C & E Publishing, Inc. South Triangle, Quezon City

Internet Team Study, External Competitiveness, Retrieved July 25, 2020 https://www.teamstudy.com/resources/chapter-7-defining-externalcompetitiveness-00Fp5vD6 MBA Skool Team, Pay Level, May 28, 2020 https://www.mbaskool.com/business-concepts/human-resources-hr-terms/16581pay-level.html eNotes Why is external competitiveness important in compensation? July 25, 2020 https://www.enotes.com/homework-help/external-competitiveness-importantcompensation-495788 Aon Empower Result Getting a Grip on Sales Compensation Pay Mix, September 2015, https:// re wards.aon.com/en-u s/insi ghts/ ar ticles /2015/gett ing-a-gri p-on-sal escompensation-pay-mix

Managing HR at South Florida, Compensation Strategy: External Competitiveness, Ma y 18, 2006 h ttp://hr- sou thflorid a.blogspot.com/2006/ 05/ch apter-7-compensati onstrategy.html

HR-Survey.com, What is a Salary Survey?, Retrieved July 25, 2020 https://hr-survey.com/SalarySurvey.htm

SlideServe, Defining Competitiveness, July 25, 2020 https://www.slideserve.com/jebediah-harrison/defining-competitiveness

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Course Hero, The three competitive pay policy alternatives, Retrieved July 25, 2020 https://www.coursehero.com/file/p689lc80/The-three-competitive-pay-policyalternatives-generally-attributed-to-the/ Ashworthblack Pay and Reward Specialist, Pay and Salary Structure, Retrieved July 25, 2020 https://www.ashworthbla ck.co .u k/pay -s al ary -str uctures/

Paydata, different types of pay structure, Retrieved July 25, 2020 https://www.paydata.co.uk/hr-hub/blogs/job-evaluation/what-are-the-differenttypes-of- pay-structure/ Geneva Business News, Performance Appraisal: How they affect Employees, Retrieved July 25, 2020 https://www.gbnews.ch/45788/ Managing HR at South Florida, The Role of Performance Appraisal in Compensation Decision, May 18, 2006 http://hr-southflorida.blogspot.com/2006/05/role-of-performanceappraisal-in.html Management Study Guide, Performance Appraisal, July 25, 2020 https://www.managementstudyguide.com/performance-appraisal.htm

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