Management 623: Compensation

1
Management 623Compensation Performance
Management

• Session 16
• March 16th 2006
• Dr. J. Bruce Prince

2
Agenda

• Cover external labor market related theories
• Prep students for FastCat 2 assignment
• Go Over Mid-Term Exam

3
Coming Up

• Tuesday-Thursday, March 21st 23rd
• Spring Break Enjoy
• If you are not in Cancun you might want to get a
  jump on the 2nd case critique or FastCat 2 (I
  plan on being around this week).
• Tuesday, March 28th
• Case Rob Parsons (2nd Case Critique Opportunity
  download from HBSP)
• Return to performance management issues
• Thursday, March 30th
• No Class Work on FastCat 2 Assignments
• Tuesday, April 4th
• FastCat 2 is due
• Presentations on FastCat 2 for 2-3 teams

4
Mid-Term Exam Results

• Multiple choice
• Average 56/72 (78) Range 40 to 64/72
• Essay
• Average 113/128 (88) Range 90 to 128/128
• Adjustments are not likely but I will consider
  once I combine scores and review distribution

5
Why Worry About External Rates?

• Firms need new human resources
• they come from external labor markets
• Firms must understand external labor markets in
  order to
• Manage costs wages are a big cost
• Attract retain motivate (the right) employees
• Productive ones with the right skills/knowledge
• Pay level and mix are the key choices
• how they fit with choices people have

6
Competitiveness 1

• How much should a firm pay employees (in
  different jobs) and be profitable?
• Theoretical lens 1 Supply demand forces
• How many will we get at what price?
• Market price is a useful starting point
• Problems (Labor Markets are generally imperfect)
• Assumes all the sameundifferentiated people
• Assumes that all have compete information,
  mobile, other employers wont respond to your
  increase

7
Supply and Demand for Business School Graduates
in the Short Run
100,000
Supply
Demand
50,000
Pay for business graduates
25,000
100
1000
Number of business graduates available
8
Competitiveness 2

• How much should a firm pay employees (in
  different jobs) and be profitable?
• Theoretical lens Economics ?MR ?MC
• Hire employees until marginal revenue equals
  marginal cost (of the last employee).
• Problems
• It assumes that labor markets are perfect
• Good logic but concepts are hard to measure so
  isnt used in a precise way

9
Demand of Labor Influences

• Why pay more than market?
• Use wages to compensate for negative factors (and
  keep/attract employees)
• Efficiency wage theory
• Hi wages attract better performing employees
• Aid competitive advantage success
• Signaling theory
• Pay practices signal corresponding behavior
• People work to their level of pay (equity theory
  also)

10
Supply of Labor Influences

• Key concepts
• Reservation wage
• Everyone has the wage level that will lead them
  to join (or leave to another employee)
• Limited search, jump at 1st satisfactory offer
• Human Capital Theory
• Markets do appreciate differences in skills
• Factoring in training development
• More training higher wages

11
Pay Policy Alternatives
Pay with Competition (Match)
Shared Choice
12
Probable Relationships Between External Pay
Policies and Objectives
13
FastCat Report 2

• See pages 37-58 for all details
• Page 53 - a good summary of write-up
• But the assignment sheet modifies this slightly
• Starting points
• Read pp. 37-58 match FastCat jobs to external
  market survey job descriptions pp.54-55
• Zip disk file must be used for market data
  analysis
• Should have time to play with data analysis
  package you are give a lot of flexibility and
  choices
• Must up-date pay objectives with decisions on
• Pay mix (benefits incentives base)
• Pay policy (lead, lag, meet market)
• Consider different structures for different job
  families

14
FastCat 2 What is done with the data?

• Once you have the data what do you do
• Match FastCat jobs with database job descriptions
• Integrate with your internal structure (JE
  points)
• Reconcile internal vs. external mkt. conflicts
• Unique job structure may be strategic or
• But many say market is king you fight it lose
• Figure out which firms should be used dont use
  all!
• Adjustments to the market data
• Adjust for age get it up-to-data USE 5
• Check for anomalies and accuracy dont use
• Statistical analysis
• Distributional (mean variation)
• Weighted mean and quartiles
• Regression market pay line you will do this!

15
The Results

• Develop a Pay Policy Line
• Adjusted from smoothed market line (pay
  objective)
• Pay mix policy - incentive vs. base
• Hi vs. lo benefits payer, etc.? (pay objective
  related)
• Pay ranges Min-max around mid-point
• Pay grades or bands
• Similar jobs into grades or bands
• Broad banding flexibility vs. control
• Dynamic markets cross-functional moves pay
  for skill performance within band