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CHAPTER 7 DEFINING COMPETITIVENESS LEARNING OUTCOMES After studying Chapter 7, students should be able to: Describe external competitiveness, and the two specific actions taken in practice that determine external competitiveness. Discuss the three major factors that shape external competitiveness. Discuss three labour demand theories and explain their predictions regarding pay. Discuss two supply side theories and explain their predictions regarding pay. Explain the three competitive pay policy alternatives. CHAPTER SUMMARY External competitiveness refers to the relationship of one’s organization’s pay to that of its competitors. In practice, external competitiveness means (1) setting a pay level that is above, below, or equal to one’s competitors and (2) considering the mix of pay forms relative to those of competitors. The three major factors that shape external competitiveness are: (1) competition in the labour market for people with various skills; (2) competition in the product and services markets, which affects the financial condition of the organization; and (3) characteristics unique to each organization and its employees, such as business strategy, technology, and the productivity and experience of its workforce. Three labour demand theories are compensating differentials theory, efficiency wage theory, and signally theory. Compensating differentials theory predicts that work with negative characteristics will require higher pay to attract workers. Efficiency wage theory predicts that above-market wages will improve efficiency by attracting workers who perform better, stay longer and require less supervision. Signalling theory predicts that pay policies will signal the kind of behaviour the employer wants (demand side) and what potential hires bring to the table (supply side). Two supply side theories are reservation wage theory and human capital theory. Reservation wage theory predicts that job seekers will not take jobs when pay is below a certain level, no matter how attractive the other job attributes are. Human capital theory predicts that people are paid at the value of a person’s skills and abilities which is a function of the time and expense required to acquire them. Three competitive pay level alternatives are: match the market, lag the market, and lead the market. Examples of pay mix alternatives are performance-driven , market match, work/life balance, and security. LECTURE NOTES COMPENSATION STRATEGY: EXTERNAL COMPETITIVENESS An organization’s policy on external competitiveness is its pay in relation to that of other organizations. The organization’s pay level helps determine its external competitiveness. The pay level is the average of the array of rates paid by an employer: base + bonuses + benefits + stock options/number of employees. Comparisons are made to external organizations for jobs in relationship to the competitor’s average rates. The pay level set by the organization depends on its analysis of conditions in the labour and product market and its strategic objectives. Pay level is the mix of the various types of payments that make up total compensation. Both pay level and pay forms focus on two objectives: to control costs, and to attract and retain employees. Control Costs Pay level decisions have a significant impact on expenses. Other things being equal, the higher the pay level, the higher the labour cost. The pay level has direct impact on the organization’s costs as well as its ability to attract and retain employees. Attract and Retain Talent The very same work is paid differently by different employers. The varying rates as well as other job factors (benefits, non-financial returns, etc.) are what allow different employers to attract different employees. Therefore, mix of pay forms are also part of competitiveness. It is important for potential employees to compare total compensation rather than just base pay. See Exhibit 7.1 on page 139 to review an analysis of the market position of a company’s pay strategy comparing base pay to total compensation. See also Exhibit 7.2 on page 140 to observe the different mixes of total compensation for two companies WHAT SHAPES EXTERNAL COMPETITIVENESS? An organization’s pay level is a function of three factors: (1) competition in the labour market for people with various skills, (2) competition in the product and service markets and (3) characteristics unique to each organization and its employees, such as its business strategy, technology, and the productivity and experience of its workforce. See Exhibit 7.3 on page 141 to review the factors that shape external competitiveness including labour market factors, product market factors and organization factors. LABOUR MARKET FACTORS Economic theories for labour markets have four basic assumptions Employers always seek to maximize profits. People are homogenous and therefore interchangeable; for example, a business school graduate is a business school graduate. The pay rates reflect all costs associated with employment (base wage, bonuses, holidays, benefits, even training. The markets faced by employers are competitive, so there is no advantage for a single employer to pay above or below the market rate. See Exhibit 7.4 on page 142 to review the supply and demand for business school graduate in the short run and the respective pay. Labour Demand An employer cannot change any other factor of production. Thus, its level of production can change only if it changes the level of human resources. Under such conditions, a single employer’s demand for labour coincides with the marginal product of labour. Marginal Product of Labour The marginal product of labour is the additional output associated with the employment of one additional human resources unit, with other production factors held constant. Marginal Revenue of Labour The marginal revenue of labour is the additional revenue generated by each additional unit of human resources, with other productions factors held constant. Employers will continue hiring additional units of human resources as long as the marginal revenue, or additional revenue generated through those resources exceeds the cost of the hiring. The demand for labour will equal the level at which the marginal revenue of labour equals the marginal cost of labour. See Exhibit 7.5 on page 143 to see the connection between the labour market and conditions facing a single employer. Labour 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) exist between jobs The supply of labour is the number of employees available at different pay rates. In a perfectly competitive market, supply available to the individual employer is elastic. As assumptions change to more closely reflect reality, the supply becomes less elastic. Therefore, an individual employer’s pay level will affect labour supply. MODIFICATIONS TO THE DEMAND SIDE Compensating Differentials Theory Compensating differentials refers to the idea that higher wages must be offered to compensate for negative features of jobs. The “net advantage” an employer may offer over other employers. This advantage could be found in factors such as greater job security or better working conditions. Efficiency Wage Theory Efficiency wage theory says that sometimes high wage may increase efficiency and actual lower labour costs if they: Attract higher-quality applicants Lower turnover Increase work effort Reduce “shirking”, and Reduce the need to supervise employees Efficiency wage theory does not assume that employers are wage takers, as does compensating differentials. Employers will pay wages above the market level in order to attract better employees, reduce turnover, or increase productivity of employees. Any of these results will make the organization more profitable by making the employees more efficient. Signalling Theory Signalling theory refers to the idea that pay levels and pay mix are designed to signal desired employee behaviours. An organization’s pay level signals expectations to potential employees about what they expect from those employees. For example, an organization may pay low base wages but high bonuses in hopes of attracting employees more willing to take risks. See Exhibit 7.6 on page 145 to review the labour demand theories and their implications. MODIFICATIONS TO THE SUPPLY SIDE Reservation Wage Theory The reservation wage theory refers to the idea that job seekers have a reservation wage level below which they will not accept a job, no matter how attractive the other job attributes. The reservation wage is the lowest wage an employee will accept for job, regardless of the other job attributes, such as advancement potential or working conditions. Human Capital Theory Human capital theory refers to the idea that higher earnings are made by people who improve their potential productivity by acquiring education, training and experience. Human capital theory says that employees will earn higher wages depending on possession of, and investment in factors that will increase their productivity for the organization, such as more education, experience, and training. See Exhibit 7.7 on page 147 to review the labour supply theories and implications. PRODUCT MARKET FACTORS AND ABILITY TO PAY An employer’s product markets are competitors who produce the same product or service. The product market determines the employer’s ability to pay wages and sets the upper limit on what wages can be paid and still remains competitive. Product Demand The product market sets the upper limit within for an employer’s pay level. Degree of Competition Employers in highly competitive markets will be less able to raise prices without loss of revenues. A Dose of Reality: What Managers Say levels of unemployment made no difference for wage adjustments profitability is considered a factor for higher management in setting the overall pay budget it is short-sighted to pay employees less poor management is responsible for attracting and retaining employees rather than inadequate compensation More Reality: Segmented Supply of Labour Significant differences in wages paid around the world and the ease of outsourcing work overseas has led many companies to cut pay. People Flow to the Work The example in the textbook makes the point that the existence of a physical building like a hospital will encourage people to flow towards the work because this is a good source of well-paid employment. Work Flows to the People – On-Site, Off-Site, Offshore In the examples of on-site, off-site and offshore, work is sometimes organized so that the labour force with be the magnet towards which the work will flow. ORGANIZATION FACTORS Industry and Technology The industry in which an organization competes dictates the technologies used. Labour-intensive technologies necessitate more employees and there, they pay less. In industries with non-labour intensive technologies can afford to pay higher wages since wages have less impact on their total costs of production. Employer Size Large organizations tend to pay higher wages than small and medium size organizations. Employees’ Preferences Markets involve both employer’s and employee’s choices to get a better understanding of employee preferences. It is increasingly important in determining external competitiveness, such as health insurance, eye care, bonuses, and pension. Organization Strategy A variety of pay level and mix strategies exists. Some employers adopt a low-wage-no-mix strategy; they compete by producing goods and services with as little total compensation as possible. Others select a low-base-high-services approach. RELEVANT MARKETS The market should never be taken for granted because it is management’s role to define the relevant market and then determine how much to pay. Since one homogenous labour market does not exist in practice, organizations must define the markets relevant to them. Research says that managers look at both their competitors- their products, location, and size, and the jobs- the skills and knowledge required, and their importance to the organization’s success. Defining the Relevant Market Defining a relevant market is important in the whole scope of defining an organization’s competitiveness. However, in reality little time is spent to do this task and so errors are often made in determining the estimates of competitors’ pay rates. Relevant markets are shaped by pressure from the labour and product markets and the organization. COMPETITIVE PAY POLICY ALTERNATIVES Pay with Competition (Match) The most common policy is to match what the competition is paying in its pay rates. This policy has advantages since paying less than competitors may lead to employee dissatisfaction and make it more difficult to attract employees to the company. Lead Policy Paying slightly higher rates than competitors allows the organization to attract and retain the highest quality employees, assuming the organization is able to identify the better applicants (not necessarily a safe assumption). It may also reduce turnover and absenteeism. Lag Policy Paying less than a competitor’s wage rates may deter the organization’s ability to attract employees. However, it also may lower labour costs. The policy may be used in combination with other attributes, such as quicker mobility or better benefits. Flexible Policies Employers may vary the policy for different occupational families or for different forms of pay. Some obvious alternatives include performance driven, market match, work life balance, and security. Different Policies for Different Employee Groups In reality, many employers will go beyond the three policy options and create hybrid options that are adapted from the organizational policies. Such examples include: Performance-Driven Market Match Work/Life Balance Security (Commitment) See Exhibit 7.8 on page 152 to compare the five external pay policies and their objectives. Employer of Choice/Shared Choice An employer of choice policy goes beyond pay level and forms to focus on all returns from employment. Just as companies compete for customers by offering a choice of product features, quality, and services at the right price, some employers also compete for employees by offering choices in the mix of base salary, incentives, benefits, and work environment. Some companies compete based on their overall reputation as a place to work, beyond pay level and mix. The shared choice approach begins with the traditional alternatives of lead, meet, or lag; but adds a second part, which is to offer employee choices (within limits) in the pay mix. Employees have more say in the forms of pay they receive. Pitfalls of Pies Thinking about the mix of pay forms as pieces in a pie chart has limitations. They are particularly clear when the value of options are volatile. See also Exhibit 7.9 on page 153 to review the hybrid policies for pay mix. See also Exhibit 7.10 on page 155 to see an example how stock value volatility can affect the total pay mix. See Exhibit 7.11 on page 155 to review an example where an organization is compared to its competitors in a dashboard format relative to its total compensation breakdown. Finally see Exhibit 7.12 on page 156 to see how pay mix can vary internally for three jobs; entry level, mid-level manager and executive. CONSEQUENCES OF PAY LEVEL AND MIX DECISIONS External competitiveness has two major consequences: it affects operating expenses, and it affect employee attitudes and work behaviours See Exhibit 7.13 on page 156 to review other consequences of pay levels. In general, the competitiveness policy directly affects the compensation objectives o efficiency, fairness, and compliance. Efficiency The pay level affects the organization’s ability to attract and retain a productive work force. This in turn affects the organization’s revenues. Fairness Satisfaction with pay is directly related to the pay level: More is better. But employees’ sense of fairness is also related to how others are paid. Compliance It’s not enough to say that an employer must pay at or above the legal minimum wage. Provisions of prevailing wage laws and equal rights legislation must also be met. CHAPTER 8 DESIGNING PAY LEVELS, PAY MIX AND PAY STRUCTURES LEARNING OUTCOMES After studying Chapter 8, students should be able to: Describe the seven decisions involved in setting externally competitive pay and designing the corresponding pay structure. Explain the steps involved in survey design. Explain the difference between a market pay line and a pay policy line. Discuss how pay grades are created, the relationship of pay ranges to pay grades, and the concept of broad banding. Explain how to adjust a pay structure to balance internal and external pressures. CHAPTER SUMMARY The seven decisions involved in setting externally competitive pay and designing the corresponding pay structure are: specify the employer’s external pay policy define the purpose of compensation survey choose relevant market competitors to survey design the survey interpret survey results and construct the market pay line construct an internal pay policy line that reflects external pay policy, and balance competitiveness with internal alignment through the use of ranges, flat rates, and/or bands. The steps involved in survey design are deciding: whether to do the survey in-house or to involve consultants how many employers to survey which jobs to include in the survey, and what specific compensation information to collect Survey data reported will change after they are collected when pay is increased at various organizations at various points throughout the year. Therefore, data are updated to forecast competitive rates for the date when the pay decisions will be implemented. A market pay line links a company’s benchmark jobs n the horizontal axis (internal structure) with market rates paid by competitors (market survey) on the vertical axis. A pay policy line represents external competitive position in the market (i.e., lead, match, lag). Pay grades are created by grouping jobs considered substantially equal for pay purposes. Pay ranges provide an upper and lower limit for pay for all jobs in a pay grade. Broad banding is the practice of establishing large bands of jobs containing several pay grades. Differences between market structures and rates and job evaluation rankings warrant a review of the basic decisions in evaluating and pricing jobs. Pay structures are often adjusted to balance these internal and external pressures by reviewing job analysis, the job description, and the job evaluation or market data for the job in question. Market data often are weighted more heavily that internal job evaluation data when making adjustments to pay structures. LECTURE NOTES MAJOR DECISIONS The major decisions involved in setting externally competitive pay and designing the corresponding pay structures are shown in Exhibit 8.1 on page 161 where externally competitive pay levels and structures are determined.. They include: specify the employers’ external pay policy, define the purpose of the survey, choose 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. See Exhibit 8.1 on page 161 to see how one might determine externally competitive pay levels and structures. SET COMPETITIVE PAY POLICY Employers decide based on whether they want to be: a market leader with respect to pay, match the average pay of competitors, or lag behind the average market pay rates. To translate any external pay policy into practice requires information on pay rates in the external market. THE PURPOSE OF A COMPENSATION SURVEY Conducting a survey is a way to obtain data necessary to set an organization’s pay policy relative to its competitors. A compensation survey is the systematic process of collecting and making judgements about the compensation paid by other employers. Additionally, a survey allows an organization to adjust its pay level, pay structure, analyze pay-related problems, and estimate the labour costs of product market competitors. Adjust Pay Level- How Much to Pay? One must adjust pay level in relation to external competition. Adjust Pay Mix- What Forms? The mix of forms and their relative importance makes up the “pay package.” Adjustments to the different forms of pay competitors use (base, bonus, stock benefits) and the relative importance they place on each form occur less frequently than adjustments to overall pay level. Adjust Pay Structure? Determine if market rates vary greatly from those obtained in the organization’s job evaluation. Market pricing establishes the pay structure by relying almost exclusively on external market pay rates. Study Special Situations Many special studies appraise the starting salary offers or current pay practices for targeted groups, such as patent attorneys, retail sales managers, or software engineers. Unusual increases in an employer’s turnover in specific jobs may require focused market surveys to find out if market changes are occurring. Estimate Competitors’ Labour Costs Employers continuously search for ways to squeeze out more costs and become more productive. They may use salary survey data to benchmark against competitors’ product pricing and manufacturing practices. Industry-wide labour cost estimates are reported by Statistics Canada. SELECT RELEVANT MARKET COMPETITORS To make decisions about pay levels, mix, and structures, a relevant labour market must be defined that includes employers who compete in one or more of the following areas: the same occupation or skills required, the same geographic area, and the same products and services. See Exhibit 8.2 on page 163 to see how relevant labour markets can be subdivided using geography and employee groups. See Exhibit 8.3 on page 164 to see how Microsoft and Google are reviewed according to relevant labour markets. Fuzzy Markets New organizations fuse diverse knowledge and experience so relevant markets look more like fuzzy markets. For example, Yahoo has kindergarten teachers, software engineers and former sales representatives to collaborate on a single team. DESIGN THE COMPENSATION SURVEY The following steps should be observed in designing a compensation survey: Who should be involved in the survey design? How many employers should be included? Which jobs should be included? What information should be collected? Who Should be Involved? In most organizations, the responsibility for managing the survey lies with the compensation manager. However, some companies hire an external consultant. How Many Employers to Survey? The number of employers to include also depends on the circumstances of the organization. The following are problems associated with global firms. Publicly Available Data- In Canada, Statistics Canada is the major source of publicly available compensation data. It publishes extensive information on pay for various occupations and industries. Word-of-Mouse”- A click of the mouse makes a wealth of data available to everyone and means that managers must be able to explain the salaries paid to employees compared to those a mouse-click away. Where are the Standards?- The reliability and validity of job evaluation has been studies. Yet for market surveys and analysis, similar indices and standards do not exist. See Exhibit 8.4 on page 166 to review the salary data on the web at Monsterca.Salary.com. Which Jobs to Include? Keep the survey simple and include only enough jobs necessary to accomplish the purpose of the survey in order to encourage participation. Some approaches to selecting jobs for inclusion: Benchmark Jobs Approach: Benchmark jobs have stable job content and are common across different employers. If the purpose of the survey is to price the entire structure, then benchmark jobs can be selected in include the entire job structure- all key functions and all levels. Low-High Approach: The simplest approach is to identify the lowest and highest paid benchmark jobs for the relevant skills in the relevant market and to use the wages for these jobs as anchors for the skill-based structures. Work at various levels within the structure then can be slotted between the anchors. Benchmark Conversion Approach: An alternative approach to job-matching difficulties is to apply the plan used to create internal alignment to the descriptions of survey jobs. What Information to Collect? Three basic types of data typically are required: information about the nature of the organization, information about the total compensation system, and specific pay data on each incumbent in the jobs under study. See Exhibit 8.5 on page 168 to review data elements to consider for compensation surveys. Organization Data: Collected data includes size, structure and financial information. Total Compensation Data: All the basic forms of pay need to be covered in a survey to assess the similarities and differences in the total pay packages and to accurately assess competitors’ practices. Three alternatives- base pay, total cash (base, profit sharing, bonuses), and total compensation (total cash plus benefits and perquisites) are the most commonly used. See Exhibit 8.6 on page 169 to review to advantages and disadvantages of measures of compensation. See Exhibit 8.7 on page 170 to review the results of a survey analysis using different measures for engineers. INTERPRET SURVEY RESULTS AND CONSTRUCT A MARKET LINE There is no single best approach that is used to analyze survey data. However, the results are analyzed through the use of some statistics in order to construct a market line. The following steps will ensure that the information is justified.. Verify Data Check the quality and accuracy of survey data. Also check for accuracy of matches. Data can be examined for patterns. Jobs can be matched for similarity with job descriptions. See Exhibit 8.7 on page 170 to see salary graphs using different measures of compensation. Accuracy of Match If jobs are similar but not identical, then levelling can be used to weigh the data according to the closeness of the match. Survey levelling occurs by multiply survey data by a numerical fat or to adjust for differences between the company job and the survey job. Anomalies An anomaly is a data point that is atypical. The first step to look for anomalies includes posing these questions: Does any company dominate? Do all employers show similar patterns? Outliers? (an outlier is a data point that falls outside the majority of the data points) Statistical Analysis Descriptive statistical techniques include: Frequency Distribution (organizes data into intervals), Central Tendency (averages or means, weighted means and medians), Variation (distribution of rates around the central tendency; standard deviation, quartiles and percentiles). See Exhibit 8.8 on pages 171-172 as the data to support Exhibit 8.9 on page 174 to generate the frequency distribution graphs for Engineer 1 and Engineer 5. See Exhibit 8.10 on page 175 to review commonly used statistical measures used in survey analyses. Age/Trend the Survey Data Survey data can be updated for comparisons in future time periods and used to forecast pay rates by the time a plan will actually be implemented. This process is often called aging or trending. Aging/trending survey data refers to the adjusting of survey data to represent pay at the current of future data when the pay decisions will be implemented. Construct a Market Pay Line Statistical techniques such as regression analysis can be used to derive a market pay line. A market pay line is a graph that links a company’s benchmark jobs on the horizontal axis (internal structure) with market rates paid by competitors (market survey) on the vertical axis (See Exhibit 8.7 on page 170). Combine Internal Structure and External Market Rates The internal consistency and external competitiveness components of the pay model are combined through the development of the pay structure. The pay structure includes a pay policy line that incorporates the internal job structure with market pay rates and pay ranges, which give the pay structure flexibility. FROM POLICY TO PRACTICE: THE PAY POLICY LINE The next major decision is to se the external competitive position by adjusting the market pay line in order to construct a pay policy. The pay policy line reflects external competitive position in the market. The pay policy line is a pay line representing an adjustment of the market pay line to reflect the company’s external competitive position in the market (i.e., lead, match of lag). Choice of Measure If Colgate practices what it claims, then one would expect Colgate to use the 50th percentile for base pay and the 75th percentile for total compensation. Updating The survey data at the beginning of the plan year may be updated to reflect the firm’s pay level policy. A pay level policy may also affect how an employer updates the survey data. See Exhibit 8.12 on page 177 to review how the market pay line is updated in order to create a pay policy line. Policy Line as Percent of Market Line A third approach to translate pay level policy into practice is simply to specify a percentage above or below the regression line(market line) that an employer intends to match, and then draw a new line at this higher (or lower) level. FROM POLICY TO PRACTICE: GRADES AND RANGES The first step in building flexibility into the pay structure is to group different jobs that are considerably substantially equally for pay purposes into a pay grade. A pay grade is a grouping of jobs considered substantially equal for pay purposes. See Exhibit 8.13 on page 178 to see an example of pay grades. Why Bother with Grades and Ranges? Both external and internal factors influence the variation of rates paid for similar jobs and skills and the need for pay ranges in the structure. A pay range is the range between the upper and lower limits on pay for all jobs in a particular pay grade. Pay ranges permit managers to recognize: Differences in quality (skills, abilities, experience) between individuals applying for work Differences in the productivity or value of these quality variations (e.g., quality differences between Microsoft and Best Buy software engineers) Differences in the mix of pay forms competitors use (Oracle uses stock options; IBM uses more base pay). Externally, quality variation among employees may translate into differences in productivity. Internally, employers may want to recognize differences in performance with pay. Also, employees often expect increases in pay over time. Depending on the nature of the work, however, flat rates are sometimes a better choice and are favoured by unions. Establish Range Midpoints, Minimums, and Maximums Pay ranges set an upper and lower limit between which all wages for all jobs in that particular grade are expected to fall. A range has three salient features: a midpoint, a minimum and a maximum. The midpoints for each range usually correspond to the point where the pay policy line crosses each grade. What Size Should the Range Be? The size of the range spread (or the dollar difference between the minimum and maximum pay levels for a particular pay grade) is based on top-level management judgements about how the ranges support career paths, promotions and other organization systems. Overlap The degree of overlap among pay ranges is the third step in setting ranges. A large degree of overlap would indicate jobs that are similarly valued between grades and small differentials in pay between grades. A smaller degree of overlap allows larger pay increases. See Exhibit 8.14 on page 180 to review an example of range overlaps. Promotion Increases Matter The size of differentials between grades should support career movement through the structure. The overlap between grades ought to be large enough to induce employees to seek promotion into a higher grade. FROM POLICY TO PRACTICE: BROAD BANDING Broad banding is a large band of jobs containing several pay grades. It reduces grades to a few and creates wider ranges. Organizations that consolidate work into fewer levels use this technique. Shadow grades or zones may be designed to keep all jobs from floating to the maximum pay. The objective of broad banding is to provide more flexibility in moving people among jobs. Bands or pay adjustments don’t have to change when people move into their jobs. Broad banding takes two steps: Set the number of bands: There are usually three to eight bands for pay purposes. Price the bands: Reference market rates act as guides. Reference rates are pay rates created from market data that are used in pricing broad bands. Broad banding encourages employees to move cross-functionally to increase cross-fertilization of ideas. A career move is more likely to be within a band and less frequently between bands. See Exhibit 8.15 on page 181 to review a comparison between ranges and bands. See Exhibit 8.16 on page 182 to review how reference rates can be located within bands.. BALANCING INTERNAL AND EXTERNAL PRESSURES: ADJUSTING THE PAY STRUCTURE Adjustments may be necessary in the pay structure in order to balance internal consistency and external competitiveness. Reconciling Differences Internal job evaluation and external market survey results may not agree and may therefore produce two different structures. Review of the job analysis and job evaluation may be necessary to determine if a job was accurately evaluated or to account for differences between the market rate and the internal rate. For example, a shortage of labour in the market may result in a higher rate for a job than the internal grade allows. Paying the higher market could result in future pay problems if the job is overpaid in relation to others with similar requirements in the organization. MARKET PRICING Strategies for market pricing de-emphasize internal consistency. Firms should price as many jobs as possible in the external market, then rank to market their unique jobs. This is appropriate for companies that fill a high percentage of all jobs in the external market rather than a strongly developed internal labour market. A disadvantage is that this approach lets competitors influence pay policies. The question that should be asked is: “How valid is market data?” Instructor Manual for Compensation George T. Milkovich, Jerry M. Newman, Barry Gerhart, Cole, Margaret Yap 9780071051569, 9781259086878, 9780078029493
