Compensation Management - DETERMINANTS OF THE WAGE STRUCTURE - Business Management , Study notes of Business Administration

Download Compensation Management - DETERMINANTS OF THE WAGE STRUCTURE - Business Management and more Study notes Business Administration in PDF only on Docsity! DETERMINANTS OF THE WAGE STRUCTURE Economic Determinants Adam Smith explains occupational wage differentials in terms of (1) hardship, (2) difficulty of learning the job, (3) stability of employment, (4) responsibility of the job, and (5) chance for success or failure in the work. This is a theory of wage structure. But his standards of worth are equally useful in explaining the complexity of wage structure decisions. The market value of an item is the price it brings in a market where demand and supply are equal. Use value is the value an individual buyer or seller anticipates 158 through use of the item. Use value obviously varies among individuals and over time. Job worth These two concepts of worth and the concept of internal labour markets combine to explain important differences among employers in wage structure decisions. Organizations with relatively open internal labour markets (organizations in which most jobs are filled from outside) make much use of market value. They also make much use of wage and salary surveys in wage structure decisions. Conversely, organizations with relatively closed internal labour markets (most jobs are filled from inside) emphasize use value. Their analysis of job worth relies more heavily on perceptions of organization members of the relative value of jobs. Training Some other wage structure determinants derived from economic analysis may be noted. Training requirements of jobs in terms of length, difficulty, and whether the training is provided by society, employers, or individuals constitute a primary factor in human-capital analysis and thus job worth. The interaction of ability requirements with training requirements can yield different job values depending on the scarcity of the ability required and the number of people who try to make it in the occupation and fail. Employee tastes 159 Organizational Determinants Organizations develop jobs to get their work done. Labour services acquire specific economic meaning only in relation to the particular jobs in which they are performed. In our economic system, the organization typically designs jobs and selects employees to fill them. The jobs the organization designs are the source of the contributions provided by employees and a primary determinant of their rewards. Through these jobs and pay decisions about them, the organization is structuring the market for labour services. Other organizations differing in technology, management competence, competitive economics, and collective bargaining are also designing jobs. As a consequence, it is quite unlikely that the jobs designed by one organization will be identical to those of other organizations. Furthermore, the decisions that go into job design are not made once and for all, but are subject to revision, as market conditions, technology, and institutional influences change. Employee Acceptance The employment exchange and of equity theory suggests that a primary criterion of organization wage structures is employee acceptance. Both the employment exchange and equity theory strongly suggest that employees' decisions to acquire and retain organization membership are based on their perception of a favorable ratio of rewards to contributions. The most visible employee contribution is the job to which he or she is assigned. Most organizations base wage structures primarily on the work content of jobs and the value of that work to the organization. Work content is determined by job analysis. Relative value of work is determined by job 162 evaluation. Equity theory postulates that employees must accept both processes as fair if the system is to achieve its purpose. OTHER INFLUENCES ON THE WAGE STRUCTURE Society People and institutions both have a hand in designing jobs and wage structures. Craft unions, for example, determine the kinds of work their members do and expect employing organizations to adjust to these decisions. Jobs for clerical workers are structured by the institutions that train them, with the result that clerical jobs are often quite similar in different organizations. Professional employees and managers insist on having a say in the design of their jobs, and the result is influenced in part by the institutions that train them. At the other extreme are semiskilled factory employees. Organizations employing these workers are subject to little influence on job design by either employees or unions, except in job-redesign decisions. Unions of semiskilled factory workers typically insist, however, on participating in the latter decisions. This participation is guided by customary relationships among and within employee groups. Custom also operates in nonunion situations, causing resistance to change in job design. The Labour Market The labour market influences the wage and salary structure through the supply of labour. But organizations differ greatly on how many of their jobs are highly market-oriented, particularly in those organizations in which the labour supply is mostly provided from within the organization. Most 163 organizations replace the external labour market with an internal labour market that makes decisions by administrative means rather than according to supply and demand. These organizations have restricted ports of entry, which are highly sensitive to the labour market but rely on the The organization's internal labour supply to fill most job openings. exception occurs when there is an internal and external shortage of people to fill vacancies for specific skills. In fact, any job for which qualified people are in short supply becomes a market-sensitive job. But given relatively adequate labour supplies, the labour market determines wages only if the labour market: is structured by unions, is otherwise well organized, or is designed to fill openings from outside the organization. Unions Unions affect wage structure, but the differential effects of craft and industrial unionism and the type of bargaining relationship are considerable. Craft unions tend to determine craft rates as well as the design of craft jobs for all organizations employing members of the craft. The limit of craft rates is the cost-price resistance of employers. Industrial unions, on the other hand, are more concerned than craft unions with employing organizations, but less concerned with product markets because they often bargain with organizations in many product markets. Thus, industrial unions may attempt to impose a common wage structure on organizations, even if the wage structure clashes with product-market realities. The Organization Organizations whose members come largely from a well-organized and competitive labour market but are not unionized have what might be called market-oriented wage structures. Organizations of this type have 164