Tuesday, 28 March 2017

Skill-Based Pay?

Skill-Based Pay



Skill-based pay refers to a pay system in which pay increases are linked to the number or depth of skills an employee acquires and applies and it is a means of developing broader and deeper skills among the workforce. Such increases are in addition to, and not in lieu of, general pay  increases employees may receive. The pay increases are usually tied to three types of skills:
  • horizontal skills, which involve a broadening of skills in terms of the range of tasks
  • vertical skills, which involve acquiring skills of a higher level
  • depth skills, which involve a high level of skills in specialised areas relating to the same job.
Skill-based pay differs in the following respects from traditional pay systems which reflect skills differences in a structure consisting of rates of pay for unskilled, semi-skilled and skilled workers:
  •  Skill-based pay is a person-based and not a job-based, system. It rewards a person for what he/she, rather than the job, is worth. Job worth is reflected in a basic rate of pay for minimum skills, but pay progression is directly linked to skills acquisition (rather than to general pay increases applicable to all) .
  • It rewards (and therefore emphasizes) a broad range of skills which makes the employee multi-skilled and therefore flexible.
  • It positively encourages skills development.
  • A skill-based pay system may not necessarily reflect how well the skill is used, as this falls within the performance component of pay. But there is nothing to prevent injecting performance criteria into the system. In such cases the system will be more performance oriented than a structure which merely recognizes different rates of pay for skills.
  • The system needs to be underpinned by opportunities for training which is critical to the success of the system. The traditional structure is not dependent on such opportunities.

Reasons For Skill-Based Pay


More than ever before in industrial relations history a commonality of interests in the skills of employees has developed between employers and employees. Skills provide employees with a measure of protection against unemployment, as well as opportunities for higher earnings. At the same time, skills provide employers with an important means of achieving competitiveness.

Many countries today are seeking to advance to more technology and skill-based industries, while others have become (or are becoming) 'post industrial1 societies, in which the application of knowledge determines productivity, performance and competitiveness. Comparative advantage based on. for instance, cheap labour or raw materials, has declined in importance relative to competitive advantage based on the ability to add value to a particular resource or advantage. Such comparative advantage partly (often largely) depends on people - their standards of literacy and education, work attitudes, value systems, skills and motivation. Critical today is the ability to innovate and develop clusters of competitive enterprises in particular industries. For the more industrialized countries this means 'capturing' some of the key industries of the next century - microelectronics, biotechnology, new materials science industries, telecommunications, civil aviation, computers and software, robotics and machine tools and entertainment. An employee with skills is most flexible and productive when he develops a broad range of skills, is able to learn the next higher skill, develop analytical skills and is also able to work in a team. Important aspects of today's skills package include multi-skills, cognitive skills, interpersonal and communication skills, positive work attitudes and quality consciousness. Training is no longer only for current competence, but is also to prepare for the next stage of skills. Thus pay systems which promote current and future skills needs are increasing in importance among employers.

The impact of rapid technological change, the increasing globalization of product markets, greater customer choice and the emphasis on quality* necessitate a frequent updating of skills, and flexibility to respond to rapid changes in the requirements of markets. A flexible workforce, which is one that is multi-skilled, ensures that production is not interrupted due to the narrow skills of workers, and that workers are themselves responsible for the quality of products.


Advantages Of Skill-Based Pay

Among the advantages of skill-based pay are the following:
  • It contributes to job enlargement and enrichment by breaking down narrow job classifications.
  • Flexibility is increased by encouraging the performance of multiple tasks. It enables job rotation, and filling of temporary vacancies due, for instance, to absenteeism. It therefore contributes to a leaner workforce.
  • It enhances productivity and quality through better use of human resources.
  • It facilitates technological change, which may meet with resistance in a purely job-based system.
  • The higher pay levels, continuous training, and job enlargement through the broadening of skills, tend to reduce staff turnover.
  • Elimination of unnecessary jobs can result from a workplace having broad, rather than narrow, skills. It also reduces the need for supervision.
  • Job satisfaction is engendered through employees having greater control over the planning
  • and implementation of their work.
  • Broadening of skills leads employees to develop a better perspective of operations as a whole.
  • It is an incentive for self-development.
  • It provides employment security through skills enhancement.
  • It reduces the need to look to promotion to higher levels (which are always limited) as the only way to enhance earnings, and it facilitates the planning of an employee's career development path.
  • Since the reward flows from the application of a skill and it does not reduce opportunities for others to similarly increase their skills and earnings, there is likely to be less competition among individuals.
  • Since the pay increases on account of skills are linked to a measurable standard, the criticism of subjectivity often associated with performance appraisals and individual-based performance-related pay, is avoided

Job-based Pay Defined?

A job-based compensation structure typically contrasts a skill-based structure in that you are paid based on the responsibilities of a position rather than your personal skills. While you might prefer the opportunity to optimize your earnings to match your abilities, job-based pay does offer some benefits that are especially important to women.

Pay for Value

In a job-based pay structure, you essentially get paid for the value of the work you perform for the company. This gives your compensation a more tangible quality than a skill-based structure where a supervisor must assess the value of the skills and qualities you bring to the table. Employers typically have pay grades or schedules indicating the salary or wage for each particular job, and this enables you to see the relative pay to the duties assigned.

Fairness and Equality

Though not 100 percent certain, job-based pay can reduce the likelihood of gender discrimination in pay. Since the focus is on the job itself, pay theoretically shouldn't vary based on personal qualities you present. In fact, some employers use job-based structures primarily to protect against discrimination claims. While the glass ceiling, or wage gap, still exists between men and women, job-based pay should ensure that men and women earn equal pay for the same position.

Clear Steps to Higher Pay

The process of earning more money are generally clear in a job-based structure. Typically, you must gain promotion to a new position to see a significant boost in pay. You can normally look at the job description of a position you want to see what skills and qualities you must possess to gain a promotion. In a skill-based structure, the path to a raise is usually more informal and grounded in the development of new skills and abilities.

Pay Comparisons

Though not necessarily your employer's intent, a job-based structure allows you to more easily compare your salary to those offered by other employers. This is especially true if most companies in an industry use a job-pay structure. A side benefit is that employers using this compensation structure are often more cognizant to compare their salaries to those offered by competitors, which may mean your earning potential is higher or more representative of current market value for your work.
Job Based Pay Structures
A job based pay structure is a structure of salary payments that is built on compensable factors determined by the job. In other words the salary for a job is determined by its responsibilities, and sometimes its work conditions.
The advantages are:
  • It is based on a hierarchical organizational structure, which is the organizational structure for most organizations.
  • It is simpler than a person based system as more work is required to define knowledge, skills and competencies required for a person based pay structure.
  • Most companies’ pay structures are job based pay structures. This means comparison is possible between companies.
  • The hierarchical order of the job structure created the illusion that there are some career paths and possibilities for promotions.
The disadvantages are:
  • It reinforces hierarchy and bureaucracy. It is less compatible with team based structures and incentives.
  • The hierarchical organizational structure that it is based on has fundamental weakness.
  • The job holder may not be competent in the job.
  • The job at the top is over paid and the job at the bottom is too paid low. It increases the overall business operating costs.
  • It encourages compromise of honesty in job descriptions and job valuations.
  • It does not reward employees directly for their knowledge, abilities and individual strengths.
  • It does not encourage development of a flexible organizational structure in terms of flatter structure; T-shaped employees and job rotation.
  • Some job evaluation systems take short cuts by using a generic set of compensable factors or develop the pay structure by using job classification.
Person Based Pay Structures
Like a job based structure, developing a person based pay structure also requires an understanding of the tasks and responsibilities of jobs in a business. Similarly the development of the structure requires job analysis and job descriptions. The difference is that it compensates the job incumbent (person) in terms of his knowledge, competencies and skills. These are called competency-based pay structure, skills-based pay structure or knowledge based pay structure.
A study made by Murray and Gerhart (1998) found that in a person based pay structure, although hourly wages increased, however product quality (scrap percentage), productivity (labour hours per part) improved and overall labor costs decreased (The Oxford Handbook of Human Resource Management By Peter F. Boxall, John Purcell, Patrick M. Wright).
Advantages and Disadvantages of Skills-Based Pay Structures
There are very few person based pay structures, so information on it is mostly academic information. Below are the academic rather than market place explanations.Skills-based pay has the following advantages and potential disadvantages (Ledford 1989)

Job-based Pay Defined

Job-based pay has traditionally been the main structure companies have used in determining how much to pay workers. Employers that use this structure pay workers according to the employee's position and job duties. An employer may also consider the employee's work experience and seniority as part of the job evaluation. The implicit message to employers who use the job-based pay structure conduct performance appraisals to measure the employee's contributions to the company.

Usefulness

Some business owners are finding that job-based pay structures do not suit their organizational strategies. They are seeking pay structures that align with their work environments. As companies have changed their work environments they are basing salaries on other structures that are more useful. For example, as more emphasis is placed on working as a team, companies are basing salaries of the efforts workers make as a member of a team.

Increased Operating Costs

Job-based pay structures can increase a company's operating costs, which is another disadvantage. For example, the company may have to hire a consulting firm to conduct compensation audits. The business may also have to revise its pay grades every year, which requires more administrative staff.

Evaluations

If job-based pay does not reward the best employees for their work, this can affect how employees are evaluated. When evaluating employee performance, employers that have job-based pay structures are limited in giving pay raises that take the worker's skills and experience into account. The fact that an employee's performance may be superb carries less weight in such structures.

Turn Over

Employees who are not rewarded for their job performance may quit because they feel that their contributions are not valuable to the company. For example, an employee whose contributions result in an increase in earnings or new clients will want to be rewarded. Employees can be rewarded with pay raises or bonuses. If the employee receives neither, he may seek employment with other companies.
ob Based Pay Structures
A job based pay structure is a structure of salary payments that is built on compensable factors determined by the job. In other words the salary for a job is determined by its responsibilities, and sometimes its work conditions.
The advantages are:
  • It is based on a hierarchical organizational structure, which is the organizational structure for most organizations.
  • It is simpler than a person based system as more work is required to define knowledge, skills and competencies required for a person based pay structure.
  • Most companies’ pay structures are job based pay structures. This means comparison is possible between companies.
  • The hierarchical order of the job structure created the illusion that there are some career paths and possibilities for promotions.
The disadvantages are:
  • It reinforces hierarchy and bureaucracy. It is less compatible with team based structures and incentives.
  • The hierarchical organizational structure that it is based on has fundamental weakness.
  • The job holder may not be competent in the job.
  • The job at the top is over paid and the job at the bottom is too paid low. It increases the overall business operating costs.
  • It encourages compromise of honesty in job descriptions and job valuations.
  • It does not reward employees directly for their knowledge, abilities and individual strengths.
  • It does not encourage development of a flexible organizational structure in terms of flatter structure; T-shaped employees and job rotation.
  • Some job evaluation systems take short cuts by using a generic set of compensable factors or develop the pay structure by using job classification.
Person Based Pay Structures
Like a job based structure, developing a person based pay structure also requires an understanding of the tasks and responsibilities of jobs in a business. Similarly the development of the structure requires job analysis and job descriptions. The difference is that it compensates the job incumbent (person) in terms of his knowledge, competencies and skills. These are called competency-based pay structure, skills-based pay structure or knowledge based pay structure.
A study made by Murray and Gerhart (1998) found that in a person based pay structure, although hourly wages increased, however product quality (scrap percentage), productivity (labour hours per part) improved and overall labor costs decreased (The Oxford Handbook of Human Resource Management By Peter F. Boxall, John Purcell, Patrick M. Wright).



What Is an Ethical Dilemma?

   There are three conditions that must be present for a situation to be considered an ethical dilemma. The first condition occurs in situations when an individual, called the “agent,” must make a decision about which course of action is best. Situations that are uncomfortable but that don’t require a choice, are not ethical dilemmas. For example, students in their internships are required to be under the supervision of an appropriately credentialed social work field instructor. Therefore, because there is no choice in the matter, there is no ethical violation or breach of confidentiality when a student discusses a case with the supervisor. The second condition for ethical dilemma is that there must be different courses of action to choose from. Third, in an ethical dilemma, no matter what course of action is taken, some ethical principle is compromised. In other words, there is no perfect solution.
    In determining what constitutes an ethical dilemma, it is necessary to make a distinction between ethics, values, morals, and laws and policies. Ethics are prepositional statements (standards) that are used by members of a profession or group to determine what the right course of action in a situation is. Ethics rely on logical and rational criteria to reach a decision, an essentially cognitive process (Congress, 1999; Dolgoff, Loewenberg, & Harrington, 2009; Reamer, 1995; Robison & Reeser, 2002). Values, on the other hand, describe ideas that we value or prize. To value something means that we hold it dear and feel it has worth to us. As such, there is often a feeling or affective component associated with values (Allen & Friedman, 2010). Often, values are ideas that we aspire to achieve, like equality and social justice. Morals describe a behavioral code of conduct to which an individual ascribes. They are used to negotiate, support, and strengthen our relationships with others (Dolgoff, Loewenberg, & Harrington, 2009).
Finally, laws and agency policies are often involved in complex cases, and social workers are often legally obligated to take a particular course of action. Standard 1.07j of the Code of Ethics (NASW, 1996) recognizes that legal obligations may require social workers to share confidential information (such as in cases of reporting child abuse) but requires that we protect confidentiality to the “extent permitted by law.” Although our profession ultimately recognizes the rule of law, we are also obligated to work to change unfair and discriminatory laws. There is considerably less recognition of the supremacy of agency policy in the Code, and Ethical Standard 3.09d states that we must not allow agency policies to interfere with our ethical practice of social work.
    It is also essential that the distinction be made between personal and professional ethics and values (Congress, 1999; Wilshere, 1997). Conflicts between personal and professional values should not be considered ethical dilemmas for a number of reasons. Because values involve feelings and are personal, the rational process used for resolving ethical dilemmas cannot be applied to values conflicts. Further, when an individual elects to become a member of a profession, he or she is agreeing to comply with the standards of the profession, including its Code of Ethics and values. Recent court cases have supported a profession’s right to expect its members to adhere to professional values and ethics. (See, for example, the Jennifer Keeton case at Augusta State University and the Julea Ward case at Eastern Michigan University.) The Council on Social Work Education states that students should “recognize and manage personal values in a way that allows professional values to guide practice” (EPAS 1.1). Therefore, although they can be difficult and uncomfortable, conflicts involving personal values should not be considered ethical dilemmas.
Two Types of Dilemmas  
    An “absolute” or “pure” ethical dilemma only occurs when two (or more) ethical standards apply to a situation but are in conflict with each other. For example, a social worker in a rural community with limited mental health care services is consulted on a client with agoraphobia, an anxiety disorder involving a fear of open and public spaces. Although this problem is outside of the clinician’s general competence, the limited options for treatment, coupled with the client`s discomfort in being too far from home, would likely mean the client might not receive any services if the clinician declined on the basis of a lack of competence (Ethical Standard 1.04). Denying to see the patient then would be potentially in conflict with our commitment to promote the well-being of clients (Ethical Standard 1.01). This is a pure ethical dilemma because two ethical standards conflict. It can be resolved by looking at Ethical Standard 4.01, which states that social workers should only accept employment (or in this case, a client) on the basis of existing competence or with “the intention to acquire the necessary competence.” The social worker can accept the case, discussing the present limits of her expertise with the client and following through on her obligation to seek training or supervision in this area.
    However, there are some complicated situations that require a decision but may also involve conflicts between values, laws, and policies. Although these are not absolute ethical dilemmas, we can think of them as “approximate” dilemmas. For example, an approximate dilemma occurs when a social worker is legally obligated to make a report of child or domestic abuse and has concerns about the releasing of information. The social worker may experience tension between the legal requirement to report and the desire to respect confidentiality. However, because the NASW Code of Ethics acknowledges our obligation to follow legal requirements and to intervene to protect the vulnerable, technically, there is no absolute ethical dilemma present. However, the social worker experiences this as a dilemma of some kind and needs to reach some kind of resolution. Breaking the situation down and identifying the ethics, morals, values, legal issues, and policies involved as well as distinguishing between personal and professional dimensions can help with the decision-making process in approximate dilemmas. Table 1 (at beginning of this article) is an illustration of how these factors might be considered.
Conclusion
    When writing an ethical dilemma paper or when attempting to resolve an ethical dilemma in practice, social workers should determine if it is an absolute or approximate dilemma; distinguish between personal and professional dimensions; and identify the ethical, moral, legal, and values considerations in the situation. After conducting this preliminary analysis, an ethical decision-making model can then be appropriately applied. Ethical Dilemma Table 1




How to Resolve Ethical Dilemmas in the Workplace

Employees make decisions at all levels of a company, whether at the top, on the front line or anywhere in between. Every employee in an organization is exposed to the risk of facing an ethical dilemma at some point, and some ethical decisions can be more challenging to fully understand than others. Knowing how to resolve ethical dilemmas in the workplace can increase your decision-making effectiveness while keeping you and your company on the right side of the law and public sentiment.

1. Consult your company's code of ethics for formal guidance. This simple act may be able to resolve your dilemma immediately, depending on how comprehensive and specific your company's ethics statement is. Your code of ethics can provide a backdrop on which to weigh the pros and cons of business decisions, giving you a clearer picture of which decision is more in line with the company's ethical commitments.
2. Share your dilemma with your supervisor to take advantage of her experience. Front-line employees can face a number of ethical dilemmas in their jobs, such as deciding whether to give out a refund that does not specifically adhere to company policies or whether to report suspicions of internal theft which cannot be proven. Taking ethical questions to supervisors can keep employees out of trouble in addition to resolving conflicts.
3. Discuss your dilemma with other executives if you are at the top of your organization. Executives and company owners make some of the farthest-reaching decisions in any organization, adding weight and additional challenges to ethical dilemmas. As an executive, it is important to show your competence at solving problems on your own, but there is nothing wrong with asking for help from time to time. Other executive team members should appreciate your commitment to making the right decision and should be able to provide unique insights into your problem.
4. Speak with peers and colleagues from other companies if you can do so without divulging company secrets. If you are a sole proprietor, you may not have any other top-level managers to consult with. Seek out someone you trust from a business networking group, a previous employer or your college years to gain insight from others. Consider speaking with friends from diverse cultural backgrounds to gain an even wider range of insights.
5. Read past news articles about other companies faced with your specific dilemma. Determine how others have dealt with your challenge before and take note of the outcome of their decisions. News outlets like to cover certain large company decisions, such as laying off workers, endorsing political candidates and bending accounting rules, which can have ethical impacts in society. Reading what happened to others after making their decisions can give you a glimpse into what to expect if you make a similar decision.


Ethical Dilemmas in the Workplace for Employees

How to Spot Abusive Behavior and What to Do About it
This is the first of a two-part series on ethical conflicts in the workplace. The next blog deals with employee-generated actions that can have legal consequences. Today I deal with discriminatory actions by one’s employer that go unresolved.
Have you been sexually harassed by a co-worker or your supervisor? Are you a victim of gender discrimination? Have you been cyber-bullied in the workplace? These are three of the most troubling issues that cause distress for an employee and create ethical dilemmas in the workplace. I have previously blogged about these issues and provide links to them below for more comprehensive coverage. My goal today is to provide advice on how to spot discrimination and what to do about it.
Sexual Harassment
Sexual harassment is a form of sex discrimination. The legal definition of sexual harassment is “unwelcome verbal, visual, or physical conduct of a sexual nature that is severe or pervasive and affects working conditions or creates a hostile work environment.”
A hostile work environment is defined as: sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature, when such advances, requests, or conduct have the purpose or effect of unreasonably interfering with an individual's work performance by creating an intimidating, hostile, humiliating, or sexually offensive work environment.
To show a hostile work environment, an employee must prove the following.
  1. He/she was subjected to conduct of a sexual nature (e.g., inappropriate touching, sexual epithets, jokes, gossip, sexual comments, requests for sex, sexually suggestive pictures and objects, leering, whistling, sexual gestures).
  2. The conduct was unwelcome.
  3. The conduct had the purpose or effect of creating an intimidating, hostile, humiliating, or sexually offensive work environment.
  4. The conduct unreasonably interfered with the employee's work performance or altered the terms and conditions of employment.
Be sure to document your concerns – what did the abuser do or say? When did he do it or say it? What did you say to him? How did he react to your concerns? Give a copy of the document to a trusted advisor or lawyer for use in any future legal action. The advisor can attest to the fact you provided the document on a specific day so that it wasn’t created after the fact.
Let’s assume your boss threatens to stifle your career advancement unless you sleep with him. This is unlawful whether you submit and avoid the threatened harm or resist and suffer the consequences. Your first step should be to make it clear to your boss this is an unwelcomed advance. If the offensive behavior persists, you should report it to the HR Department where Equal Employment Opportunity Commission (EEOC) matters are dealt with. You can also file a complaint with the EEOC and/or your state’s fair employment agency.
Gender Discrimination
Gender bias is wrong in any form whether based on age, sex, or sexual orientation. The law has not caught up with the rights of transgender individuals but the spirit of the law should protect trans people in the workplace. The workplace should be a welcoming environment and the culture one of inclusion.
Gender identity issues have surfaced recently because of the landmark opinion by the U.S. Supreme Court on June 26, 2015, that established same-sex couples can marry nationwide. It’s not a leap to focus attention on the rights of the LGBT community. The basic ethical principal here is one of fair treatment. Each of us deserves respect for who we are. Discriminating against anyone based on gender identity is wrong. After all, what does this have to do with workplace performance?
Gender identity discrimination can include terminating a transgender employee after the employer finds out about the employee's gender identity or planned transition; denying a transgender employee access to workplace restroom facilities available to other employees; harassing a transgender employee; permitting and/or refusing to investigate claims of harassment by coworkers and supervisors; or any other negative employment action taken because of an employee's gender identity.
Discrimination based on gender identity is not specifically prohibited under federal law but there are legislative efforts to pass federal laws to make it explicitly illegal. There is also some case law interpreting sex discrimination laws to encompass gender identity in certain circumstances. Protection from gender identity discrimination is enforced by state or local anti-discrimination agencies in 18 states.
Given the relative newness of gender identity issues, I suggest you first contact The Human Rights Campaign for advice and emotional support. HRC works to achieve equality for the LGBT community and represents a force of more than 1.5 million members and supporters nationwide.
Cyber-bullying
Workplace Bullying refers to repeated, unreasonable actions of individuals (or a group) directed towards an employee (or a group of employees), which are intended to intimidate, degrade, humiliate, or undermine, or which create a risk to the health or safety of the employee(s) including physical and emotional stress.
Workplace Bullying often involves an abuse or misuse of power. Bullying behavior creates feelings of defenselessness and injustice in the target and undermines an individual’s right to dignity at work. Bullying is different from aggression. Whereas aggression may involve a single act, bullying involves repeated attacks against the target, creating an on-going pattern of behavior. “Tough” or “demanding” bosses are not necessarily bullies so long as they are respectful and fair and their primary motivation is to obtain the best performance by setting high yet reasonable expectations for working safely.
Cyber Bullying in the Workplace usually looks like offensive emails or text messages containing jokes or inappropriate wording towards a specific race, nationality, or about sexual preference. In these cases, the words uttered have a direct effect on the target of the bullying act through threatening email being sent to the target anonymously or not. It might include a response that is copied and pasted for the whole office to see.
Sharing embarrassing situations relating to the target with everyone online, being offensive and mean to the target on various social media websites and networks, spreading rumors or gossip online which could have a serious effect on a fellow co-worker, and downright mean-spirited actions are meant to harm the target whether on a personal or professionals level.
Cyber bullying can cause significant emotional distress and significantly lead to diminished workplace performance. The danger of cyber bullying in the workplace is that it follows you home after working hours. The target is put under constant harassment even when the working hours are over. The only way to avoid such harassment is having it reported to try and put an end to it.
Cyber bullying in the workplace needs to be addressed through promoting a work environment that refuses to nurture a bully. As with most actions in the workplace, the best way to prevent cyber bullying is to create an ethical culture in the organization. Top management must make it clear that any form of bullying will not be tolerated.

What Is Effective Listening?

What Is Effective Listening?

For people who have not done public speaking, it may seem like speaking before a crowd is different than speaking, say, to a friend over a mocha latte. But really, it is quite the same. If you think of an audience as a group of individuals gathered in one place, then you will understand why it is so important to listen to each member as an individual.
Let's break this down. When you are chatting with a friend, your focus is on the conversation. You nod at the right times and respond with feedback in appropriate measure.
All of these behaviors tell your friend that you are interested in what she has to say. That is effective listening, and it really means hearing the message being sent, making meaning of it and responding in a way that lets the sender know you truly understand.
When you are speaking before a crowd, it is pretty much the same way. Things like eye contact with the individual members and non-verbal communication techniques tell the audience that you are engaged.
So now, let's reverse this. Since you are the public speaker, you are not really conversing as much as you are talking. But you still must listen in the same way and for the same things. So, what exactly are you listening for?

Effective Listening When Public Speaking

For one thing, the speaker should understand the audience's mood. Just like individuals, groups of people gathered together have a mood. If the audience roars with excitement as the speaker approaches the podium, it is obvious they are excited about the event. If there is silence, well, not so much!
And this mood can change as the speech evolves. The vivacious enthusiasm demonstrated by the audience at the beginning of the speech can change drastically if the speaker says something out of line. Don't worry, here are a few things you can do to be sure you not only reach your audience but also keep them interested.
First, observe them. You can do this by watching their body language. Things like making eye contact, nodding in agreement and even clapping are clues that the group is into what you are saying.
You can also pause between points. If you take a few moments to assess their interest level between thoughts, you will know whether they are still roped in. A muddled audience may look around at each other or just stare into space. You can quickly change tunes and clarify the confusion.
Another way to effectively listen is to actively involve the audience in your speech. You can do this by asking questions and exchanging thoughts and ideas.
Sometimes, there is just no getting through to an audience because there are barriers to the communication process. A public speaker does not have to needlessly fret over this. There are ways to overcome them.

Eight barriers to effective listening

More attention is usually paid to making people better speakers or writers (the "supply side" of the communication chain) rather than on making them better listeners or readers (the "demand side"). The most direct way to improve communication is by learning to listen more effectively.
Nearly every aspect of human life could be improved by better listening -- from family matters to corporate business affairs to international relations.
Most of us are terrible listeners. We're such poor listeners, in fact, that we don't know how much we're missing.
The following are eight common barriers to good listening, with suggestions for overcoming each.

#1 - Knowing the answer

"Knowing the answer" means that you think you already know what the speaker wants to say, before she actually finishes saying it. You might then impatiently cut her off or try to complete the sentence for her.
Even more disruptive is interrupting her by saying that you disagree with her, but without letting her finish saying what it is that you think you disagree with. That's a common problem when a discussion gets heated, and which causes the discussion to degrade quickly.
By interrupting the speaker before letting her finish, you're essentially saying that you don't value what she's saying. Showing respect to the speaker is a crucial element of good listening.
The "knowing the answer" barrier also causes the listener to pre-judge what the speaker is saying -- a kind of closed-mindedness.
A good listener tries to keep an open, receptive mind. He looks for opportunities to stretch his mind when listening, and to acquire new ideas or insights, rather than reinforcing existing points of view.

Strategy for overcoming this barrier

A simple strategy for overcoming the "knowing the answer" barrier is to wait for three seconds after the speaker finishes before beginning your reply.
Three seconds can seem like a very long time during a heated discussion, and following this rule also means that you might have to listen for a long time before the other person finally stops speaking. That's usually a good thing, because it gives the speaker a chance to fully vent his or her feelings.
Another strategy is to schedule a structured session during which only one person speaks while the other listens. You then switch roles in the next session.
It's worth emphasizing that the goal of good listening is simply to listen -- nothing more and nothing less.
During the session when you play the role of listener, you are only allowed to ask supportive questions or seek clarification of the speaker's points. You may not make any points of your own during this session. That can be tricky, because some people's "questions" tend to be more like statements.
Keeping the mind open during conversation requires discipline and practice. One strategy is to make a commitment to learn at least one unexpected, worthwhile thing during every conversation. The decision to look for something new and interesting helps make your mind more open and receptive while listening.
Using this strategy, most people will probably discover at least one gem -- and often more than one -- no matter whom the conversation is with.

#2 - Trying to be helpful

Another significant barrier to good listening is "trying to be helpful". Although trying to be helpful may seem beneficial, it interferes with listening because the listener is thinking about how to solve what he perceives to be the speaker's problem. Consequently, he misses what the speaker is actually saying.
An old Zen proverb says, "When walking, walk. When eating, eat." In other words, give your whole attention to whatever you're doing. It's worth emphasizing that the goal of good listening is simply to listen -- nothing more and nothing less. Interrupting the speaker in order to offer advice disrupts the flow of conversation, and impairs the listener's ability to understand the speaker's experience.
Many people have a "messiah complex" and try to fix or rescue other people as a way of feeling fulfilled. Such people usually get a kick out of being problem-solvers, perhaps because it gives them a sense of importance. However, that behavior can be a huge hurdle to good listening.
Trying to be helpful while listening also implies that you've made certain judgments about the speaker. That can raise emotional barriers to communication, as judgments can mean that the listener doesn't have complete understanding or respect for the speaker.
In a sense, giving a person your undivided attention while listening is the purest act of love you can offer. Because human beings are such social animals, simply knowing that another person has listened and understood is empowering. Often that's all a person needs in order to solve the problems on his or her own.
If you as a listener step in and heroically offer your solution, you're implying that you're more capable of seeing the solution than the speaker is.
If the speaker is describing a difficult or long-term problem, and you offer a facile, off-the-cuff solution, you're probably forgetting that he or she may have already considered your instant solution long before.

Strategy for overcoming this barrier

Schedule a separate session for giving advice. Many people forget that it's rude to offer advice when the speaker isn't asking for it. Even if the advice is good.
In any case, a person can give better advice if he first listens carefully and understands the speaker's complete situation before trying to offer advice.
If you believe you have valuable advice that the speaker isn't likely to know, then first politely ask if you may offer what you see as a possible solution. Wait for the speaker to clearly invite you to go ahead before you offer your advice.

#3 - Treating discussion as competition

Some people feel that agreeing with the speaker during a heated discussion is a sign of weakness. They feel compelled to challenge every point the speaker makes, even if they inwardly agree. Discussion then becomes a contest, with a score being kept for who wins the most points by arguing.
Treating discussion as competition is one of the most serious barriers to good listening. It greatly inhibits the listener from stretching and seeing a different point of view. It can also be frustrating for the speaker.

Strategy for overcoming this barrier

Although competitive debate serves many useful purposes, and can be great fun, debating should be scheduled for a separate session of its own, where it won't interfere with good listening.
Except in a very rare case where you truly disagree with absolutely everything the speaker is saying, you should avoid dismissing her statements completely. Instead, affirm the points of agreement.
Try to voice active agreement whenever you do agree, and be very specific about what you disagree with.
A good overall listening principle is to be generous with the speaker. Offer affirmative feedback as often as you feel comfortable doing so. Generosity also entails clearly voicing exactly where you disagree, as well as where you agree.

#4 - Trying to influence or impress

Because good listening depends on listening just for the sake of listening, any ulterior motive will diminish the effectiveness of the listener. Examples of ulterior motives are trying to impress or to influence the speaker.
A person who has an agenda other than simply to understand what the speaker is thinking and feeling will not be able to pay complete attention while listening.
Psychologists have pointed out that people can understand language about two or three times faster than they can speak. That implies that a listener has a lot of extra mental "bandwidth" for thinking about other things while listening. A good listener knows how to use that spare capacity to think about what the speaker is talking about.
A listener with an ulterior motive, such as to influence or impress the speaker, will probably use the spare capacity to think about his "next move" in the conversation -- his rebuttal or what he will say next when the speaker is finished -- instead of focusing on understanding the speaker.

Strategy for overcoming this barrier

"Trying to influence or impress" is a difficult barrier to overcome, because motives usually can't just be willed away. Deciding not to have a motive usually only drives it beneath your awareness so that it becomes a hidden motive.
One strategy is to make note of your internal motives while you're listening. As you notice your motives in progressively closer and finer detail, you'll eventually become more fully conscious of ulterior motives, and they may even unravel, allowing you to let go and listen just for the sake of listening.

#5 - Reacting to red flag words

Words can provoke a reaction in the listener that wasn't necessarily what the speaker intended. When that happens the listener won't be able to hear or pay full attention to what the speaker is saying.
Red flag words or expressions trigger an unexpectedly strong association in the listener's mind, often because of the listener's private beliefs or experiences.
Technology is often seen as the driver of improved communications, but technology, in itself, creates noise and discord as much as it melds minds.
Good listeners have learned how to minimize the distraction caused by red flag words, but a red flag word will make almost any listener momentarily unable to hear with full attention.
An important point is that the speaker may not have actually meant the word in the way that the listener understood. However, the listener will be so distracted by the red flag that she will not notice what the speaker actually did mean to say.
Red flag words don't always provoke emotional reactions. Sometimes they just cause slight disagreements or misunderstandings. Whenever a listener finds himself disagreeing or reacting, he should be on the lookout for red flag words or expressions.

Strategy for overcoming this barrier

When a speaker uses a word or expression that triggers a reflexive association, you as a good listener can ask the speaker to confirm whether she meant to say what you think she said.
When you hear a word or expression that raises a red flag, try to stop the conversation, if possible, so that you don't miss anything that the speaker says. Then ask the speaker to clarify and explain the point in a different way.

#6 - Believing in language

One of the trickiest barriers is "believing in language" -- a misplaced trust in the precision of words.
Language is a guessing game. Speaker and listener use language to predict what each other is thinking. Meaning must always be actively negotiated.
It's a fallacy to think that a word's dictionary definition can be transmitted directly through using the word. An example of that fallacy is revealed in the statement, "I said it perfectly clearly, so why didn't you understand?". Of course, the naive assumption here is that words that are clear to one person are clear to another, as if the words themselves contained absolute meaning.
Words have a unique effect in the mind of each person, because each person's experience is unique. Those differences can be small, but the overall effect of the differences can become large enough to cause misunderstanding.
A worse problem is that words work by pointing at experiences shared by speaker and listener.
If the listener hasn't had the experience that the speaker is using the word to point at, then the word points at nothing. Worse still, the listener may quietly substitute a different experience to match the word.

Strategy for overcoming this barrier

You as a good listener ought to practice mistrusting the meaning of words. Ask the speaker supporting questions to cross-verify what the words mean to him.
Don't assume that words or expressions mean exactly the same to you as they do to the speaker. You can stop the speaker and question the meaning of a word. Doing that too often also becomes an impediment, of course, but if you suspect that the speaker's usage of the word might be slightly different, you ought to take time to explore that, before the difference leads to misunderstanding.

#7 - Mixing up the forest and the trees

A common saying refers to an inability "to see the forest for the trees". Sometimes people pay such close attention to detail, that they miss the overall meaning or context of a situation.
Some speakers are what we will call "trees" people. They prefer concrete, detailed explanations. They might explain a complex situation just by naming or describing its characteristics in no particular order.
Other speakers are "forest" people. When they have to explain complex situations, they prefer to begin by giving a sweeping, abstract, bird's-eye view.
Good explanations usually involve both types, with the big-picture "forest" view providing context and overall meaning, and the specific "trees" view providing illuminating examples.
When trying to communicate complex information, the speaker needs to accurately shift between forest and trees in order to show how the details fit into the big picture. However, speakers often forget to use "turn indicators" to signal that they are shifting from one to another, which can cause confusion or misunderstanding for the listener.
Each style is prone to weaknesses in communication. For example, "trees" people often have trouble telling their listener which of the details are more important and how those details fit into the overall context. They can also fail to tell their listener that they are making a transition from one thought to another -- a problem that quickly shows up in their writing, as well.
"Forest" people, on the other hand, often baffle their listeners with obscure abstractions. They tend to prefer using concepts, but sometimes those concepts are so removed from the world of the senses that their listeners get lost.
"Trees" people commonly accuse "forest" people of going off on tangents or speaking in unwarranted generalities. "Forest" people commonly feel that "trees" people are too narrow and literal.

Strategy for overcoming this barrier

You as a good listener can explicitly ask the speaker for overall context or for specific exemplary details, as needed. You should cross-verify by asking the speaker how the trees fit together to form the forest. Having an accurate picture of how the details fit together is crucial to understanding the speaker's thoughts.
An important point to remember is that a "trees" speaker may become confused or irritated if you as the listener try to supply missing context, and a "forest" speaker may become impatient or annoyed if you try to supply missing examples.
A more effective approach is to encourage the speaker to supply missing context or examples by asking him open-ended questions.
Asking open-ended questions when listening is generally more effective than asking closed-ended ones.
For example, an open-ended question such as "Can you give me a concrete example of that?" is less likely to cause confusion or disagreement than a more closed-ended one such as "Would such-and-such be an example of what you're talking about?"
Some speakers may even fail to notice that a closed-ended question is actually a question. They may then disagree with what they thought was a statement of opinion, and that will cause distracting friction or confusion.
The strategy of asking open-ended questions, instead of closed-ended or leading questions, is an important overall component of good listening.

#8 - Over-splitting or over-lumping

Speakers have different styles of organizing thoughts when explaining complex situations. Some speakers, "splitters", tend to pay more attention to how things are different. Other speakers, "lumpers", tend to look for how things are alike. Perhaps this is a matter of temperament.
If the speaker and listener are on opposite sides of the splitter-lumper spectrum, the different mental styles can cause confusion or lack of understanding.
A listener who is an over-splitter can inadvertently signal that he disagrees with the speaker over everything, even if he actually agrees with most of what the speaker says and only disagrees with a nuance or point of emphasis.
That can cause "noise" and interfere with the flow of conversation. Likewise, a listener who is an over-lumper can let crucial differences of opinion go unchallenged, which can lead to a serious misunderstanding later. The speaker will mistakenly assume that the listener has understood and agreed.
It's important to achieve a good balance between splitting (critical thinking) and lumping (metaphorical thinking). Even more important is for the listener to recognize when the speaker is splitting and when she is lumping.

Strategy for overcoming this barrier

An approach to overcoming this barrier when listening is to ask questions to determine more precisely where you agree or disagree with what the speaker is saying, and then to explicitly point that out, when appropriate.
For example, you might say, "I think we have differing views on several points here, but do we at least agree that ... ?" or "We agree with each other on most of this, but I think we have different views in the area of ...."
By actively voicing the points of convergence and divergence, the listener can create a more accurate mental model of the speaker's mind. That reduces the conversational noise that can arise when speaker and listener fail to realize how their minds are aligned or unaligned.

Quadrant of cognitive/explanatory styles

More than one barrier may often be present at once. For example, a speaker might be an over-splitter who has trouble seeing the forest, while the listener is an over-lumper who can see only the forest and never the trees. They will have even more difficulty communicating if one or both also has the habit of "knowing the answer" or "treating discussion as competition".
. . .
Good listening is arguably one of the most important skills to have in today's complex world. Families need good listening to face complicated stresses together. Corporate employees need it to solve complex problems quickly and stay competitive. Students need it to understand complex issues in their fields. Much can be gained by improving listening skills.
When the question of how to improve communication comes up, most attention is paid to making people better speakers or writers (the "supply side" of the communication chain) rather than on making them better listeners or readers (the "demand side").
More depends on listening than on speaking. An especially skillful listener will know how to overcome many of the deficiencies of a vague or disorganized speaker. On the other hand, it won't matter how eloquent or cogent a speaker is if the listener isn't paying attention.
The listener arguably bears more responsibility than the speaker for the quality of communication.



















Power and Politics?

The organization is a complex entity of interacting individuals. The kinds of interactions are dictated by individual interests and organizational interests and structure.
The realities of organizational decision making are that the interests of the decision maker and those of the organization, are at best overlapping, but never synonymous. (Overlapping circles.)
Decision makers act in their self interests first, and are not likely to sublimate their own interests to those of the organization. Decisions will be taken to enhance their own power, and these do not always coincide with an organization's best interests. eg: phasing out one's own department may be best, but which department head would do that. Rather they seek expansion of their own power domain.
Organizations are made up of individuals who are grouped into coalitions of interests. Coalitions form to protect and improve their vested interests. Often they are formed along departmental lines, but not always.

Interests

This refers to the political interests in the organization. The different subunits in an organization are not neutral. Each group has a distinct set of interests which is frequently at odds with other groups. The groups compete for favourable allocation of resources.
The structure of an organization is a crucial determinant of the flow of the distribution of resources, therefor built into the organization is a structure of advantage and disadvantage. It is in the interests of a group to have resources distributed in its favour. So interests refer to the relationship between an individual or group and the distribution of organizational resources. Interests are concerned with securing a fair share of organizational resources, and are expressed through a motivation to enhance or defend a particular distribution of organizational resources.
There are of course competing interests in any organization.

Dependencies of Power

Organizational groups vary in their ability to influence the translation of their interests into favourable organizational arrangements; they have differential power.
Power is a capacity to determine outcomes, and structures are used to obtain and utilize power.
Organizations differ in the distribution of power. In some power is focussed and concentrated within a narrowly drawn coalition, in others power is relatively dispersed between a multiplicity of groups.
There is a difference between power and authority which has to be made clear. Authority refers to the rights and privileges accrued from a legally sanctioned position. Power refers to an individuals or group's capacity to influence - decisions, others etc. This separation is important, because in organizations they are not necessarily co-resident.

Individual Power

French and Raven have identified 5 sources of power in the individual:
  1. Legitimate power: Legally sanctioned power vested in the position. This power can be attained through appointment to a position, election to a position, or divine right.
  2. Reward power: the ability to bestow rewards that ate valued by another. This is often related to the position. Eg. Awarding bonuses.
  3. Punishment (coercive) power: the ability to coerce another by use of threats of punishment. Eg. Threatening to fire someone.
  4. Expert power: the ability to influence another by virtue of the expertise and knowledge one has, that is of value to the other.
  5. Referent (charismatic) power: the ability to influence by force of personality.

Organizational Power

In an organization we can talk about hierarchical power, lateral power and informal power.
  • Hierarchical power refers to ascribed power structure in an organization as defined by the different levels of management.
  • Lateral power is where the real power in an organization often lies. It defines the power among peers (Sables, 1979) and is attained through control of information or resources, a high level of visibility and active coalition building.
  • Informal power is based on the network of relationships that underlies the formal power structure of an organization. It is through this informal network that vital information is exchanged, important contacts are made and developed, that will eventually be translated to formal and lateral power.

Routes to the Acquisition of Power

There are six routes to the acquisition of power in an organization.
  1. Hierarchical authority: Here influence is sanctioned by position and the position defines rights and prerogatives, and often also control over resources.
  2. Control over resources: The scarcer and more important the resource, the greater the power. Lack of substitutability makes the resource even scarcer. This refers to skills as well. Those with non-substitutable skills have power. Control over resources can mean a restriction of options. The more a resource approaches criticality to the organization, the more power accrued to its holder. This is as true of information as other kinds of resources.
  3. Network centrality: Being in the right place in an organization is a source of power. This is not a random phenomenon. Who has centrality depends on organizational strategy, and the problems an organization faces at any given moment. And this often shifts according to environmental demands.
  4. Discretion: the freedom to exercise ones judgment rather than referring to specific rules.
  5. Visibility: being seen as possessing valuable resources is critical in attaining power.
  6. Non-substitutability: possessing knowledge and/or skills which are not easily substituted in the organization. This is on the personal level. On the group level, forming a collectivity such as a union can give power to individually substitutable employees.
Vying for power and control is often a source of conflict.



Power has been an important aspect of human civilization since time immemorial. Power might be physical, political or social. In the context of business as well, power dynamics tend to influence decisions and people transactions heavily. So defining power can be difficult as it is understood and interpreted in several ways however power can definitely not be called a force which gets you what you want. Power basically emanates from position or authority which can influence people both positively and negatively.
For simplicity and understanding purposes power is usually classified into following categories:
  1. Coercive Power- This kind of power involves the usage of threat to make people do what one desires. In the organizational set up, it translates into threatening someone with transfer, firing, demotions etc. it basically forces people to submit to one’s demand for the fear of losing something.
  2. Reward Power- As the name suggests, this type of power uses rewards, perks, new projects or training opportunities, better roles and monetary benefits to influence people. However an interesting aspect of this type of power is that, it is not powerful enough in itself, as decisions related to rewards do not rest solely with the person promising them, because in organizations, a lot of other people come into play like senior managers and board.
  3. Legitimate Power- This power emanates from an official position held by someone, be it in an organization, beurocracy or government etc. The duration of this power is short lived as a person can use it only till the time he/she holds that position, as well as, the scope of the power is small as it is strictly defined by the position held.
  4. Expert Power- This is a personal kind of power which owes its genesis to the skills and expertise possessed by an individual, which is of higher quality and not easily available. In such a situation, the person can exercise the power of knowledge to influence people. Since, it is very person specific and skills can be enhanced with time; it has more credibility and respect.
  5. Referent Power- This is a power wielded by celebrities and film stars as they have huge following amongst masses who like them, identify with them and follow them. Hence, they exert lasting influence on a large number of people for a large number of decisions; like from what car to buy to which candidate to choose for a higher office in the country.
So, power can be defined in a number of ways however what is important is the usage of the power by people who possess it. Within the organizational context the power dynamics and equations need to be carefully managed as they have a huge impact on the motivation and engagement level of employees. It also defines the organization’s culture in general and people transactions within the organization in particular. A very hierarchy and power driven organization finds it difficult to accommodate new and innovative ideas, any change is vehemently refused, egos clash and lesser opportunities are made available for the high performers, thus delaying organizational growth. On the other hand, in an organization which is flat in structure, people are encouraged to innovate and explore, thus bringing in new concepts and ideas to accelerate organizational growth and expansion.

Sunday, 26 March 2017

Baumol's Theory of Sales Revenue Maximisation?Marris Growth Maximization Model?

Prof. Baumol, in his book 'Business behaviour, Value and Growth' has propounded a theory of Sales Maximisation. Main aim of a firm is to maximise sales. By sales he meant total revenue earned by the sale of goods. That is why this goal is also referred to as Sales Maximisation Goal. According to this theory, once profits reach acceptable levels, the goal of the firms become maximisation of sales revenue rather than maximisation of profits.

In the words of Baumoul, 'The sales maximisation goal says that managers of firms seek to maximise their sales revenue subject to the constraint of earning a satisfactory profits. "


The above definition maintains that when the profits of firms reach a level considered satisfactory by the shareholders then the efforts of the managers are directed to maximise revenue by promoting sales instead of maximising profit. While studying this theory. K must be kept in view that firms do not Ignore profit altogether. They do aspire to attain a general level of profit. But once an acceptable level of profit is obtained their goal shifts to sales maximisation in place of profit maximisation.

Baumol raised serious questions on the validity of profit maximisation as an objective of the firm. He stressed that in competitive markets, firms would rather aim at maximising revenue, through maximisation of sales. According to him, sales volumes, and not profit volumes, determine market leadership in competition. He further stressed that in large organisations, management is separate from owners. Hence there would always be a dichotomy of managers' goals and owners' goals. Manager's salary and other benefits are largely linked with sales volumes, rather than profits.

Baumol hypothesised that managers often attach their personal prestige to the company's revenue or sales; therefore they would rather attempt to maximise the firm's total revenue, instead of profits. Moreover, sales volumes are better indicator of firm's position in the market, and growing sales strengthen the competitive spirit of the firm. Since operations of the firm are in the hands of managers, and managers' performance is measured in terms of achieving sales targets, therefore it follows that management is more interested in maximising sales, with a constraint of minimum profit. Hence the objective is not to maximise profit, but to maximise sales revenue, along with which, firms need to maintain a minimum level of profit to keep shareholder satisfied. This minimum level of profit is regarded as the profit constraint.

However, empirical evidence to support above arguments of Baumol is not sufficient to draw any definite conclusion. Whatever research has been done is based on inadequate data; hence the results are inconclusive.

Arguments in favour of Maximisation of Sales Goal

Following arguments are given in favour of maximisation of sales goal:


i. More Realistic: Goal of maximisation of sales is a more realistic goal- In fact, firms accord more importance to the goal of sales maximisation than profit maximisation. It is so because success of a firm is generally judged from its total sales. According to Ferguson and Krupps, 'Among the various alternatives advanced, Baumoul’s thesis has great advantage — it raises the other models in the direction of reality and plausibility while still permitting a rather general theoretical analysis."

ii. More Practical: Revenue maximisation thesis of Baumol is more practical. It is so because goal of revenue (Sales) maximisation leads to more production which, in turn, leads to fall in price. As a result, consumers' welfare is promoted. They also endorse this goal of the firms.

iii. More Availability of Loans: At the time of sanctioning loan to a firm, financial institutions mainly consider its sales. Prospects of loans are bright for such firms as have large total sales.

iv. Strong Position in the Market: Maximum sales of a firm symbolize its strong position in the market. Sales of a firm will be large only in that situation when consumers like its production, firm has more competitive power and has been expanding. All these features are indicative of the progress of the firm.

v. More Advantageous to the Managers: It is more to the advantage of the managers that the firm should aim at sates maximisation. This way their credibility enhances in the market. Maximum sales is a reflection of the competence of the managers It has a favorable effect on their wages. Firm is in a position to offer higher wages to the employees. Consequently, employer-employee relations become more cordial. II is the constant endeavour of the managers to maximize the sales of the firm after attaining a given level of profit.

Marris Growth Maximization Model:



Working on the principle of segregation of managers from owners, Marris proposed that owners (shareholders) aim at profits and market share, whereas managers aim at better salary, job security and growth. These two sets of goals can be achieved by maximising balanced growth of the firm (G), which is dependent on ihe growth rate of demand for the firm's products (GD) and growth rate of capital supply to the firm (GC). Hence growth rate of the firm is balanced when the demand for its product and the capital supply to the firm grow at the same rate.

Marris further said that firms face two constraints in the objective of maximisation of balanced growth, which are explained below:

i. Managerial Constraint

Among managerial constraints, Marris stressed on the importance of the role of human resource in achieving organisational objectives. According to him, skills, expertise, efficiency and sincerity of team managers are vital to the growth of the firm. Non availability of managerial skill sets in required size creates constraints for growth: organisations on their high levels of growth may face constraint of skill ceiling among the existing employees. New recruitments may be used to increase the size of the managerial pool with desired skills; however new recruits lack experience to make quick decisions, which may pose as another constraint.

ii. Financial Constraint


This relates to the prudence needed in managing financial resources. Marris suggested that a prudent financial policy will be based on at least three financial ratios, which in turn set the limit for the growth of the firm. In order to prove their discretion managers will normally create a tradeoff and prefer a moderate debt equity ratio (rj), moderate liquidity ratio (r2) and moderate retained profit ratio (r3). (Let us mention here that the ratios used in the financial constraint are dealt with in detail in any standard text book on Financial Management and are beyond the scope of this book). However a brief description is given hereunder:

(a) Debt equity ratio (r1) This is the ratio between borrowed capital and owners* capital. High value of debt equity ratio may cause insolvency; hence a low value of this ratio is usually preferred by managers to avoid insolvency. However, a low value of r, may create a constraint to the growth of the firm in terms of dependence on high cost capital, i.e., equity.

(b) Liquidity ratio (r2) This is the ratio between current assets and current liabilities and is an indicator of coverage provided by current assets to current liabilities. According to Marris, a manager would try to operate in a region where there is sufficient liquidity and safety and hence would prefer a high liquidity ratio. But a high r2 would imply low yielding assets, since liquid assets either do not earn at all (like cash and inventory), or earn low returns (like short term securities).

(c) Retention ratio (r3) This is the ratio between retained profits and total profits. In other words, it is the inverse of dividend payout ratio, i.e., the retained profits are that portion of net profit which is not distributed among shareholders. A high retention ratio is good for growth, as retained profits provide internal source of funds. However, a higher r3 would imply greater volume of retained profits, which may antagonise the shareholders. Hence managers cannot afford to keep a very high value of retention ratio.

Williamson’s Managerial Discretionary Theory:


The theory of Managerial Utility Maximisation was developed separately by Berle-Means-Galbralth and Williamson. It is also known as Managerial Discretion Theory. The Theory is based on the concept that shareholders or owners of the firm and managers are (two separate groups. The owners or the shareholders want high dividends and are. therefore, interested In maximising profits, the managers, on the other hand, have different motives other than profit maximisation. Once the managers have achieved a level of profit that will pay satisfactory dividends to shareholders and still ensure growth.

they are free to increase their own emoluments and also the size of their staff and expenditure on them. In the words of Williamson, "7b the extent that the pressure from the capital market and competition in the product market is imperfect, the manager, therefore, has discretion to pursue goals other than profits." Further Berle and Means suggested that "The lack of corporate democracy leaues owners or shareholders with little or no power to change corporation policy."

According to Williamson, "Managerial Utility function may be expressed as follows:

U = f(S, M. ID)

It will be read: Managerial utility is a function (f) of additional expenditure on staff, managerial emoluments and discretionary investment.

(Here, U = managerial utility; S = additional expenditure on staff; M = managerial emoluments and ID = discretionary investment).

Managerial utility function maximises the utility of the managers rather than profits of the firm. The manager is expected to follow policies which maximise the following components of his utility function.

i. Expansion of Staff: The manager will like to increase the quality and number of staff reporting to him. This will lead to an increase in the salary of the staff. More staff are valued because they lead to the manager getting more salary, more prestige and more security.

ii. Increase in Managerial Emoluments:
Managerial Utility also depends on managerial emoluments. It includes facilities like entertainment allowance, luxurious office, staff car, company phone, etc. Expenditure of this nature reflects to a large extent the prestige, power and status of the manager.

iii. Discretionary Power of Investment: Managerial utility also depends on the discretion of the manager to undertake investment beyond those required for normal operations. The manager is in a position to invest in advanced technology and modem plants. Such investments may or may not be economically efficient. These investments may be undertaken for the self-satisfaction of the manager.

According to the theory, in a firm, shareholders and managers are two separate groups. The firm tries to get maximum returns on investment and get maximum profit, whereas managers try to maximize profit in their satisfying function.

At last, Williamson’s managerial discretion theory shows the utility function of a manager. In this theory, the firm will try to get maximum returns or maximum profit where as manager try to maximum utility satisfying function. They are in equilibrium when the utility has maximum amount.

Elasticity of Demand?

Elasticity = responsiveness of consumer due to the price change of any commodity

Definitions

  • According to Alfred Marshall: "Elasticity of demand may be defined as the percentage change in quantity demanded to the percentage change in price."
  • According to A.K. Cairncross : "The elasticity of demand for a commodity is the rate at which quantity bought changes as the price changes."
  • According to J.M. Keynes : "The elasticity of demand is a measure of the relative change in quantity to a relative change in price."
  • According to Kenneth Boulding : "Elasticity of demand measures the responsiveness of demand to changes in price."

The law of demand tells us that consumers will respond to a price decrease by buying more of a product (other things remaining constant), but it does not tell us how much more.

The degree of responsiveness or sensitivity of consumers to a change in price is measured by the concept of price elasticity of demand

If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). The opposite also applies; a product is inelastic if a large change in price is accompanied by a small amount of change in demand.

Business know that they face demand curves, but rarely do they know what these curves look like. Yet sometimes a business needs to have a good idea of what part of a demand curve looks like if it is to make good decisions. If Rick's Pizza raises its prices by ten percent, what will happen to its revenues? The answer depends on how consumers will respond. Will they cut back purchases a little or a lot? This question of how responsive consumers are to price changes involves the economic concept of elasticity.

DEGREES OF PRICE ELASTICITY

Different commodities have different price elasticities. Some commodities have more elastic demand while others have relative elastic demand. Basically, the price elasticity of demand ranges from zero to infinity. It can be equal to zero, less than one, greater than one and equal to unity.

According to Dr. Marshall : "The elasticity or responsiveness of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price and diminishes much or little for a given rise in price."

However, some particular values of elasticity of demand have been explained as under ;

Types of Price Elasticity of Demand:-
  1. Perfectly elastic demand.
  2. Perfectly inelastic demand.
  3. Relatively elastic demand.
  4. Relatively inelastic demand.
  5. Unitary inelastic demand.

MEASUREMENT OF PRICE ELASTICITY OF DEMAND

There are five methods to measure the price elasticity of demand.
  1. Total Expenditure Method.
  2. Proportionate Method.
  3. Point Elasticity of Demand.
  4. Arc Elasticity of Demand.
  5. Revenue Method.

Total Expenditure Method

Dr. Marshall has evolved the total expenditure method to measure the price elasticity of demand. According to this method, elasticity of demand can be measured by considering the change in price and the subsequent change in the total quantity of goods purchased and the total amount of money spend on it.

Proportionate Method
This method is also associated with the name of Dr. Marshall. According to this method, "price elasticity of demand is the ratio of percentage change in the amount demanded to the percentage change in price of the commodity." It is also known as the Percentage Method, Flux Method, Ratio Method, and Arithmetic Method.

Ed = Proportionate change in Quantity Demanded
proportionate change in price

Arc Elasticity of Demand
  • According to Prof. Baumol: "Arc elasticity is a measure of the average responsiveness to price change exhibited by a demand curve over some finite stretch of the curve".
  • According to Leftwitch : "When elasticity is computed between two separate points on a demand curve, the concept is called Are elasticity."

                
                                            
Revenue Method
Mrs.; Joan Robinson has given this method. She says that elasticity of demand can be measured with the help of average revenue and marginal revenue. Therefore, a sale proceeds that a firm obtains by selling its products is called its revenue. However, when total revenue is divided by the number of units sold, we get average revenue. On the contrary, when addition is made to the total revenue by the sale of one more unit of the
commodity is called marginal revenue.

Formula:
                  Ed =   A   
                         A-M

where Ed represents elasticity of demand, A = average revenue and M = marginal revenue.

Perfectly Elastic Demand

When the percentage change in quantity demanded is infinite even if the percentage change in price is zero, the demand is said to be perfectly elastic. Endless demand at given price.

Observe the graph, price of the goods raised from P to P1 and remained constant. But the demand curve of the products is increasing from Q1 to Q2 and so on.
 
Eg:-  we can take example as bikes market.  In today’s Indian bike market The demand for bikes is increasing day by day without any effect of price change.

When the percentage change in quantity demanded is zero no matter how price is changed, the demand is said to be perfectly inelastic
Observe the graph, price of the goods changing or raises from P1 to P2 and P3 but there is no change in demand at Q.


Example: Emergency services, drugs and essential food item have perfectly inelastic demand. The price of food item may increase or decrease; there will be no change in the demand for goods
Or
An example of perfectly inelastic demand would be a lifesaving drug that people will pay any price to obtain. Even if the price of the drug were to increase dramatically, the quantity demanded would remain the same.

Relatively Elastic Demand



When the percentage change in quantity demanded is greater than the percentage change in price, the demand is said to be elastic.

Or

In other words, relatively small changes in price cause relatively large changes in quantity.

Observe the graph, price of the goods increased from P1 to P2 and eventually the demand for the goods decreases from Q1 to Q2. But the proportionate change in price is less than the proportionate change in demand


 
Example: - there are commodities for which a small change in price will drastically reduce the amount of the commodity demanded. For example, air-travel for vacationers is very sensitive to price. An increase in the air fare will lead the vacationer to choose another mode of transportation like car or lead him to postpone the vacation plan for the time being. Thus for a rise in air fare for the vacationers we will see a relatively more drastic reduction in quantity demanded and hence high price elasticity of demand.

Relatively Inelastic Demand

More change in the price of the goods but less change in demand for the goods.
Observe the graph, price of the goods increased from P1 to P2 and eventually the demand for the goods decreases from Q1 to Q2. The proportionate change in price is more than the proportionate change in demand.

 
Example: if we observe the prices of petrol and comparing its demand change with the change in price levels of petrol (even though the price changes to great extent, there will not be much change in demand)
Facts [+]

WASHINGTON: US motorists drove 1.2 per cent fewer miles in 2011, the lowest level measured since 2003, while concerns about the high cost of gasoline are rising, the government announced Tuesday.
According to Federal Highway Administration figures, last year US drivers drove 57.5 billion km less than they did in 2010.

Since 2008, the distance covered by US drivers, which is calculated by taking into account traffic volume on the highways, has fallen due to the economic crisis and the high price of gasoline. 

Unitary Elastic Demand

The proportion of change in demand is equal to proportion of change in price.


Observe the graph, price of the goods increased from P1 to P2 and eventually the demand for the goods decreases from Q1 to Q2. The proportionate change in price is equal the proportionate change in demand

Example: The price of digital cameras increases by 10%, the quantity of digital cameras demanded decreases by 10%.  The price elasticity of demand is (unitary elastic demand).

Problem on PED

The most common elasticity measurement is that of price elasticity of demand. It measures how much consumers respond in their buying decisions to a change in price. The basic formula used to determine price elasticity is

Problems:
              If price increases by 10% and consumers respond by decreasing purchases by 20%, the equation computes the elasticity coefficient as -2. The result is negative because an increase in price (a positive number) leads to a decrease in purchases (a negative number). Because the law of demand says it will always be negative, many economists ignore the negative sign, as we will in the following discussion.
Problem 1:
If the price of certain goods falls from 20/- to 10/-, that causes increase in the demand from43 units to 75 units. Calculate the price elasticity of demand.
Solution:
 I f the values are given separately and not in the percentages, we should apply the following formula model 1
  • ∆Q =change in the demand.(difference in demand) =43- 75= 32
  • ∆P=change in the price.(difference in the price) =20-10 = 10
  • P=initial price. (first price/ old price) =20
  • Q=initial demand. (first demand/ old demand)= 43
Here the answer is PED =1.48
We should compare the above value with the price which is 1%. And its general always.
Hence 1% of the price change causes the 1.48% change in demand


Easy way to remember: 

Elastic means that a change in price leads to a bigger Change in quantity demanded. Think of a rubber band, or elastic, that stretches to a bigger size than its original size. Inelastic means that a change in price leads to a smaller Change in quantity demanded. Unlike a rubber band, it does not stretch bigger.

Unit Elastic means that a change in price leads to a one-for-One change in quantity demanded. For example, a doubling of the price leads to a halving of the quantity demanded. Remember by unit, meaning single or one.