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COMPENSATION, BENEFITS, AND WORK OPTIONS

WEEK 3 (cont.)__________________________

Dr. Teal McAteer-Early

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Objectives of Today’s Lecture

• General issues re: compensation

• Myths about pay

• Study re: the effects of pay cuts

• Discussion re: secret vs open pay

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Some Questions about Compensation

1. How much should employees be paid?

2. What is the pay mix (base, benefits, promotion, ownership)?

3. How much emphasis should be placed on keeping pay rates low?

4. Should the system include pay incentives to reward individual performance?

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Total Compensation

• Base Pay– Fixed pay that is received on a regular basis– E.g., hourly wage; salary

• Pay Incentives– Designed to reward performance– E.g., merit pay, gainsharing, etc.

• Indirect Compensation / Benefits– Pensions, vacations, stock options, etc.

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Goals of Compensation Systems

• Effective compensation systems:– Attract potential employees to organization

– Retain existing employees

– Motivate employees

• Equity concerns – External equity

• Alignment (& perceived fairness) of pay relative to the marketplace

– Internal equity• Alignment (& perceived fairness) of pay relative to the pay of

others within the organization

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6 Myths about Pay

• Pfeffer, J. (1998). Six dangerous myths about pay. Harvard Business Review (May-June), 109-119.

1. People work primarily for money

• Reality:• People need money, but in most cases, work

provides people with meaning and enjoyment

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6 Myths about Pay

2. Labour rates = Labour costs

• Reality:• Labour rates = salary / time worked• Labour costs are a combination of wages

and productivity• It’s not what you pay but what you receive in

return• E.g. – next slide

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Example of Steel Minimills• 2 steel companies

– Company 1: pays $18.07/hr – Company 2: pays $21.52/hr– Assuming benefits are equal, which company

has higher labour costs?

• Company 2 required 34% fewer labour hours to produce 1 ton of steel and generated 63% less scrap– It could pay >$25/hr and still have lower labour

costs

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6 Myths about Pay

3. You can lower your labour costs by cutting labour rates

• Reality:• To reduce labour costs, a company must

address both pay and productivity• If a pay cut results in a corresponding

reduction in performance, labour costs remain the same (they may even increase)

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6 Myths about Pay

4. Labour costs constitute a significant portion of total costs

• Reality:• Is true in some cases – varies widely by

industry• The problem is that labour costs seem to be

the easiest to cut• E.g., layoffs, move production to location with lower

labour rates

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6 Myths about Pay

5. Low labour costs are an effective and sustainable source of competitive advantage

• Reality:• Labour costs are least sustainable

competitive weapon• Quality, customer service, innovation,

technological leadership are better strategies

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6 Myths about Pay

6. Individual incentive pay improves performance• Based on assumption that people will work hard

only if specifically rewarded for doing so

• Reality:• Individual incentives often have no impact on

performance• And they can undermine teamwork, foster

competition, and encourage short-term focus

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Study re: the Cost of Pay Cuts

• Greenberg, J. (1990). Employee theft as a reaction to underpayment inequity: The hidden cost of pay cuts. Journal of Applied Psychology, 75, 561-568.

• Study background– Company had lost 2 large contracts– In lieu of layoffs, company made temporary

pay cuts of 15% in 2 manufacturing plants

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Research Questions

• Based on equity theory– Would employees perceive the pay cut as

unfair and seek to redress this via theft?

– Would the nature of the reason provided for the pay cut influence the degree of theft that would occur?

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Rationales for Pay Cut

• In the 2 plants getting pay cut, the explanation for pay cut was varied– Plant A: Adequate explanation

• rationale for cut, management showed remorse

– Plant B: Inadequate explanation• rationale was minimal, no remorse

– Plant C: Control plant • A plant owned by same company where cuts were not

necessary

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Method

• Data collected every 2 weeks for 30 week period– 10 weeks before, during, and after pay cut– Plant A - n = 55; Plant B - n = 30; Plant C - n = 58– Measured theft using shrinkage measure (% of

inventory not accounted for by known usage, sales, etc)

– Any guesses?

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Mean percentage of employee theft as function of time relative to pay cut

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1

2

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Before During AfterTime period relative to pay cut

Mea

n %

the

ft

Inadequateexplanation

Adequateexplanation

Control

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Summary

• Increase in theft during underpayment period– Moderated by adequacy of explanation – Less theft when decision was not biased, authorities were

sensitive to employee point of view, decision based on adequate information

• Preexisting differences between plants may have influenced results

• Conclusion– Fairness re: pay cuts has significant influence on employee

negative reactions to pay cuts

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Open vs Secret Pay

• Should organizations make individual pay information available to its members?– Why or Why not?

• What are the potential advantages and disadvantages of:– keeping individual pay information secret?– disclosing individual pay information?