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
2
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?
3
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
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others within the organization
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 focus12
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
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not necessary
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 % theft
Mean percentage of employee theft as
function of time relative to pay cut
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8
7
6
5
4
3
2
1
0
Inadequate
explanation
Adequate
explanation
Control
Before
During
After
Time period relative to pay cut
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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?
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