COMPENSATION, BENEFITS, AND WORK OPTIONS WEEK 10 (Part A) __________________________ Dr. Teal McAteer

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COMPENSATION, BENEFITS, AND WORK
OPTIONSWEEK 10 (Part A)_______________________
___Dr. Teal McAteer

• 2BC3

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Objectives

• General issues re compensation
• Myths about pay
• Study re the effects of pay cuts
• Discussion re secret vs open pay
• Review summary (Week 10 Part B) on Pay Systems
  Administration

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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.
• 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

• Labour rates Labour costs
• Reality
• Labour rates salary / time worked
• Labour costs are a combination of wages and
  productivity
• Its 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 gt25/hr and still have lower labour
  costs

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6 Myths about Pay

• 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

• 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

• 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

• 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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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?