COMPENSATION, BENEFITS, AND WORK OPTIONS WEEK 10 (Part A) __________________________ Dr. Teal McAteer 2BC3

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

Some Questions about Compensation How much should employees be paid? What is the pay mix (base, benefits, promotion, ownership)? How much emphasis should be placed on keeping pay rates low? Should the system include pay incentives to reward individual performance?

Total Compensation Base Pay Pay Incentives 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.

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

6 Myths about Pay People work primarily for money Reality: 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

6 Myths about Pay 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

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

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)

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

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

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

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

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?

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

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?

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

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

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?