Case of the Unpopular Pay

7381 Words May 10th, 2012 30 Pages
Many managers have bought into expensive fictions about compensation, Haveyoul

SIX DANGEROUS MYTHS ABOUT PAY
BY JEFFREY PFEFFER

pays an average C average of $21.^2hourly wage of $18.07. ^^^^ second pays an an hour. Assuming that other directemployment costs, such as benefits, are the same for the two groups, which group has the higher labor eosts^ • • • • An airline is seeking to compete in the low-cost, low-frills segment of the U.S. market where, for obvious reasons, labor productivity and efficiency are crucial for competitive success. The company pays virtually no one on the basis of individual merit or performance. Does it stand a chance of successl • • • • A company that operates in an intensely competitive segment of the
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But according to data collected by Fairfield University Professor Jeffrey Artbur, its labor costs were much lower because tbe productivity of tbe mills was higher. The seeond set of mills actually required 34% fewer labor bours to produce a ton of steel tban tbe first set and also generated 63% less scrap. Tbe second set of mills eould bave raised workers' pay rate by 19% and still bad lower labor costs. Connected to tbe first mytb are three more mytbs tbat draw on tbe same logic. Wben managers believe tbat labor costs and labor rates are tbe same tbing, tbey also tend to believe tbat tbey can cut labor costs by cutting labor rates. That's Mytb #2. Again, tbis leaves out tbe important matter of productivity. I may replace my $2,ooo-a-week engineers witb ones tbat earn $500 a week, but my costs may skyrocket because tbe new, lower-paid employees are inexperienced, slow, and less capable. In that case, I would bave increased my costs by cutting my rates. Managers wbo mix up labor rates and labor costs also tend to accept Mytb #3: tbat labor costs are a significant portion of total costs. Sometimes, tbat's true. It is, for example, at accounting and consulting firms. But tbe ratio of labor costs to total costs varies widely in different industries and companies. And even where it is true, it's not as important as many managers believe. Tbose wbo swallow Mytb #4-tbat low labor costs are a potent competitive
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