Essay about Wage Compression and Symbolic Egalitarianism

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An organisations internal pay structure can affect the way employees perform to the business strategy. Where a workers performance not only depends on the level of pay they receive (Solow, 1979, in Alexopoulos & Cohen, 2003), but also takes into consideration their pay compared to workers above and below them, those within the same occupational group, and the external labour market (Akerlof and Yellen, 1990). Pfeffer (2005) argues that wage compression, which is the act of reducing the size of the pay differences among employees, improves productivity. To gain competitive advantage, organisations need to acknowledge not only hierarchical wage compression (between management and employees) but also the differences between individuals at …show more content…
There is also a range of returns employees can receive; the psychological relational returns (learning opportunities, employment security), and total compensation returns which are transactional (benefits such as work/life balance, allowances, as well as cash compensation and bonuses) (Milkovich, Newman, Gerhart, 2011).

However, the validity of Pfeffers’ argument is contestable. Although compressing the pay structure supports fairness and equality, there is also the problem of creating the opposite outcome. When wage differentials are eliminated, it may not be perceived as fair and create a negative effect on effort and motivation (Kraft, 1994). A Swedish study demonstrates this negative effect, whereby the higher paid workers morale and effort subsided leading to lower outputs as they did not feel valued for their skills (Hibbs and Locking, 2000, in Alexopoulos & Cohen, 2003). Therefore, wage differentials aid in distinguishing between workers abilities and responsibilities to organisational performance (Beaumont & Harris, 2003). Theorists have thus developed a counter argument, that it is in fact wage dispersion that leads to increased effort and performance (Lallemand, Plasman, & Rycx, 2004). Instead of emphasising co-operation, Lazear and Rosen’s (1981) ‘tournament’ theory highlights the need to differentiate pay, as larger variations are more motivating than smaller or equal differences.
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