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

2. 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

3. 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?

4. 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.

5. 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. 6 Myths about Pay People work primarily for money Reality:
Pfeffer, J. (1998). Six dangerous myths about pay. Harvard Business Review (May-June),
People work primarily for money
Reality:
People need money, but in most cases, work provides people with meaning and enjoyment

7. 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

8. 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

9. 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)

10. 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

11. 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

12. 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

13. 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,
Study background
Company had lost 2 large contracts
In lieu of layoffs, company made temporary pay cuts of 15% in 2 manufacturing plants

14. 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?

15. 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

16. 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?

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

18. 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

19. 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?