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Many managers are influenced by dangerous myths about pay [#permalink]
16 Sep 2009, 13:39
Many managers are influenced by dangerous myths about pay that lead to counterproductive decisions about Line how their companies compensate (5) employees. One such myth is that labor rates, the rate per hour paid to workers, are identical with labor costs, the money spent on labor in relation to the productivity of the labor force. (10) This myth leads to the assumption that a company can simply lower its labor costs by cutting wages. But labor costs and labor rates are not in fact the same: one company could pay (15) its workers considerably more than another and yet have lower labor costs if that company’s productivity were higher due to the talent of its workforce, the efficiency of its work (20) processes, or other factors. The confusion of costs with rates per- sists partly because labor rates are a convenient target for managers who want to make an impact on their com- (25) pany’s budgets. Because labor rates are highly visible, managers can easily compare their company’s rates with those of competitors. Furthermore, labor rates often appear to be a (30) company’s most malleable financial variable: cutting wages appears an easier way to control costs than such options as reconfiguring work pro- cesses or altering product design. (35) The myth that labor rates and labor costs are equivalent is supported by business journalists, who frequently confound the two. For example, prom- inent business journals often remark on (40) the “high” cost of German labor, citing as evidence the average amount paid to German workers. The myth is also perpetuated by the compensation- consulting industry, which has its own (45) incentives to keep such myths alive. First, although some of these con- sulting firms have recently broadened their practices beyond the area of compensation, their mainstay con- (50) tinues to be advising companies on changing their compensation prac- tices. Suggesting that a company’s performance can be improved in some other way than by altering its (55) pay system may be empirically cor- rect but contrary to the consultants’ interests. Furthermore, changes to the compensation system may appear to be simpler to implement (60) than changes to other aspects of an organization, so managers are more likely to find such advice from con- sultants palatable. Finally, to the extant that changes in compensation (65) create new problems, the consultants will continue to have work solving the problems that result from their advice. -------------------------------------------------------------------------------- Q22: The author of the passage suggests which of the following about the advice that the consulting firms discussed in the passage customarily give to companies attempting to control costs? A. It often fails to bring about the intended changes in companies’ compensation systems. B. It has highly influenced views that predominate in prominent business journals. C. It tends to result in decreased labor rates but increased labor costs. D. It leads to changes in companies’ compensation practices that are less visible than changes to work processes would be. E. It might be different if the consulting firms were less narrowly specialized.