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Many managers are influenced by dangerous myths about pay [#permalink]
27 Oct 2007, 15:10
Many managers are influenced by
dangerous myths about pay that lead
to counterproductive decisions about
how their companies compensate
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.
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
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
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-
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
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.
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
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
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-
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
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
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
create new problems, the consultants
will continue to have work solving the
problems that result from their advice.
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.