Pfeffer J (1998) Six Dangerous Myths About Pay Harvard Business Review
The Thought in Cursory
Southwest Airlines' employees are the about loyal and productive in the industry—even so they earn less than other airlines' staff.
How does Southwest go on them? It knows that bounty is not the primal to employee or corporate success. Rather, productivity and competitive advantage are.
Many companies view pay as a powerful strategic lever—in particular, they believe that cutting or freezing wages boosts profitability. But this is a myth. In fact, firms can fall victim to as many as half-dozen myths almost bounty. All of them spell danger in the course of lost productivity and ballooning costs, eroded squad and individual performance, and dulling competitive edge.
The Idea in Exercise
Six Myths About Pay
Dislocated by pay myths? This table clarifies why pay doesn't necessarily work the way nosotros recollect it does.
Consider ii groups of steel minimills. One grouping pays an average hourly wage of $18.07. The second pays an boilerplate of $21.52 an hour. Bold that other direct-employment costs, such equally benefits, are the aforementioned for the ii groups, which grouping has the higher labor costs? • • • •
An airline is seeking to compete in the depression-cost, low-frills segment of the U.S. market where, for obvious reasons, labor productivity and efficiency are crucial for competitive success. The visitor pays virtually no 1 on the basis of individual merit or operation. Does it stand up a gamble of success? • • • •
A company that operates in an intensely competitive segment of the software industry does not pay its sales force on commission. Nor does information technology pay private bonuses or offer stock options or phantom stock, common incentives in an industry heavily dependent on alluring and retaining scarce programming talent. Would yous invest in this company? • • • •
Every day, organizational leaders face up decisions nearly pay. Should they suit the company'south compensation system to encourage some gear up of behaviors? Should they retain consultants to help them implement a performance-based pay organization? How big a raise should they authorize?
In general terms, these kinds of questions come down to 4 decisions about compensation:
- how much to pay employees;
- how much emphasis to identify on financial compensation as a part of the total reward organisation;
- how much accent to identify on attempting to concord down the rate of pay; and
- whether to implement a organization of individual incentives to advantage differences in performance and productivity and, if and so, how much accent to place on these incentives.
For leaders, there tin exist no delegation of these matters. Everyone knows decisions nigh pay are of import. For one thing, they help establish a visitor's culture by rewarding the business organisation activities, behaviors, and values that senior managers hold love. Senior management at Quantum, disk drive manufacturer in Milpitas, California, for example, demonstrates its commitment to squad-work by placing all employees, from the CEO to hourly workers, on the same bonus plan, tracking everyone by the same measure—in this case, return on full upper-case letter.
Compensation is also a concept and exercise very much in flux. Compensation is condign more variable as companies base a greater proportion of it on stock options and bonuses and a smaller proportion on base salary, non just for executives just also for people farther and further down the hierarchy. As managers make arrangement-defining decisions near pay systems, they do so in a shifting mural while being bombarded with advice about the best routes to stable ground.
Managers are bombarded with advice almost pay. Unfortunately, much of that advice is wrong
Unfortunately, much of that advice is incorrect. Indeed, much of the conventional wisdom and public discussion about pay today is misleading, wrong, or sometimes both at the same fourth dimension. The result is that businesspeople end upwardly adopting wrongheaded notions about how to pay people and why. They believe in 6 dangerous myths virtually pay—fictions near compensation that take somehow come to be seen as the truth.
Truth And Consequences: The Six Unsafe Myths About Bounty
Practise you remember y'all have managed to avoid these myths? Permit's see how you answered the three questions that open this article. If yous said the second set up of steel minimills had higher labor costs, you fell into the common trap of disruptive laborrates with labor costs. That is Myth #1: that labor rates and labor costs are the same thing. Only how different they really are. The 2nd set of minimills paid its workers at a rate of $three.45 an hour more than the get-go. Only according to data collected past Fairfield University Professor Jeffrey Arthur, its labor costs were much lower because the productivity of the mills was college. The second gear up of mills actually required 34% fewer labor hours to produce a ton of steel than the outset set and as well generated 63% less scrap. The second prepare of mills could have raised workers' pay charge per unit by 19% and all the same had lower labor costs.
Connected to the showtime myth are three more than myths that draw on the aforementioned logic. When managers believe that labor costs and labor rates are the same thing, they besides tend to believe that they can cutting labor costs by cutting labor rates. That'south Myth #2. Once more, this leaves out the important matter of productivity. I may replace my $2,000-a-calendar week engineers with ones that earn $500 a calendar week, but my costs may skyrocket because the new, lower-paid employees are inexperienced, tiresome, and less capable. In that case, I would take increased my costs by cutting my rates.
Managers who mix upwards labor rates and labor costs also tend to accept Myth #3: that labor costs are a significant portion of full costs. Sometimes, that's truthful. Information technology is, for instance, at bookkeeping and consulting firms. But the ratio of labor costs to total costs varies widely in unlike industries and companies. And even where it is true, it's not equally important as many managers believe. Those who eat Myth #4—that low labor costs are a potent competitive strategy—may neglect other, more effective ways of competing, such every bit through quality, service, delivery, and innovation. In reality, low labor costs are a slippery manner to compete and perhaps the least sustainable competitive advantage there is.
Those of you who believed that the airline trying to compete in the low-cost, depression-frills segment of the U.S. market would not succeed without using individual incentives succumbed to Myth #five: that the most effective way to motivate people to work productively is through individual incentive compensation. But Southwest Airlines has never used such a system, and it is the cost and productivity leader in its industry. Southwest is not alone, but nevertheless it takes smart, informed managers to buck the trend of offering individual rewards.
Would you have invested in the computer software company that didn't offer its people bonuses, stock options, or other financial incentives that could make them millionaires? You should have because it has succeeded mightily, growing over the by 21 years at a compound almanac rate of more 25%. The company is the SAS Institute of Cary, North Carolina. Today information technology is the largest privately held visitor in the software industry, with 1997 revenues of some $750 meg.
Rather than emphasize pay, SAS has achieved an unbelievably low turnover charge per unit below 4%—in an industry where the norm is closer to twenty%—by offering intellectually engaging work; a family-friendly environment that features exceptional benefits; and the opportunity to piece of work with fun, interesting people using state-of-the-fine art equipment.
In short, SAS has escaped Myth #half dozen: that people work primarily for money. SAS, operating under the contrary supposition, demonstrates otherwise. In the terminal three years, the company has lost none of its 20 North American commune sales managers. How many software companies do you know could make that argument, even about the final three months?
Every mean solar day, I see managers harming their organizations by believing in these myths most pay. What I desire to practise in these following pages is explore some factors that aid account for why the myths are so pervasive, present some evidence to disprove their underlying assumptions, and suggest how leaders might think more productively and usefully about the important issue of pay practices in their organizations.
Why the Myths Be
On October 10, 1997, the Wall Street Periodical published an article expressing surprise that a "contrarian Motorola" had chosen to build a establish in Germany to make cellular phones despite the notoriously high "cost" of German labor. The Periodical is not alone in framing business decisions about pay in this manner. The Economist has likewise written manufactures about high German language labor "costs," citing evidence labor rates (including fringe benefits) of more than $thirty per hr.
The semantic defoliation of labor rates with labor costs, owned in business journalism and everyday discussion, leads managers to see the two as equivalent. And when the ii seem equivalent, the associated myths about labor costs seem to brand sense, too. But, of course, labor rates and labor costs just aren't the same thing. A labor rate is total bacon divided by time worked. Just labor costs take productivity into business relationship. That's how the second set of minimills managed to have lower labor costs than the mills with the lower wages. They fabricated more steel, and they made it faster and amend.
Many executives spend too much time thinking about compensation when other managerial tools piece of work just besides—or ameliorate.
Some other reason why the confusion over costs and rates persists is that labor rates are a convenient target for managers who want to make an affect. Labor rates are highly visible, and it's easy to compare the rates yous pay with those paid by your competitors or with those paid in other parts of the globe. In addition, labor rates often appear to be a company'due south most malleable fiscal variable. It seems a lot quicker and easier to cut wages than to control costs in other ways, like reconfiguring manufacturing processes, irresolute corporate culture, or altering product blueprint. Because labor costs appear to be the lever closest at hand, managers mistakenly assume it is the one that has the most leverage.
For the myths that individual incentive pay drives creativity and productivity, and that people are primarily motivated past money, we have economic theory to arraign. More specifically, we can blame the economic model of man behavior widely taught in business organization schools and held to be true in the pop press. This model presumes that beliefs is rational—driven past the all-time information available at the time and designed to maximize the individual'south self-involvement. According to this model, people take jobs and make up one's mind how much effort to expend in those jobs based on their expected fiscal render. If pay is non contingent on operation, the theory goes, individuals will not devote sufficient attention and free energy to their jobs.
Additional problems arise from such popular economic concepts equally bureau theory (which contends that there are differences in preference and perspective between owners and those who work for them) and transaction-cost economics (which tries to identify which transactions are best organized past markets and which by hierarchies). Embedded in both concepts is the thought that individuals not just pursue self-interest just do so on occasion with guile and opportunism. Thus agency theory suggests that employees have unlike objectives than their employers and, moreover, have opportunities to misrepresent information and divert resource to their personal use. Transaction-cost theory suggests that people will make imitation or empty threats and promises to get better deals from i another.
All of these economic models portray work as hard and aversive—implying that the merely fashion people tin can exist induced to work is through some combination of rewards and sanctions. As professor James North. Baron of Stanford Business School has written, "The image of workers in these models is somewhat akin to Newton'south first police of motion: employees remain in a state of rest unless compelled to change that state by a stronger forcefulness impressed upon them—namely, an optimal labor contract."
Similarly, the linguistic communication of economics is filled with terms such every bit shirking and free riding. Language is powerful, and as Robert Frank, himself an economist, has noted, theories of homo behavior become self-fulfilling. Nosotros deed on the basis of these theories, and through our own actions produce in others the beliefs we expect. If we believe people will work hard only if specifically rewarded for doing so, we will provide contingent rewards and thereby condition people to work simply when they are rewarded. If nosotros look people to be untrustworthy, we will closely monitor and control them and by doing and then will betoken that they can't exist trusted an expectation that they will most likely confirm for us.
So self-reinforcing are these ideas that y'all nearly have to avoid mainstream business organization to get away from them. Mayhap that'south why several companies known to be strongly committed to managing through trust, common respect, and true decentralization Electric, the Men'southward Wearhouse, the SAS Institute, ServiceMaster, Southwest Airlines, and Whole Foods Market—tend to avoid recruiting at conventional concern schools.
In that location's i last factor that helps perpetuate all these myths: the compensation-consulting industry. Unfortunately, that industry has a number of perverse incentives to keep these myths alive.
Commencement, although some of these consulting firms have recently broadened their practices, compensation remains their bread and butter. Suggesting that an organization's performance tin can be improved in some mode other than by tinkering with the pay organisation may be empirically right merely is probably also selfless a beliefs to expect from these firms.
Second, if it'southward simpler for managers to tinker with the compensation arrangement than to change an organization'due south culture, the way piece of work is organized, and the level of trust and respect the system displays, information technology'southward even easier for consultants. Thus both the compensation consultants and their clients are tempted past the apparent speed and ease with which reward-organisation solutions can be implemented.
Information technology's simpler for managers to tinker with compensation than to change the visitor'south civilisation.
3rd, to the extent that changes in pay systems bring their own new predicaments, the consultants volition go on to have work solving the issues that the tinkering has acquired in the first place.
From Myth to Reality: A Look at the Evidence
The media are filled with accounts of companies attempting to reduce their labor costs by laying off people, moving production to places where labor rates are lower, freezing wages, or some combination of the above. In the early 1990s, for case, Ford decided not to award merit raises to its white-neckband workers as part of a new cost-cutting plan. And in 1997, Full general Motors endured a serial of highly publicized strikes over the effect of outsourcing. GM wanted to motility more of its work to nonunion, presumably lower-wage, suppliers to reduce its labor costs and get more profitable.
Ford's and GM's decisions were driven by the myths that labor rates and labor costs are the aforementioned thing, and that labor costs establish a significant portion of total costs. Even so hard bear witness to back up those contentions is slim. New United Motor Manufacturing, the joint venture between Toyota and General Motors based in Fremont, California, paid the highest wage in the auto manufacture when it began operations in the mid-1980s, and it too offered a guarantee of secure employment. With productivity some 50% higher than at comparable, GM plants, the venture could beget to pay 10% more and nevertheless come out ahead.
Yet General Motors apparently did not learn the lessons that what matters is non pay rate but productivity. In May 1996, as GM was preparing to confront the matrimony over the issue of outsourcing, the "Harbour Report," the automobile industry'due south bible of comparative efficiency, published some interesting data suggesting that General Motors' problems had little to do with labor rates. As reported in the Wall Street Journal at the time, the written report showed that information technology took Full general Motors some 46 hours to gather a car, while it took Ford just 37.92 hours, Toyota 29.44, and Nissan just 27.36. As a way of attacking toll problems, officials at General Motors should have asked why they needed 21% more hours than Ford to accomplish the same thing or why GM was some 68% less efficient than Nissan.
For more evidence of how reality really looks, consider the machine tool industry. Many of its senior managers have been particularly concerned with low-cost strange competition, believing that the cost advantage has come up from the lower labor rates bachelor offshore. But for machine tool companies that stop fixating on labor rates and focus instead on their overall management organisation and manufacturing processes, in that location are corking potential returns. Cincinnati Milacron, a company that had virtually surrendered the market for low-cease machine tools to Asian competitors by the mid-1980s, overhauled its assembly procedure, abolished its stockroom, and reduced job categories from seven to one. Without whatsoever capital investment, those changes in the production procedure reduced labor hours by 50%, and the company's productivity is now higher than its competitors' in Taiwan.
Even U.S. apparel manufacturers lend back up to the argument that labor costs are not the be-all and cease-all of profitability. Companies in this industry are more often than not obsessed with finding places where hourly wages are depression. But the cost of straight labor needed to manufacture a pair of jeans is actually only nigh 15% of full costs, and fifty-fifty the direct labor involved in producing a homo'due south suit is only $12.fifty.1
Compelling evidence also exists to dispute the myth that competing on labor costs will create any sustainable reward. Let'due south start shut to home. I day, I arrived at a large disbelieve store with a shopping listing. Having the good fortune to really find a sales acquaintance, I asked him where I could locate the kickoff item on my list. "I don't know," he replied. He gave a similar reply when queried about the second detail. A glance at the long list I was holding brought the confession that considering of high employee turnover, the young human being had been in the store only a few hours himself. What is that employee worth to the store? Not but tin't he sell the trade, he tin't even find it! Needless to say, I wasn't able to buy everything on my list because I got tired of looking and gave upwards. And I haven't returned since. Companies that compete on cost solitary eventually crash-land into consumers similar me. It's no accident that Wal-Mart combines its depression-cost strategy with friendly staff members greeting people at the door and works assiduously to keep turnover low.
Some other example of a company that understands the limits of competing solely on labor costs is the Men'due south Wearhouse, the enormously successful off-price retailer of tailored men's clothing. The company operates in a fiercely competitive industry in which growth is possible primarily past taking sales from competitors, and cost wars are intense. Still, less than 15% of the company's staff is role-time, wages are higher than the industry average, and the company engages in all-encompassing grooming. All these policies defy conventional wisdom for the retailing industry. But the outcome isn't what the Men's Wear-firm's employees cost, it'due south what they tin do: sell very effectively because of their product knowledge and sales skills. Moreover, by keeping inventory losses and employee turnover low, the company saves coin on shrinkage and hiring. Companies that miss this point—that costs, particularly labor costs, aren't everything—oft overlook ways of succeeding that competitors tin can't readily re-create.
Evidence also exists that challenges the myth nearly the effectiveness of individual incentives. This evidence, withal, has done little to stem the tide of private merit pay. A survey of the pay practices of the Fortune 1,000 reported that betwixt 1987 and 1993, the proportion of companies using individual incentives for at least 20% of their workforce increased from 38% to 50% while the proportion of companies using turn a profit sharing—a more collective reward—decreased from 45% to 43%. Between 1981 and 1990, the proportion of retail salespeople that were paid solely on direct salary, with no commission, declined from 21% to 7%. And this tendency toward private incentive bounty is not confined to the U.s.. A study of pay practices at plants in the United kingdom of great britain and northern ireland reported that the proportion using some form of merit pay had increased every year since 1986 such that by 1990 it had reached 50%.2
Despite the evident popularity of this do, the problems with private merit pay are numerous and well documented. It has been shown to undermine teamwork, encourage employees to focus on the brusk term, and lead people to link compensation to political skills and ingratiating personalities rather than to functioning. Indeed, those are among the reasons why Due west. Edwards Deming and other quality experts have argued strongly against using such schemes.
Consider the results of several studies. One carefully designed the study of a performance-contingent pay programme at twenty Social Security Administration offices found that merit pay had no upshot on office performance. Even though the merit pay programme was contingent on a number of objective indicators, such as the time taken to settle claims and the accuracy of claims processing, employees exhibited no difference in functioning afterward the merit pay plan was introduced equally part of a reform of civil service pay practices. Contrast that study with another that examined the elimination of a piecework system and its replacement past a more group-oriented compensation system at a manufacturer of frazzle organization components. In that location, grievances decreased, product quality increased almost tenfold, and perceptions of teamwork and business concern for performance all improved.3
Surveys conducted by various consulting companies that specialize in direction and compensation also reveal the issues and dissatisfaction with individual merit pay. For instance, a study past the consulting firm William One thousand. Mercer reported 73% that major changes to their performance-direction plans in the preceding two years, equally they experimented with different means to tie pay to individual functioning. But 47% reported that their employees constitute the systems neither fair nor sensible, and 51% of the employees said that the performance direction organisation provided little value to the company. No wonder Mercer ended that nigh private merit or operation-based pay plans share two attributes: they absorb vast amounts of management time and resources, and they brand everybody unhappy.
Most merit-pay systems share ii attributes: they absorb vast amounts of management time and make everybody unhappy.
One concern about paying on a more group-oriented footing is the so-called free-passenger problem, the worry that people will non piece of work difficult because they know that if rewards are based on commonage functioning and their colleagues make the effort, they will share in those rewards regardless of the level of their private efforts. Simply there are ii reasons why organizations should non be reluctant to design such collective pay systems.
First, much to the surprise of people who have spent too much time reading economics, empirical evidence from numerous studies indicates that the extent of free riding is quite modest. For instance, one comprehensive review reported that "nether the conditions described by the theory as leading to gratis riding, people often cooperate instead."iv
2nd, individuals practise not make decisions about how much endeavor to expend in a social vacuum; they are influenced by peer pressure level and the social relations they take with their workmates. This social influence is potent, and although information technology may be some-what stronger in smaller groups, it can be a force mitigating against gratis riding even in big organizations. Every bit ane might wait, and so, in that location is evidence that organizations paying on a more collective basis, such as through profit sharing or gain sharing, outperform those that don't.
Sometimes, private pay schemes get then far as to affect customers. Sears was forced to eliminate a commission system at its car repair stores in California when officials establish widespread evidence of consumer fraud. Employees, anxious to run across quotas and earn commissions on repair sales, were selling unneeded services to unsuspecting customers. Similarly, in 1992, Wall Street Journal reported that Highland Superstores, an electronics and appliance retailer, eliminated commissions because they had encouraged such ambitious behavior on the part of salespeople that customers were alienated.
Enchantment with individual merit pay reflects not merely the conventionalities that people won't work effectively if they are non rewarded for their individual efforts simply too the related view that the route to solving organizational problems is largely paved with adjustments to pay and measurement practices. Consider once more the data from the Mercer survey: nearly three-quarters of all the companies surveyed had fabricated major changes to their pay plans in just the past ii years. That'due south tinkering on a grand calibration. Or take the case of Air Products and Chemicals of Allentown, Pennsylvania. When on October 23, 1996, the company reported mediocre sales and profits, the stock toll declined from the depression $60s to the high $50s. Viii days later on, the visitor announced a new set up of management-bounty and stock-ownership initiatives designed to reassure Wall Street that management cared about its shareholders and was demonstrating that business by changing compensation arrangements. The results were dramatic. On the day of the announcement, the stock price went 1 ¼ points, and the side by side twenty-four hour period information technology rose an additional 4 ¾ points. By November 29, Air Products' stock had gone up more than than xv%. According to Value Line, this ascension was an enthusiastic reaction by investors to the new compensation system. No wonder managers are so tempted to tamper with pay practices!
Merely as Bill Strusz, director of corporate industrial relations at Xerox in Rochester, New York, has said, if managers seeking to improve functioning or solve organizational problems apply compensation as the merely lever, they will get two results: nothing will happen, and they will spend a lot of money. That's because people want more out of their jobs than only money. Numerous surveys—even of second-year Yard.B.A. students, who frequently graduate with large amounts of debt—indicate that coin is far from the most important cistron in choosing a job or remaining in 1.
Why has the SAS Plant had such depression turnover in the software manufacture despite its tight labor marketplace? When asked this question, employees said they were motivated by SAS'southward unique perks—plentiful opportunities to work with the latest and most up-to-appointment equipment and the ease with which they could move dorsum and along between being a managing director and existence an individual contributor. They also cited how much variety there was in the projects they worked on, how intelligent and nice the people they worked with were, and how much the organization cared for and appreciated them. Of form, SAS pays competitive salaries, merely in an manufacture in which people have the opportunity to become millionaires through stock options by moving to a competitor, the primal to retention is SAS'due south culture, not its monetary rewards.
People seek, in a phrase, an enjoyable work environs . That's what AES, the Men'south Wearhouse, SAS, and Southwest have in common. I of the core values at each company is fun. When a colleague and I wrote a business school case on Due south-west, we asked some of the employees, a number of whom had been offered much more money to work elsewhere, why they stayed. The answer we heard repeatedly was that they knew what the other environments were like, and they would rather be at a identify, as one employee put it, where This doesn't mean piece of work has to be like shooting fish in a barrel. As an AES employee noted, fun means working in a place where people tin use their gifts and skills and can piece of work with others in an atmosphere of mutual respect.
People seek an enjoyable work surround, i where work is non a four-letter word.
There is a great body of literature on the upshot of big external rewards on individuals' intrinsic motivation. The literature argues that extrinsic rewards diminish intrinsic motivation and, moreover, that large extrinsic rewards can really subtract performance in tasks that require creativity and innovation. I would not necessarily become so far as to say that external rewards backfire, simply they certainly create their own problems. First, people receiving such rewards can reduce their own motivation through a trick of cocky-perception, figuring, "I must non like the chore if I have to be paid so much to do it" or "I make so much, I must be doing it for the money." Second, they undermine their own loyalty or performance by reacting against a sense of being controlled, thinking something like, "I will show the company that I tin't be controlled just through money."
I would non necessarily say that external rewards backlash, only they do create their own issues.
But most important, to my mind, is the logic in the idea that any organization assertive it tin solve its allure, retention, and motivation bug solely by its compensation system is probably not spending as much time and effort as it should on the work environment—on defining its jobs, on creating its civilization, and on making work fun and meaningful. Information technology is a question of fourth dimension and attention, of scarce managerial resource. The time and attention spent managing the advantage system are not bachelor to devote to other aspects of the piece of work environment that in the terminate may be much more critical to success.
Some Communication About Pay
Since I have traipsed you lot through a discussion of what'south incorrect with the mode most companies approach compensation, let me now offer some advice near how to get it right.
The first, and possibly most obvious, suggestion is that managers would do well to go on the difference betwixt labor rates and labor costs straight. In doing so, remember that only labor costs—and not labor rates—are the ground for contest, and that labor costs may non be a major component of full costs. In whatsoever outcome, managers should remember that the result is not only what you pay people, only also what they produce.
To combat the myth most the effectiveness of individual performance pay, managers should see what happens when they include a large dose of commonage rewards in their employees' compensation package. The more aggregated the unit used to measure functioning, the more reliably operation tin be assessed. One can tell pretty accurately how well an organization, or even a subunit, has done with respect to sales, profits, quality, productivity, and the similar. Trying to bundle out who, specifically, was responsible for exactly how much of that productivity, quality, or sales is oftentimes much more hard or fifty-fifty incommunicable. Every bit Herbert Simon, the Nobel-prize-winning economist, has recognized, people in organizations are interdependent, and therefore organizational results are the issue of collective behavior and functioning. If you could reliably and hands measure and reward individual contributions, you probably would not need an organization at all as everyone would enter markets solely every bit individuals.
If you could reliably measure out and reward individual contributions, organizations wouldn't exist needed.
In the typical individual-based merit pay system, the boss works with a heighten budget that's some percent of the total bacon upkeep for the unit. Information technology'due south magazine inherently a zero-sum process: the more than I go in my raise, the less is left for my colleagues. Then the worse my workmates perform, the happier I am because I know I will look amend by comparison. A like dynamic can occur across organizational units in which competition for a fixed bonus puddle discourages people from sharing best practices and learning from employees in other parts of the organization. In Nov 1995, for example, Fortune magazine reported that at Lantech, a manufacturer of packaging mechanism in Louisville, Kentucky, private incentives caused such intense rivalry that the chairman of the company, Pat Lancaster, said, "I was spending 95% of my time on conflict resolution instead of on how to serve our customers."
Managers can fight the myth that people are primarily motivated by coin past de-emphasizing pay and not portraying it as the chief thing you lot get from working at a particular company. How? Consider the example of Tandem Computer which, in the years before information technology was acquired by Compaq, would not even tell you your salary before expecting you to have a job. If y'all asked, yous would be told that Tandem paid expert, competitive salaries. The company had a elementary philosophy—if you came for money, you lot would go out for money, and Tandem wanted employees who were there because they liked the work, the culture, and the people, non something—money—that every company could offering. Emphasizing pay as the primary reward encourages people to come up and to stay for the wrong reasons. AES, a global contained power producer in Arlington, Virginia, has a relatively short vesting menstruum for retirement-plan contributions and tries not to pay the highest salaries for jobs in its local labor market place. By so doing, it seeks to ensure that people are non locked into working at a place where they don't desire to be just for the money.
Managers must also recognize that pay has substantive and symbolic components. In signaling what and who in the arrangement is valued, pay both reflects and helps determine the arrangement'southward culture. Therefore, managers must make sure that the letters sent by pay practices are intended. Talking about teamwork and cooperation and then not having a group-based component to the pay organisation matters because paying solely on an individual ground signals what the organization believes is actually important—individual behavior and functioning. Talking about the importance of all people in the organization and and then paying some disproportionately more than others belies that message. Ane need not go to the extreme of Whole Foods Market, which pays no one more eight times the average visitor salary (the result being close to $1 billion in sales at a visitor where the CEO makes less than $200,000 a year). But paying big executive bonuses while laying off people and asking for wage freezes, as Full general Motors did in the 1980s, may not send the right message, either. When Southwest Airlines asked its pilots for a five-year wage freeze, CEO Herb Kelleher voluntarily asked the compensation committee to freeze his salary for at least four years every bit well. The message of shared, common fate is powerful in an arrangement truly seeking to build a culture of teamwork.
Making pay practices public also sends a powerful symbolic message. Some organizations reveal pay distributions past position or level. A few organizations, such every bit Whole Foods Market, actually make data on private pay bachelor to all members who are interested. Other organizations try to maintain a high level of secrecy about pay. What message practise those organizations send? Keeping salaries secret suggests that the organization has something to hibernate or that it doesn't trust its people with the data. Moreover, keeping things surreptitious merely encourages people to uncover the secrets—if something is worth hiding, it must exist important and interesting enough to expend effort discovering. Pay systems that are more open and transparent transport a positive message about the disinterestedness of the system and the trust that the company places in its people.
Managers should also consider using other methods besides pay to betoken company values and focus beliefs. The head of North American sales and operations for the SAS Establish has a useful perspective on this consequence. He didn't think he was smart plenty to design an incentive system that couldn't be gamed. Instead of using the pay organisation to betoken what was of import, he and other SAS managers simply told people what was important for the visitor and why. That resulted in much more than nuanced and rapid changes in beliefs considering the visitor didn't take to change the compensation organization every time business priorities altered a piddling. What a novel idea—actually talking to people about what is important, and why, rather than trying to ship some subtle signals through the compensation system!
Mayhap almost important, leaders must come to see pay for what it is: simply one element in a prepare of management practices that tin either build or reduce delivery, teamwork, and performance. Thus my final slice of communication well-nigh pay is to make certain that pay practices are coinciding with other management practices and reinforce rather than oppose their effects.
Breaking with Convention To Break the Myths
Many organizations devote enormous amounts of time and free energy to their pay systems, only people, from senior managers to hourly workers, remain unhappy with them. Organizations are trapped in unproductive ways of budgeted pay, which they find difficult to escape. The reason, I would suggest, is that people are afraid to claiming the myths about bounty. It's easier and less controversial to see what anybody else is doing and then to exercise the same. In fact, when I talk to executives at companies about installing pay systems that actually work, I usually hear, "Simply that's different from what most other companies are saying and doing."
It must certainly exist the case that a visitor cannot earn "aberrant" returns by following the crowd. That'southward true about marketplace strategies, and it's true about bounty. Companies that are truly exceptional are not trapped by convention but instead see and pursue a amend business model.
Companies that have successfully transcended the myths about pay know that pay cannot substitute for a working environs high on trust, fun, and meaningful work. They also know that information technology is more than important to worry about what people do than what they cost, and that zero-sum pay plans tin can set up off internal competition that makes learning from others, teamwork, and cross-functional cooperation a dream rather than the fashion the place works on an everyday basis.
Pay cannot substitute for a working environs high on trust, fun, and meaningful work.
There is an interesting paradox in achieving loftier—organizational functioning through innovative pay practices—if it were easy to do, it wouldn't provide equally much competitive leverage every bit it actually does. Then while I tin review the logic and evidence and offer some alternative ways of thinking near pay, information technology is the job of leaders to practise both the judgment and the backbone necessary to break with common practice. Those who exercise volition develop organizations in which pay practices really contribute rather than backbite from edifice high-performance direction systems. Those who are stuck in the by are probably doomed to countless tinkering with pay; at the terminate of the day, they won't take achieved much, just they volition accept expended a lot of time and money doing it.
one. John T. Dunlop and David Weil, "Improvidence and Operation of Modular Production in the U.S. Apparel Industry," Industrial Relations, July 1996, p.337.
two. For the survey of the pay practices of Fortune 1,000 companies, see Gerald E. Ledford, Jr., Edward Due east. Lawler Three, and Susan A. Mohrman, "Reward Innovations in Fortune one,000 Companies," Compensation and Benefits Review, Apr 1995, p. 76; for the bacon and committee information, see Gregory A. Patterson, "Distressed Shoppers, Disaffected Workers Prompt Stores to Alter Sales Commissions," the Wall Street Journal, July 1, 1992, p. B1; for the study of U.K. pay practices, meet Stephen Wood, "High Delivery Management and Payment Systems," Journal of Management Studies, January 1996, p. 53.
3. For the Social Security Administration written report, see Jone L. Pearce, William B. Stevenson, and James L. Perry, "Managerial Compensation Based on Organizational Performance: A Time Series Assay of the Effects of Merit Pay," Academy of Management Periodical, June 1985, p. 261; for the study of group-oriented compensation, see Larry Hatcher and Timothy L. Ross, "From Private Incentives to an Organisation-Broad Gain-sharing Plan: Effects on Teamwork and Product Quality," Periodical of Organizational Behavior, May 1991, p.169.
iv. Gerald Marwell, "Altruism and the Problem of Collective Action," in Five.J. Derlega and J. Grzelak, eds., Cooperation and Helping Behavior: Theories and Enquiry (New York: Academic Press, 1982), p. 208.
A version of this article appeared in the May–June 1998 issue of Harvard Business organisation Review.
Source: https://hbr.org/1998/05/six-dangerous-myths-about-pay
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