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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 persists partly because labor rates are a convenient
target for managers who want to make an impact on their
company’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 processes 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, prominent 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 consulting firms have
recently broadened their practices beyond the area of
compensation, their mainstay continues to be advising
companies on changing their compensation practices.
Suggesting that a company’s performance can be improved in
some other way than by altering its pay system may be
empirically correct 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 consultants 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 |
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