GWD-4-22

Q22 to Q25:

      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.