| 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 persists
 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
 24
 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 processes
 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, prominent
 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 compensationconsulting
 industry, which has its own
 (45) 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 con-
 (50) tinues 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
 (55) 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
 (60) 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
 (65) create new problems, the consultants
 will continue to have work solving the
 problems that result from their advice. |