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Fair pay and fair play plague US companies
July 1, 2013, Monday
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WHETHER you are a shelf stocker at Walmart, a second year associate at a consulting company or an equity analyst at an investment bank, you may feel that you are not adequately compensated for the work you do - in other words, you are underpaid.
But underpaid relative to what? How do employers determine compensation levels, and what consequences can these decisions have for the organization?
Many people think that compensation systems are broken, with some CEOs paid exorbitant sums that are not always related to their performance while lower-level employees are paid salaries that barely keep them above the poverty level.
A recent article on Bloomberg.com illustrates the gap between high and low wage earners in the US.
According to the article, in 2012, the average multiple of CEO compensation to that of rank-and-file workers was 204, up 20 percent since 2009. In other words, the average CEO made 204 times what the average worker earned in wages and benefits.
The most egregious example cited by Bloomberg.com was Ron Johnson, former CEO of JC Penney, which fired him April 8 after a 17-month stint during which he failed to turn around the company.
Johnson, according to Bloomberg, received US$53.3 million in compensation as reported in the company's 2012 proxy - "1,795 times the average wage and benefits of a US department store worker ($29,688) when he was hired."
Comparing the two numbers "is the equivalent of stacking the length of a loaf of bread - give or take a few slices - against the height of the Empire State Building," the article said.
But CEO pay is just part of a much bigger issue: What does it mean to be "fairly" compensated? What are the consequences when employees feel they are underpaid, and how can employers address this concern?
Employee perspective
According to Wharton management professor Peter Cappelli, the issue comes down to "whether employees believe that the amount you are paying them, all things considered, is unfair relative to what you are asking them to do and relative to what type of job they could get someplace else."
Consider universities and other non-profits, says Cappelli, whose latest book is "Why Good People Can't Get Jobs: The Skills Gap and What Companies Can Do About It."
He says: "They tell employees that they may be making less money in terms of salary, but the benefits are good, the jobs are stable, the mission is important. All that could be true."
One of the key determinants of satisfaction - or dissatisfaction - with compensation is how employees feel their pay package compares to others, according to Wharton management professor Matthew Bidwell. "No doubt if somebody thinks he or she is doing the same work as another who is paid a lot more, this leads to resentment and ultimately to disengagement."
Employers pay employees different compensation partly because of supply and demand, says Bidwell. "If the supply conditions are favorable, then wages go down. It feels rational."
But clearly employers also want their employees to be happy in their jobs. "So paying people the absolute minimum you can get away with is probably not a very good idea in terms of motivating them and keeping them from jumping ship."
Wharton management professor John Paul MacDuffie cites research which suggests that employees arrive at perceptions of fairness regarding their compensation by comparing the ratio of their inputs - including, for example, their credentials, level of experience and amount of effort put into the job - to their outcomes, including such things as salary and benefits.
Under this theory, employees also compare themselves to someone else, such as another person in the organization or even to themselves at an earlier stage of their career.
In any case, "if the ratio is not equal, it causes a psychological strain that the employee wants to resolve," MacDuffie says.
To deal with a feeling of being underpaid, he adds, an employee can do a number of things. For example, he can focus on the fact that he is lucky to have a job in a down economy, he can focus on the benefits of the job instead of the low pay, he can demand a raise or he can quit.
Wharton management professor Adam Cobb comes at the issue from the perspective of labor rates versus labor costs.
Labor rates v labor costs
Organizations, he says, do everyone a disservice by "equating the two. Labor rates refer to how much an employee makes per hour. But labor costs also reflect productivity. You could have two workers," one who gets paid US$20 an hour and the other US$10 an hour. "But that doesn't mean your labor costs are higher" if the US$20 employee is five times more productive.
Employers, especially when it comes to low-wage workers, "tend to think that if you raise the minimum wage, it will make labor prohibitively costly. But the reality is, if you pay people more, they tend to work harder," whether that means devoting more attention to customers or pointing out ways that business processes can be improved.
A growing body of research, says Cobb, looks at the connection between low-wage work and productivity, and yet these studies don't always filter down into corporate decision making.
Instead, store managers often get bonuses if they reduce labor costs by eliminating employee bonuses, cutting back employee hours and so forth - "doing things that will diminish productivity."
Adapted from China Knowledge@Wharton,http://www.knowledgeatwharton.com.cn. To read the original, please visit: http://www.knowledgeatwharton.com.cn/index.cfm?fa=article&articleid=2796
But underpaid relative to what? How do employers determine compensation levels, and what consequences can these decisions have for the organization?
Many people think that compensation systems are broken, with some CEOs paid exorbitant sums that are not always related to their performance while lower-level employees are paid salaries that barely keep them above the poverty level.
A recent article on Bloomberg.com illustrates the gap between high and low wage earners in the US.
According to the article, in 2012, the average multiple of CEO compensation to that of rank-and-file workers was 204, up 20 percent since 2009. In other words, the average CEO made 204 times what the average worker earned in wages and benefits.
The most egregious example cited by Bloomberg.com was Ron Johnson, former CEO of JC Penney, which fired him April 8 after a 17-month stint during which he failed to turn around the company.
Johnson, according to Bloomberg, received US$53.3 million in compensation as reported in the company's 2012 proxy - "1,795 times the average wage and benefits of a US department store worker ($29,688) when he was hired."
Comparing the two numbers "is the equivalent of stacking the length of a loaf of bread - give or take a few slices - against the height of the Empire State Building," the article said.
But CEO pay is just part of a much bigger issue: What does it mean to be "fairly" compensated? What are the consequences when employees feel they are underpaid, and how can employers address this concern?
Employee perspective
According to Wharton management professor Peter Cappelli, the issue comes down to "whether employees believe that the amount you are paying them, all things considered, is unfair relative to what you are asking them to do and relative to what type of job they could get someplace else."
Consider universities and other non-profits, says Cappelli, whose latest book is "Why Good People Can't Get Jobs: The Skills Gap and What Companies Can Do About It."
He says: "They tell employees that they may be making less money in terms of salary, but the benefits are good, the jobs are stable, the mission is important. All that could be true."
One of the key determinants of satisfaction - or dissatisfaction - with compensation is how employees feel their pay package compares to others, according to Wharton management professor Matthew Bidwell. "No doubt if somebody thinks he or she is doing the same work as another who is paid a lot more, this leads to resentment and ultimately to disengagement."
Employers pay employees different compensation partly because of supply and demand, says Bidwell. "If the supply conditions are favorable, then wages go down. It feels rational."
But clearly employers also want their employees to be happy in their jobs. "So paying people the absolute minimum you can get away with is probably not a very good idea in terms of motivating them and keeping them from jumping ship."
Wharton management professor John Paul MacDuffie cites research which suggests that employees arrive at perceptions of fairness regarding their compensation by comparing the ratio of their inputs - including, for example, their credentials, level of experience and amount of effort put into the job - to their outcomes, including such things as salary and benefits.
Under this theory, employees also compare themselves to someone else, such as another person in the organization or even to themselves at an earlier stage of their career.
In any case, "if the ratio is not equal, it causes a psychological strain that the employee wants to resolve," MacDuffie says.
To deal with a feeling of being underpaid, he adds, an employee can do a number of things. For example, he can focus on the fact that he is lucky to have a job in a down economy, he can focus on the benefits of the job instead of the low pay, he can demand a raise or he can quit.
Wharton management professor Adam Cobb comes at the issue from the perspective of labor rates versus labor costs.
Labor rates v labor costs
Organizations, he says, do everyone a disservice by "equating the two. Labor rates refer to how much an employee makes per hour. But labor costs also reflect productivity. You could have two workers," one who gets paid US$20 an hour and the other US$10 an hour. "But that doesn't mean your labor costs are higher" if the US$20 employee is five times more productive.
Employers, especially when it comes to low-wage workers, "tend to think that if you raise the minimum wage, it will make labor prohibitively costly. But the reality is, if you pay people more, they tend to work harder," whether that means devoting more attention to customers or pointing out ways that business processes can be improved.
A growing body of research, says Cobb, looks at the connection between low-wage work and productivity, and yet these studies don't always filter down into corporate decision making.
Instead, store managers often get bonuses if they reduce labor costs by eliminating employee bonuses, cutting back employee hours and so forth - "doing things that will diminish productivity."
Adapted from China Knowledge@Wharton,http://www.knowledgeatwharton.com.cn. To read the original, please visit: http://www.knowledgeatwharton.com.cn/index.cfm?fa=article&articleid=2796
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