Evidence-Based HR
Sam’s Club, Costco, and Wal-Mart are all low-price retail merchandisers. Each one has a
different approach to labor costs. Costco has 338 stores and 67,600 employees, and is number
one in this market accounting for about 50 percent of the market. Sam’s Club has 551 stores and
110,200 employees and is number two, accounting for about 40 percent of the market. Costco
provides relatively high pay and benefits for its employees, compared to its competitors. The
average wage at Costco is $17 an hour, but at Wal-Mart the average wage is $10.11 an hour. 82
percent of Costco employees have health insurance coverage, but less than half have coverage at
Wal-Mart. The turnover at Costco, however, is unusually low, at 17 percent overall. Wal-Mart’s
turnover is 44 percent. Since the fully loaded cost of replacing a work who leaves is typically 1.5
to 2.5 times a workers’ annual salary, the lower turnover rates at Costco actually results in lower
costs of employee churn. Additionally, employees at Costco are more loyal and productive.
Exercise
Identify an industry or industries (other than discount retailing industry). Have students select
one company to study, and have them conduct some research on the compensation and benefits
offered by the company they select. Encourage students to be creative in the ways that they
conduct their research. For example, have them go to the company’s employment site in order to
learn about their pay and benefits; have them talk to people who work at the company (where
possible) and ask them directly about their pay and benefits (where appropriate). Have students
report their findings back to the class. Facilitate a discussion on the differences in pay and
benefits philosophies, and consider how a pay and benefits policy impacts employee loyalty and
retention.
V. The Importance of Process: Communication and Participation
A. Since pay decisions might be viewed in different ways by different groups in the
organization and technology rarely provides a “right” answer, how decisions are
made and communicated is critical.
1. Participation should involve both those who will manage the process and
those who will be affected by it (HR staff and line managers). Usually,
participation comes in recommending, designing, and communicating a
pay program. Typically, pay-level decisions are only made by top
management.
2. Communication
a. The consequences of not communicating effectively are described
in a study in which a group that received pay cuts, but to which
was communicated adequate information and remorse, engaged in
significantly less theft after the pay cut than a group to whom
communication was inadequate.
b. The effect of communication is likely to be an impact on
employees’ perceptions of equity. Managers must be prepared to
explain to employees why the pay structure is designed the way it
is and to judge whether employee concerns about the structure
need to be addressed with changes to the structure.
VI. Current Challenges
A. Although most commonly used, job-based pay structures can create the following
problems:
1. They encourage bureaucracy.
2. They reinforce top-down decision making as well as status differentials.
3. The bureaucracy, time, and cost required to generate and update job
descriptions and job evaluations can become a barrier to change.
4. The job-based structure may not reward desired behaviors, where the
knowledge, skills, and abilities needed yesterday may not be helpful today
and tomorrow.
5. The system encourages promotion-seeking behavior, but discourages
lateral movement.
B. Responses to problems with job-based pay structures include the following:
1. Delayering is reducing the number of job levels. This provides more
flexibility in job assignments and assigning merit increases. These broader
groups are also called broad bands. (Table 11.8 provides an example of
pay bands).
2. A second response to job-based pay structure problems has been to move
away from linking pay to jobs and toward building structures on skill,
knowledge, and competency. Competency-based pay is similar but usually
refers to a plan that covers exempt employees (e.g., managers).
a. Skill-based pay typically pays individuals for the skills they are
capable of using rather than for the job they are performing at a
point in time.
b. Advantages are that flexibility helps promote lower staffing levels
and aids in situations where the manufacturing process demands
adaptable and flexible responses (e.g., flexible manufacturing,
just-in-time systems). It has also been suggested that skill-based
plans contribute to a climate of learning and adaptability and give
employees a broader view of how the organization functions.
c. Potential disadvantages:
– The organization may find it difficult to use all skills
effectively (i.e., work design must also change).
– Employees may acquire skills quickly and compensation tops
out.
– Skill-based plans may require a larger bureaucracy (related to
skills definition and measurement, training, and certification).
– Lastly, there is almost no market information available on how
to price skills.
C. Can the U.S. Labor Force Compete?
1. The costs for labor are high in the United States, particularly in
comparison to newly industrialized and developing countries (see Table
11.9)
2. There are several factors to consider in shifting production to other
countries:
a. Instability of Country Differences in Labor Costs: relative labor
costs are very unstable over time because of fluctuations in
currency exchange rates.
b. Skill Levels: the quality and productivity of national labor forces
can vary dramatically. Lower labor costs may reflect the lower
average skill level of the labor force.
c. Productivity: in terms of comparative productivity, unit labor costs,
and gross domestic product per person, the United States is the
highest in the world (See Figure 11.4).
d. Nonlabor Considerations: operating costs may be high enough to
compensate for lower labor costs. Also, product development and
customer response may be faster when manufacturing is closer to
staff groups.
D. Executive Pay
1. Executive pay has been given widespread attention in the press. However,
executive pay accounts for a small proportion of the labor costs of an
organization, and executives have a disproportionate ability to influence
organizational performance. They also help set the culture, so if their pay
seems unrelated to organizational performance, employees may not
understand why their pay should be at risk depending on the organization’s
performance. Table 11.10 in the text provides data on CEO compensation.
B. There is much criticism of executive pay, however, because:
1. Some executives are very highly paid, such as Lawrence Ellison, the CEO
of Oracle who earns over $96 million. However, these figures reflect
participation in a stock plan (Table 11.11).
2. Executives in the United States are the best paid in the world (see Table
11.12 for total remuneration of CEOs in selected countries).
3. Often, the ratio of executive pay to average worker pay is cited as creating
a “trust gap” in which workers do not trust executives’ intentions and
resent their pay. The issue becomes even more salient when companies are
engaging in layoffs but are not cutting executive pay.
IX. Government Regulation of Employee Compensation
A. Equal Employment Opportunity (EEO) (Title VII) prohibits discrimination in all
employment outcomes, including pay, unless business necessity can be proven.
Two trends related to EEO are the increasing participation of women and
nonwhites in the labor force.
1. The proportion of wages that women earn compared to men was 81
percent in 2010, and Black to White earnings was 80 percent. There are
legitimate explanations such as education, experience, and occupation,
although even when these are controlled, differences remain.
2. Although the rates have risen in recent years, in the case of women, the
gap may be related to the fact that “women’s” work may be undervalued.
Another hypothesis is related to “crowding,” which argues that women
have been restricted to entering only a few (low-paid) occupations.
3. Comparable worth (or pay equity) is a public policy that advocates
remedies for any under evaluation of women’s jobs.
a. Typically, comparable worth becomes an issue when comparisons
between internal (job evaluation) and external (market surveys)
data suggest that there is conflict in which jobs predominantly
occupied by women are evaluated more highly internally than in
terms of the market data. (See Table 11.13).
b. One problem is that job evaluation is most often used to help apply
market-pay policy and not replace the market. There is also
concern that EEO regulations will attempt to replace market forces
(although there are no regulations related to comparable worth)
and that using only internal comparisons would result in
overpayment and underpayment in several instances in relationship
to the market, which would create a market disadvantage.
c. Despite potential problems with market shares, the courts have
consistently ruled that using the going market rates of pay is an
acceptable defense in comparable worth litigation suits.
d. Another approach has been to suggest that organizations should
examine, when women’s pay falls behind that of men, entry and
access to promotions, and so on. Programs such as mentoring
might improve the ability of women to access higher-level jobs.
1.1.1.1 B. Minimum Wage, Overtime, and Prevailing Wage Laws
1. The Fair Labor Standards Act (FLSA) of 1938 established a minimum
wage and overtime pay rate.
2. Minimum wage is the lowest amount that employers are legally allowed
to pay. Minimum wage now stands at $7.25 an hour.
3. Executive, professional, administrative, outside sales, and certain
“computer employees” are exempt from FLSA coverage (the estimate is
that about 20 percent of jobs fall in this category). Exempt means that
these employees are not covered by the FLSA, and they are not eligible for
overtime pay.
4. The Davis-Bacon Act (1931) and Walsh-Healy Public Contracts Act
(1936) require federal contractors to pay employees no less than the
prevailing wages in the area. The prevailing wage is set by the Secretary
of Labor and is greatly influenced by relevant union contracts in the area.
1.2
Integrity In Action:
When It Comes to Working Overtime, What Is Good for Workers?
This vignette overviews the overtime situation at Taiwan-based Foxconn – a major supplier for
Apple. In the past, the company had been found in violation of China’s labor laws requiring
workers to work more overtime than permitted. The company agreed to limit overtime, but some
workers still work more hours than permitted. However, interviews with several employees
indicate that these workers want to continue to work the overtime hours they are and more.
Some workers predicted that others would leave the company if overtime was cut. Another
dimension of this problem is that labor costs in China are predicted to increase with the limits on
overtime due to increase number of hires and anticipated increased base pay in order to entice
workers to work for the company.
Discussion Question
1. What is the ethical thing to do here regarding overtime?
This question is very personal in nature and each student will likely have their own
Foxconn in the past – including employee suicides due to overwork. The other side of
1.3 A Look Back
We began this chapter by looking at how U.S. automobile companies and their workers
have had to make dramatic changes to reduce labor costs in hopes of helping the
companies survive, as well as saving jobs. We also saw other strategies to control labor
costs in these difficult times. For example, some firms are offshoring work to countries
(e.g., China and India, but also the United States) in part, to make labor costs more
competitive.
2 Questions
1. What types of changes have the companies discussed in this chapter made to their pay
structures to support execution of their business strategies?
One example presented in the chapter is VW, which has built a new plant in Tennessee,
2. Would other companies seeking to better align their pay structures with their business
strategies benefit from imitating the changes made at these companies?
Yes, certainly the examples of VW and of Google provide illustrations of ways that
Chapter Vocabulary
These terms are defined in the “Extended Chapter Outline” section.
Pay Structure
Pay Level
Job Structure
Efficiency Wage Theory
Benchmarking
Rate Ranges
Key Jobs
Nonkey Jobs
Job Evaluation
Compensable Factors
Pay-Policy Line
Pay Grades
Range Spread
Compa-Ratio
Delayering
Skill-based Pay
Comparable worth
Fair Labor Standards Act (FLSA)
Minimum Wage
Exempt
Discussion Questions
1. You have been asked to evaluate whether your organization’s current pay structure makes
sense in view of what competing organizations are paying. How would you determine
what organizations to compare your organization with? Why might your organization’s
pay structure differ from those in competing organizations? What are the potential
consequences of having a pay structure that is “out of line” relative to your competitors’?
You would determine what organizations to compare an organization to by looking
Your organization’s pay structure may differ from those in competing organizations if
A consequence of having a pay structure out of line is that if you are overpaying, you will
2. Top management has decided that the organization is too bureaucratic and has too many
layers of jobs to compete effectively. You have been asked to suggest innovative
alternatives to the traditional “job-based” approach to employee compensation and to list
the advantages and disadvantages of these new approaches.
The most innovative alternative discussed in the text is skill-based pay. The advantages
and disadvantages discussed in the text are as follows:
Advantages are that flexibility helps promote lower staffing levels and aids in
Potential disadvantages are that the organization may find it difficult to use all
3. If major changes of the type mentioned in question 2 are to be made, what types of so-called
process issues need to be considered? Of what relevance is equity theory in helping
understand how employees might react to changes in the pay structure?
Communication and participation would both be critical if skill-based pay was
implemented. Communication would undoubtedly be complicated since, as mentioned in
4. Are executive pay levels unreasonable? Why or why not?
There is evidence that may be presented on both sides for this question. The text
discusses that pay levels may not be unreasonable, since executives are critical in
On the other hand, there are some executives who tend to be very highly compensated
(often on the basis of stock options). This presents some problems relative to social
5. Your company plans to build a new manufacturing plant but is undecided where to locate
it. What factors would you consider in making a decision about which country (or state)
to build the plant in?
For most organizations, the cost of labor is the highest operating expense; therefore labor
with the appropriate skills must be available. Also, the area should be assessed to
6. You have been asked to evaluate whether the pay structure is fair to women and
minorities. How would you go about answering this question?
First, you would have to examine whether any policies exist that are unfair to women and
Next, you would want to examine possible clusters of minorities and women, what their