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VII. ANALYSIS OF DILEMMAS:
DILEMMA 1:
Based on an evaluation of SKA's, a company has determined that two jobs (job A and job B) are
equal. However, when the firm studies the labor market, it /nds that applicants for job A are plentiful
whereas those for job B are very scarce. Should the firm offer less to those who apply for job A or should
the pay be equal?
This dilemma raises a number of issues. What criteria should be used to determine pay ranges
and starting pay for a given job? Should pay be based on the knowledge, skills, and abilities (SKA's)
required to perform a job? Should it be based on the applicant's past record or market conditions?
Ethical considerations are involved in these questions because pay ranges for one job are evaluated in
terms of fairness by those performing other jobs. If these ranges are viewed as too high, employees
holding other jobs feel mistreated. On the other hand, if the employees holding the job in question
believe that their pay is too low, they may feel that they have been intentionally "harmed" by the
employer.
Many firms base pay ranges on the knowledge, skills, and abilities necessary to perform a job.
Yet, this can lead to moral dilemmas. The national media has highlighted this issue repeatedly. Teachers
in large cities have often noted that they are paid less than garbage collectors and have protested that
this is unethical. Those advocating comparable worth have likewise raised this issue.
DILEMMA 2:
Assume that the supply of electrical technicians is low, so a firm hires a group of them at $18 per
hour. Two years later, due to a recession, the supply of technicians is high, so the market rate for them is
now $15 per hour. Should the firm pay new hires $18 or $15? Should it lower the pay of existing
technicians to $15?
Either course of action can be viewed as unfair by some because either may have the effect of
bene/ting some group and harming others. Instructors may want to raise the issue of a psychological
contract here. Employees may expect that their pay should not ever be lowered--particularly in
response to supply and demand. Employees may view this as an implied contract.
DILEMMA 3:
Jim is given an extremely large raise because of his superb work record one year. As a result he
is currently earning $50,000, whereas others at the firm holding the same job are earning $45,000.
Everyone expects Jim to continue to excel and enhance the entire unit's productivity. Unfortunately,
Jim's performance drops o1 a7er the first year, and his performance is now just average. What should
be done about his pay? Should it be reduced to reCect his current performance?
The ethical issues in this case revolve around what criteria should be used to determine pay
raises. Should they be based solely on job performance? Educational achievement? effort and aDtude?
Hardship and need? Length of service? A combination of criteria? In this case, Jim's coworkers may
view this situation as unfair whereas Jim may feel mistreated if his pay is reduced.
There is a high consensus among human resource managers that employees should be rewarded
solely on performance. However, it isn’t unusual to /nd rewards predicated on favoritism, friendship, or
membership in a gender, race, or age group.
It is important to keep in mind that employees often argue against basing pay strictly on job
performance. Some prefer that seniority or educational achievement or some other criteria be the
driving force. This further complicates the ethical issues involved.
DILEMMA 4:
One year, Ethan's performance is truly spectacular, just as good as Jim's had been in the previous
case. Moreover, let's further assume that the company has no raise money available that year so no
employee, including Ethan, receives a merit raise. Is this appropriate?
This dilemma is similar to the proceeding one in that both deal with the issue of employee
raises. Ethan may feel that he deserves a raise in spite of the lack of raise money available. However,
what is the firm to do if no money is available? Should money be taken from some other employee(s)
and given to Ethan? Should the firm promise Ethan that in the future he will be justly rewarded? But,
will the firm be able to keep its promise?
DILEMMA 5:
Mary and Sue both work in the same department. Mary believes that Sue is being paid
considerably more than she is. In fact, both employees are being paid about the same amount. Mary
complains to her boss and the compensation manager and wants a pay raise. What should the
compensation manager say, assuming the firm follows the policy of not revealing the pay of individual
employees? Should Mary be told the amount of Sue's pay? Or, should Mary only be told that there is a
"misunderstanding" and that her belief is incorrect? Or, should some other approach be taken?
This ethical dilemma focuses on the issue of what compensation-related information should be
communicated to employees? Should firms reveal pay ranges for each job and how each job was
evaluated for pay purposes? What should be communicated regarding fringe benefit? Should starting
pay rates be shared with current employees? What should employees be told regarding executive
compensation? All of these questions entail ethical dimensions because the answers not only involve
the fairness issue but also the issue of truth and honesty. Is the firm treating employees fairly? Is the
information provided truthful and complete or is deception or a cover-up involved?
Many firms prohibit disclosure of the pay of individual employees. Indeed, some ask employees
not to tell others what they are being paid. Some organizations contend that pay disclosure may lead to
hard feelings and give rise to negative consequences for the firm and employee. A second contention is
that organizations cannot compete effectively if pay is disclosed. Competitors might be able to identify
an organization's labor cost structure, while the organization does not have equal access to other firms'
data. A compounding factor involves employees' right to privacy.
DILEMMA 6:
When Mary was hired she was told verbally that she would receive a raise when she finished her
college degree and yet another raise when she was given added responsibility. She accepted the job
offer based on this understanding. However, during the next two years, the firm experienced slow sales
and has asked all factory employees to accept a 12% pay decrease. But Mary, who does not work in the
factory, has finished college, and has accepted more responsibility. Should she receive a raise?
In this case, the firm made a verbal commitment to Mary to give her a raise. Mary acted based
on this commitment and undoubtedly feels that she is entitled to the raise. On the other hand,
employees in the factory are being asked to accept a 12% decrease in pay which they may feel breeches
an implied commitment not to cut their pay. Further complicating maJers is the fact that employees in
the factory may be even more upset if they learn that Mary gets a raise.
It should be noted that the issues depicted in this dilemma show up whenever firms grant pay
increases to one group of employees (e.g., executives) while not granting wage increases to another
group or even asking them for wage concessions. Some union leaders contend that this is unethical
because if the company is financially suffering, all groups should bear the burden equally.
DILEMMA 7:
Two firms in the chemical solvent industry decide to merge. Employees in the testing
department of firm A have enjoyed high pay for many years. However, firm A is purchased by firm B who
has a history of paying low wages. As a result, employees in firms A's testing department earn on
average $2.00 more per hour than those at firm B. Upon completion of the merger, what wage levels
should prevail? Should wages be cut for those who worked for firm A? Or, should wages be increased
for those in firm B?
Those enjoying higher salary levels view a downward adjustment as unfair, particularly since
they had no say in the merger. Those employees being paid at the lower rate would undoubtedly
welcome a raise. On the other hand, management must balance the demands of the shareholders with
the wishes of the employees.
Instructors may want to point out the broader issues involved in this dilemma. What
compensation levels should prevail when any firms merge? Buy-outs often entail consideration of the
pay structure of the two firms involved, and it isn't uncommon to /nd similar positions with signiticantly
different pay levels. Is it ethical to reduce the compensation of employees working for a recently
acquired firm to reCect the pay structure of the acquiring firm?
DILEMMA 8:
Sue is a /7y-/ve year old employee of company A. Her children are out of college and her
parents have both died. Company A offers a child care program to all employees along with an elder
care program. However, Sue, like many other employees, has no need for these services, neither now or
in the future. Should the firm retain these programs? Should alternative benefit for employees who
have no use for such services be offered?
This dilemma raises the issue of which fringe benefit should be offered to employees. Should
all employees be offered the same benefit? What about employees who have no use for a certain
bene/t? Most benefit are not used equally by all. But some benefit, such as child and elder care may
be more selective as many employees will never need them while others may use it extensively. Further,
both child and elder care may be relatively expensive. Employees who have no use for these benefit
argue that it is unfair, thus unethical, for firms to offer services that cater only to a few. On the other
hand, the firm may feel that it has to offer these benefit in order to aJract new employees and remain
competitive. It should be noted that some firms have developed Cexible bene/t plans to deal with this
problem.
DILEMMA 9:
Mary works as an accountant for a firm in the textile industry. During non-working hours she
does extensive volunteer work for the American Red Cross, Meals on Wheels, and the American Heart
Association. Mary's employer wants to maintain a favorable image in the community, so it wants every
employee to donate money to the United Way. Should the firm pressure Mary to donate money? Keep
in mind that if Mary doesn't donate money, other employees may not either which could result in the
firm having an unfavorable image in the community. On the other hand, Mary already donates time
which has a monetary value, and she may feel that it is unfair to be asked to donate even more.
Should employees be asked or coerced into contributing to charitable fund drives? Some firms
want to be good corporate citizens and believe that the only way they will obtain suNcient money and
participation is to pressure employees into contributing to a favored charity. A few employers require
"fair share" donations as a condition of employment. Yet, employees such as Mary may resent such
pressure and believe that it is unethical.
Instructors may want to point out that charities need money in order to serve citizens. Does
their need justify the "requirement" that employees must donate? Students often have strong feelings
on this one!
DILEMMA 10:
Frank works 25 hours per week for a mail order firm in the packaging department. He receives
no benefit other than those required by law. Frank does the same type of work as three other
employees all of whom work full time. These employees qualify for pensions, medical care, long term
disability, child care, etc.. Is this appropriate? Assume that Frank would like to work full-time, really
wants to receive benefit, and feels harmed because of his shorPall. On the other hand, the firm is not
legally required to pay Frank benefit, Frank only works part time, and it would be expensive to pay
benefit to all part-time employees, including Frank.
The fundamental ethical issue involved in this case is whether part-time employees should
receive some, all, or a pro-rated share of the fringe benefit granted full time employees. Part-time
employees in many firms do not receive any benefit above those required by law. One could argue that
this is inequitable, particularly if their contribution to the organization's success is substantial.
Conversely, one could argue that part-time employees contribute less to the organization and it would be
unduly expensive to pay such benefit.
72. EXERCISE: PAY INVERSION: IS IT PRACTICAL AND ETHICAL?
I. OBJECTIVES
1. To familiarize students with the concept of pay inversion
2. To examine different ethical approaches and how they may apply to pay inversion.
3. To examine the issue of whether an action is ethical irrespective of whether one is
the fibene/ciary” of an action, the fivictim” of it, or a decision maker.
4. To familiarize students with the potential costs and benefit to a firm of inverting
pay.
5. To examine alternatives to pay inversion
II. OUT-OF-CLASS Preparation Time: None, unless the professor assigns reading the exercise
before class.
III. IN- CLASS TIME SUGGESTED: 30 minutes
IV. PROCEDURE: See text
V. INTRODUCTION:
Historically, firms have based employee compensation on the skills, knowledge, and abilities
needed to perform a job. Similar jobs were grouped together to form pay grades. Then, within each pay
grade, raises were determined by merit or a combination of merit and seniority. This pay system was
deemed both logical and fair.
However, for jobs in high demand, this system has come under pressure by a phenomenon
called pay inversion. Economists note that whenever demand for labor exceeds supply, prices increase.
So, unless firms establish a policy to eliminate or mitigate its effects, pay inversion, or at least pay
compression, is likely to occur.
VI. DEBRIEFING THE EXERCISE
A7er students have presented their answers to the questions at the end of all three scenarios,
an instructor may want to review the answers. Did their answers differ from one scenario to another?
That is, were they more likely to invert pay and believe it is ethical if they were the bene/ciary rather
than the victim? How many students agreed to invert pay when they were placed in the manager’s role?
Students may believe that there is nothing wrong accepting a new job at market rates (Scenario 1), but
that it is unethical for the firm to hire a new employee at a higher salary than they are making (Scenario
2). At this point, one could ask whether the ethics of an action should depend on whether one is the
bene/ciary, a victim, or a decision maker. One could argue that ethical correctness should be
independent of one’s role.
As an aside, when discussing the exercise, the instructor may want to avoid using the terms
fibene/ciary” and fivictim” because they are judgmental, implying that inversion is unfair. Neutral terms
such as fibeing paid more” (not the bene/ciary) and fibeing paid less” (not the victim) could be used.
Alternatively, one could use the terms fiat market” or fibelow market.”
Ethical Issues. Students are asked in this exercise to examine the three scenarios in terms of /ve (or
more depending on the professor’s preference) specific ethical theories. To assist faculty, we will now
examine pay inversion in terms of these theories.
Legalistic Approach. The legalistic approach to ethics contends that if an action is legal, then it is ethical.
Instructors may want to ask if any laws make inversion illegal. Since pay inversion may affect older
employees, some may say it is illegal because it discriminates based on age. Under the 1967 Age
Discrimination in Employment Act (ADEA), plainti1s must bring a claim on the grounds of discriminatory
intent or adverse impact. The Supreme Court ruled in 2005 that firms can validly argue in their defense
that pay inversion is a fibusiness necessity.” Thus, the bar for winning adverse impact cases based on age
discrimination is high. Instructors may want to ask if they see any disadvantages to using legalism to
justify inversion. Do they think it will cause employees to also adopt an fiif it is legal, it is ethical”
philosophy? Should employees judge all behaviors only in terms of whether they are legal? What would
be the rami/cations of this approach? Is a legalistic corporate culture one students would recommend?
Ethical Egoism. As a moral philosophy, ethical egoism states it is ethical to act only in one’s own best
interests without regard for others. It has been argued that most businesses are fundamentally egoistic
and just look out for themselves. While one may consider this harmful to society, Adam Smith suggests
that looking out for one’s interests will ultimately lead to the greatest good for the greatest number.
Students could be asked if they believe Adam Smith’s argument. Instructors may want to ask whether
justifying salary inversion based on ethical egoism has any negative consequences. For example, the
instructor could ask whether this reliance on ethical egoism will encourage employees to also adopt the
expediency principle and filook out for number one.” What are the consequences to the firm and the
effect on its corporate culture if everyone adopted this moral philosophy?
Utilitarianism. Utilitarianism is a teleological moral philosophy that compares the costs versus the
benefit of an action and bases decisions on what helps the most with the least harm. It focuses on the
consequences of one’s actions and not the intention. Unlike ethical egoism, this approach looks at
actions in terms of how outcomes affect all stakeholders, not just one individual. Based on utilitarianism,
one could justify pay inversion by arguing that its’ benefit to stakeholders outweigh the costs. One
could argue that paying a market salary aJracts highly qualified applicants. Inversion ensures that the
position will be filled quickly, reducing recruiting costs and eliminating harm to current employees by
reducing, or at least not increasing, their work load. This argument would be particularly compelling if
the position would be lost if not filled quickly. Instructors may want to explain that one of the major
problems with utilitarianism is the diNculty of identifying the various stakeholders, assessing their
importance, and quantifying the costs and benefit to each. A key factor in determining whether or not
inversion is ethical in terms of utilitarianism may depend upon how management presents the costs and
benefit of pay inversion to employees. Is their presentation balanced (costs as well as benefit),
transparent, and honest? Do they explain what the firm intends to do about pay inversion in the future?
Distributive Justice. The fundamental principle of distributive justice is that equals should be treated
equally. An instructor could ask whether salary inversion violates this principle. If distributive justice
were adopted as a firm’s ethical philosophy, what would the corporate culture be like? Would this be a
good company to work for? Why or why not? An instructor may want to ask what the applicant in
Scenario 1 would need to do in order to meet the requirements of distributive justice. Asking to be paid
less than what was offered and less than what current employees are earning would meet the
requirements, but would this ever happen? Instructors may want to mention that management
theorists have developed their own versions of distributive justice, one of which is Adams’ theory of
equity (Adams, 1963). Here, employees determine if they are being treated fairly by comparing their
contributions to the firm (inputs) against their rewards (outcomes) to those of one or more other
employees. If an individual believes that this ratio is equal, then the person views the situation as being
fair. If the ratio is perceived as being unequal, the person will view it as being unfair. Employees could
see salary inversion as being unfair based on equity theory since the new hire’s inputs are less and the
outcomes (salary) are more. Another management theory related to distributive justice and fairness is
psychological contract theory (Rousseau & Parks, 1992). It argues that employment offers and
acceptances are based on mutual understandings. Traditionally, the psychological contract includes the
provision that rewards are based on job performance. An instructor may want to ask: does salary
inversion break the psychological contract? Is this unethical?
Kant’ Ethical Imperative Approach. Under Kant’s ethical imperative approach to ethical behavior, respect
for humans is crucial. Kant argues that to be respecPul, one should treat people only as they have freely
consented to be treated beforehand. An instructor could ask whether most employees would consent to
salary inversion, especially in the long term. Does hiring someone with fewer job skills at a higher salary
show respect for current employees? Is inversion ethical under Kant’s theory? In addition, one might
infer that Kant would ask what would happen if salary inversion became a universal law and was
widespread, i.e. pay for all employees was primarily based on when one was hired and the market at the
time, not necessarily the traditional pay criteria of job duties, seniority and/or job performance. Does
minimizing the value of seniority and/or performance lead to a moral corporate culture that respects
individuals?
Cost/Benet Issues in Pay Inversion. One of the questions asked in Scenario 3 relates to the
costs/benefit of pay inversion. Most students can quickly state the benefit of inversion: by paying
higher rates, management is able to hire a new employee who may ultimately help the firm meet its
staNng needs. However, students have more trouble focusing on the costs. These costs can be divided
into three major categories, those associated with: 1) recruiting, hiring, and training the new employee;
2) current employees leaving for higher pay elsewhere, and 3) remaining employees’ behavioral
response to pay inversion.
The expenses associated with recruiting, hiring, and training new employees can be signiticant.
They include advertising positions, reviewing applicants’ records, paying travel and hotel expenses,
conducting interviews, giving psychological and skill tests, doing background checks, and paying for
physical exams. A study conducted by the Hay group found that the replacement costs for professional
employees can be equal to 18 months pay, not including lost sales and productivity (Lavelle, 2003).
The costs associated with inversion-related turnover can also be substantial. Job specific
knowledge, knowledge of organizational history, and important contacts both outside and inside the firm
may be lost. Furthermore, when employees leave for higher pay, it may encourage others to question
why they should stay, possibly causing them to leave. As suggested above, there are costs associated
with the lost sales and productivity that occur until the new hire arrives and is fully capable of
performing the job. If the departing employee is an integral part of a work team, his or her departure
may reduce the productivity of other team members, at least for a short time.
Considerable research has been conducted regarding the effects of pay dissatisfaction on
employee behavior. The results clearly show that employee perceptions of pay inequity can adversely
affect their motivation and job performance (Aldag & Kuzuhara, 2002). In addition, employees may feel
unappreciated because the firm hasn’t taken into account their tenure, experience, historical knowledge,
and contributions. This belief can translate into a powerfully negative message about the importance of
job performance as a determinant of compensation and result in lower productivity.
Likewise, according to equity theory, when employees believe that they are being unfairly
treated, they are likely to take action to restore equity (Adams, 1963). These steps may include a direct
reduction in productivity. In addition, some employees may resent the new hire and may refuse to help
the new person, taking the aDtude that those who are paid more should earn their money. In addition,
studies show that employees who are dissatis/ed with their jobs, whether or not as a result of inversion,
are somewhat more likely to be absent (George & Jones, 2005). All negative behaviors employees take
to restore equity are costs that have to be considered as part of the cost-bene/t analysis. It is important
to remind students that not all employees will react negatively to inversion; some may be altruistic and
not resent inversion while others may not place a high value on compensation. Still others may not like
inversion but will work hard out of a sense of responsibility or professionalism.
Research has also found that when employees are dissatis/ed with their job, their organizational
citizenship behavior (see Organ, 1994) and the degree to which they engage in counterproductive work
behavior ( Dalal, 2005) are affected. Counterproductive work behavior is defined as intentional
employee behavior that is harmful to the legitimate interests of an organization (Gruys & SackeJ, 2003)
and includes giving poor customer service, complaining and creating discontent among fellow
employees, and stealing company property.
Organizational citizenship behavior is beneficial to the organization and refers to behavior that is
above and beyond the call of duty. It includes helping behaviors which relate to the willingness of
workers to assist coworkers, civic virtue which entails being a good corporate citizen and includes
aJending voluntary meetings and responding to E-mails promptly, and sportsmanship which involves
being willing to tolerate minor problems in the workplace (e.g., not complaining or finding fault with
others) (Ackfeldt & Coote, 2005).
A study conducted by Dolan, Tzafrir & Baruch (2005) found that when employees believe that
employment processes are fair, their trust in the organization increases, and they are more likely to
engage in organizational citizenship behavior. One could surmise that if employees feel that pay
inversion is an unfair employment process, they may decrease their organizational citizenship behavior
and increase their counterproductive work behavior.
As part of any discussion on the practical issues surrounding pay inversion, an instructor may
also want to discuss the typical explanation for salary inversion which is that the fimarket” demands it,
i.e., firms must pay market rates to hire people who are in short supply. Some, however, question the
validity of the market argument because when someone says that the external fimarket” for a particular
job is $X, the person is typically referring to an average. Some are paid less, while others are paid more.
Furthermore, when economists talk about fithe market,” they are typically referring to a commodity, e.g.,
light sweet crude oil. However, one could argue that employees are not commodities. In addition, the
fimarket” has diNculty taking into account real life factors such as the cost of living or the quality of life
in an area and the unique qualities of the applicant or the job. The market argument also may run
counter to the ficomparable worth” notion that pay should be equal for jobs that require comparable
skills, effort, and responsibility and that have similar working conditions. Students may be asked
whether or not they think fithe market” argument is valid.
Pay inversion has also been justi/ed by saying that there are two different markets, one for
current employees and one for new employees. Starting pay is tied to external markets and set high to
aJract people who are in short supply. On the other hand, current employees who often have limited
mobility can be retained at lower salaries. Students may be asked whether or not this two-tiered system
is a valid justification for pay inversion.
Firms often argue that they don’t have funds to pay all current employees market rates, thereby
eliminating pay inversion. This explanation is plausible if a firm is weak financially. However, the filack of
funds” argument is less compelling (and less honest) when firms expand their facilities, buy new
equipment, set up new divisions, give raises to top executives, and hire more managers. Students may
be asked whether this filack of funds” argument is a valid argument for inversion.
Alternative to Pay Inversion. A question in Scenario III asks students to address potential ways firms
may be able to avoid pay inversion. The most obvious option is for the firm to raise the compensation of
all current employees so as to establish equity for everyone. However, many firms may argue that they
cannot afford to do this. So, other alternatives need to be examined. Firms that believe there are both
signiticant costs and benefit to pay inversion may want to establish a policy that permits inversion but
aJempts to minimize it. For example, a firm could take the view that compensation consists of both
salary and non-salary rewards and offer the laJer to those whose pay is inverted. This may include
giving current employees first choice of vacation times, beJer oNces and working conditions, and first
choice of working overtime. These firms also may improve the quality of life for current employees by
giving them more work/life balance options. For example, at Red Lobster restaurants, top performing
general managers are rewarded with resort vacations as well as seminars with psychologists on lifestyle
issues to keep them from leaving (Berta, 2005).
Another strategy for minimizing the negative impact of inversion is to compensate current
employees financially but not through salary increases. For example, a firm can give employees stock
options based on seniority and performance to keep current employees from leaving for a higher salary
or giving bonuses.
Some firms may aJempt to address inversion by building equity adjustments into the salary
increase budget. For example, if the budget is 4%, then a firm could allocate 3.5% based on merit and .
5% based on equity adjustments. A similar approach is to give set dollar amounts (e.g., $3,000) for raises
rather than using percentage increases. This does not eliminate pay inversion, but the dollar differences
between those who bene/t from inversion and those who don’t will not increase and, over time, the
percentage difference between the two groups’ pay will decrease.
Firms could also minimize the raises given to new employees until the pay of current employees
catches up. This approach is an extension of the one used when mergers occur and some employees are
demoted. Those receiving fired circle rates” are told their salary is frozen until equality is established.
This policy is based on the philosophy that new employees should not bene/t inde/nitely from market
conditions at the time they were hired. One could argue that those former finew employees” are now
ficurrent employees” and should be treated as such.
Some firms may prefer to develop a policy that divides the workforce into two or more groups.
Here, the firm would increase the pay for those in the highest productivity group to meet or exceed the
pay of new, less productive employees. Workers in the less productive groups would not be granted pay
increases, but may receive non-salary rewards commensurate with their productivity. The logic behind
this approach is that if the firm can’t pay market rates to everyone, it should at least try to retain its best
employees by paying them market rates.
Finally, some firms may conclude that inversion is unethical and/or the costs of inversion far
exceed the benefit and establish a fino inversion” policy. For example, many union contracts prohibit
pay inversion so these firms often establish apprenticeship programs to supply them with new
employees at a relatively low starting wage. Similarly, some non-unionized firms eliminate inversion by
having a policy of hiring people with fewer credentials and training them. For example, a firm may hire
employees with a bachelor’s degree and train them, rather than pay an inverted salary to someone with
an MBA. Firms can also avoid inversion by increasing the job duties, responsibilities, and what is
expected of new employees so that they are worth the extra money they are being paid. In addition,
firms that pride themselves on having a very aJractive location or work environment, may compete for
new employees based on quality-of work-life issues, rather than invert pay.
