Six Dangerous Myths About Pay (HBR OnPoint Enhanced Edition)

This is an enhanced edition of HBR article 98309, originally published in May/June 1998. HBR OnPoint articles save you time by enhancing an original Harvard Business Review article with an overview that draws out the main points and an annotated bibliography that points you to related resources. This enables you to scan, absorb, and share the management insights with others. In this article, Jeffrey Pfeffer (Thomas D. Dee Professor of Organizational Behavior at Stanford Business School) identifies widely accepted "fictions" about pay, disproves them with evidence, and then offers advice on how managers should pay their employees, and why. Every day, executives make decisions about pay, and they do so in a landscape that's shifting. As more and more companies base less of their compensation on straight salary and look to other financial options, managers are bombarded with advice about the best approaches to take. Unfortunately, much of that advice is wrong. Indeed, much of the conventional wisdom and public discussion about pay today is misleading, incorrect, or both. The result is that business people are adopting wrongheaded notions about how to pay people and why. In particular, they are subscribing to six dangerous myths about pay: 1) Labor rates are the same as labor costs; 2) Cutting labor rates will lower labor costs; 3) Labor costs represent a large portion of a company's total costs; 4) Keeping labor costs low creates a potent and sustainable competitive edge; 5) Individual incentive pay improves performance; and 6: People work primarily for the money. The author explains why these myths are so pervasive, shows where they go wrong, and suggests how leaders might think more productively about compensation. With increasing frequency, the author says, he sees managers harming their organizations by buying into--and acting on--these myths. Those that do, he warns, are probably doomed to endless tinkering with pay that at the end of the day will accomplish little but cost a lot.