Many managers are influenced by dangerous myths about pay that lead to counterproductiv
Many managers are influenced by dangerous myths about pay that lead to counterproductive decisions about how their companies compensate 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. 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 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 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 company’s budgets. Because labor rates are highly visible, managers can easily compare their company’s rates with those of competitors. Furthermore, labor rates often appear to be a 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.
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 the “high” cost of German labor, citing as evidence the average amount paid to German workers. The myth is also perpetuated by the compensation-consulting industry, which has its own 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 continues 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 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 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 create new problems, the consultants will continue to have work solving the problems that result from their advice.
1. The passage suggests that the “myth” mentioned in line 5 persists partly because
A. managers find it easier to compare their companies’ labor rates with those of competitors than to compare labor costs
B. managers tend to assume that labor rates affect their companies’ budgets less than they actually do
C. managers tend to believe that labor rates can have an impact on the efficiency of their companies’ work processes
D. the average amount paid to workers differs significantly from one country to another
E. many companies fail to rely on compensation consultants when making decisions about labor rates
2. The author of the passage mentions business journals (line 39) primarily in order to
A. demonstrate how a particular kind of evidence can be used to support two different conclusions
B. cast doubt on a particular view about the average amount paid to German workers
C. suggest that business journalists may have a vested interest in perpetuating a particular view
D. identify one source of support for a view common among business managers
E. indicate a way in which a particular myth could be dispelled
3. It can be inferred from the passage that the author would be most likely to agree with which of the following statements about compensation?
A. A company’s labor costs are not affected by the efficiency of its work processes.
B. High labor rates are not necessarily inconsistent with the goals of companies that want to reduce costs
C. It is more difficult for managers to compare their companies’ labor rates with those of competitors than to compare labor costs.
D. A company whose labor rates are high is unlikely to have lower labor costs than other companies.
E. Managers often use information about competitors’ labor costs to calculate those companies’ labor rates.
4. The author of the passage suggests which of the following about the advice that the consulting firms discussed in the passage customarily give to companies attempting to control costs?
A. It often fails to bring about the intended changes in companies’ compensation systems.
B. It has highly influenced views that predominate in prominent business journals.
C. It tends to result in decreased labor rates but increased labor costs.
D. It leads to changes in companies’ compensation practices that are less visible than changes to work processes would be.
E. It might be different if the consulting firms were less narrowly specialized.
5. According to the passage, which of the following is true about changes to a company’s compensation system?
A. They are often implemented in conjunction with a company’s efforts to reconfigure its work processes.
B. They have been advocated by prominent business journals as the most direct way for a company to bring about changes in its labor costs.
C. They are more likely to result in an increase in labor costs than they are to bring about competitive advantages for the company.
D. They sometimes result in significant cost savings but are likely to create labor-relations problems for the company.
E. They may seem to managers to be relatively easy to implement compared with other kinds of changes managers might consider.
6. The primary purpose of the passage is to
(A) describe a common practice used by managers to control labor costs
(B) examine the relation between labor costs and other costs incurred by businesses
(C) explain why labor rates are a more significant factor than labor costs for most businesses
(D) identify a common misperception held by managers and point out some of the reasons for its persistence
(E) distinguish between a factor that companies can easily control and another that is more difficult to change