6 Dangerous Myths

about Pay
Group 16
Bhagat Pratik Jaydas | MBA19183
Atif Yamin | MBA19203
Prateek Dhyani | MBA19213
Ujjwal Singh | MBA19238
Prateek Pandey | MBA19265
Truth and
Consequences
 Myth 1 states that labour rates and labour cost are the same thing
 Reasons for this myth
1. Labour rates are highly visible. Its easy to
compare these rates with that of your
competitor. Thus a manager who is thinking
short term will focus on this myth
2. Labour cost appear to be the lever closest at
hand so managers assume it has the most
leverage.

MYTH 1  Myth Buster

1. Throughout the industry we have various
examples which shows that it is high
productivity rate and not high labour rate that
matters
2. We have examples where organizations have
high attrition rate due to reduction in their
labour rate. This leads to poor customer
experience because new employees are not as
efficient. This in turn leads to reduction in profit
 MYTH 2

Myth 2 states that you can lower your labour cost by cutting labour rates
 Reasons for this myth
1. Managers buy into myth 2 if they already believe in myth 1
2. Managers don’t take in account the reduction in productivity that will occur due to cutting labour
rates
 Myth Buster
In a software intensive industry good programmers are expensive. If a company replaces a $2000 a week
engineer with one that earns $500 a week then it is highly likely that the overall cost will shoot up
because the lower paid employee will be slow and inexperienced
 Myth 3 states that labour costs constitute a significant
portion of total costs
 Reasons for this myth
1. Managers buy into myth 2 if they already
believe in myth 1
2. This myth is true but only sometimes. We have
industries like accounting and consulting where
labour cost are a significant portion of total
costs. But in rest all industries this is not true
MYTH 3 yet due to its partial correctness it is
considered as a universal truth

 Myth Buster
Labour cost are only the most immediately
malleable expense. We have industries like new
united motor manufacturing which paid high wages
and still had better results than companies like Ford
and General Motors which believed in cost cutting
by reducing wages
 MYTH 4

Myth 4 states that low labour costs are a potent and sustainable competitive weapon
 Reasons for this myth
1. The compensation-Consulting industry helps to perpetuate this myth
2. The managers are unable to get a birds eye view of their organization. They tend to focus more on
low wages than on increasing productivity through process improvement and technology
3. Low Labour costs are easy way out for these managers

 Myth Buster
Companies like Toyota which focus more on quality control where able to get better returns then their
competitors like Ford and General Motors which focused more on low labour cost. Concepts like six
sigma and total quality management enabled companies like Toyota and Nissan to get a head start over
their counterparts
 Myth 5 states that individual incentive pay improves
performance
 Reasons for this myth
1. We can blame the economic model of human
behaviour taught in B-Schools and held to be
true in the popular press. This model presumes
that behaviour is rational and human psyche is
driven by self interest
2. Throughout the 1990’s the pay practice of
Fortune 1000 reported an increase in individual
pay structure. This encouraged the entire

MYTH 5 industry to follow the model blindly

 Myth Buster
1. Many studies strongly suggest that this form of
reward undermines team work, encourages
short term focus and this also leads to increase
in various biases. At lantech due to this pay
structure the rivalry between colleagues
intensified. The 95% of upper managements
time went into conflict resolution
2. At Highland super stores customers were
misguided because of this pay structure this led
to loss in business
 MYTH 6

Myth 6 states that people work for money

 Reasons for this myth
1. Many economic models portray work as hard and aversive this implies that the only way people
can be induced to work is through some combination of reward and sanctions. Due to this fallacy
many managers try to bribe there employees into working
 Myth Buster
We have industries like SAS and AES where the salary is not high but people still work because of the
work culture and the environment that is created by the upper management
When people were asked why they didn’t move to higher paying jobs they simply said that the holistic
environment is more important for them. Many of them get to work with the latest technology and have
the freedom to implement their own ideas. This creative freedom was more important for the
employees
  Through various examples mentioned in the
paper we came to realize that due to the
prevalent myths the companies are unable to
fully utilize the full potential of their human
capital
 Most of the companies are simply following the
model that is most popular in the industry. They
have no logical reason to follow the models.

ANALYSIS Moreover the managers lack the courage to

implement the changes when suggested
 Pay cannot substitute for a working
environment high on trust fun and meaningful
work
 Most merit pay systems share two attributes
1. They absorb vast amount of
management time
2. They make everybody unhappy