Pfeffer’s Six Dangerous Myths About Pay

A few days ago, I had a little twitter conversation with Dave Rooney, Ben Simo, and Elisabeth Hendrickson about rate vs. cost.

Which reminded me of Jeffrey Pfeffer‘s excellent article, Six Dangerous Myths About Pay (originally in HBR May/June 1998).

This article should be required reading for all managers.

The Myths are:

Myth #1: labor rates are the same as labor costs.

Myth #2: cutting labor rates will lower labor costs.

Myth #3: labor costs represent a large portion of a company’s total costs.

Myth #4: keeping labor costs low creates a potent and sustainable competitive edge.

Myth #5: individual incentive pay improves performance.

Myth #6: people work primarily for the money.

Ain’t none of ‘em so.

When managers confuse labor rate with labor cost, they make decisions that usually end up costing lots of money.

Labor is an easy to count cost. It’s much harder to count the costs of multi-tasking, poor decision-making, ineffective and demotivating work systems, communication latency and other wastes. But the later factors have a big effect on productivity, and therefore, labor cost.

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