Join Edward Lawler III for an in-depth discussion in this video Why pay matters, part of Pay Strategy.
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- Well, pay matters because it's one of the most important elements of the relationship between an individual and an organization. From an organization's point of view, first and foremost, it's a major cost. Increasingly, it represents 60 or 70% or more of the total cost an organization bears as part of their business model. That's if you include benefits as well as cash in your pay equation. That's increased over time because increasingly knowledge-work businesses have labor as their major factor in their cost structure, and that of course means that pay and benefits become a very, very major part of their business model.
But it shouldn't be looked at just as a cost of doing business which has to be in line with your competitors, otherwise, of course, your products will be too expensive. It matters because it can impact behavior and organizational effectiveness in very significant ways. It's not just a matter of controlling costs, it's a matter of delivering pay in a manner that produces results that contribute to the bottom line or the performance of the organization. There's an enormous amount of research which shows that pay affects absenteeism, turnover, the willingness of people to join unions, but perhaps more important, their productivity and their performance.
And finally, of course, it also impacts their willingness to learn new skills and the kind of skills that they are able to learn and ultimately end up learning. Well, the first thing I'd suggest in talking to you about your pay is how big a piece of your total cost structure it is. If it's significant, which it is in almost every business, you should be very aware of how you're spending it, how your cost structure compares with that of your competitors, and of course what your return is on the investments you're making in pay.
And as a businessperson, you want to be sure that you're getting a good return on your business pay structure, and that it's producing the kind of results that you should get from it. And what do I mean by results? Well, I mean the productivity of your employees, is it influencing that in a positive way? Is it attracting and retaining the right employees? Is it encouraging them to learn the right things, to develop, to be agile when the business changes, to do the right things that are required in order for you to have a successful business? The pay structure of your organization should be both cost-effective and produce the right behaviors and the right results for the organization.