Monday, June 8, 2015

How a Two-tier Systems Undermines Productivity

Breaking Bad Character by Jonah Engler

Many companies of all sizes have tried to get cute with the payroll by paying employees vastly different salaries for doing essentially the same work. The idea, of course, is that if you don’t haggle well enough, you should take what you get. The rationalization for this obviously poor forethought is that people won’t talk about their salaries. But, of course, they do. Doesn’t matter why or when or how … people will eventually talk about how much they make. That’s when the real problems start. But, for the offending manager, those problems may not be obvious until it is far too late to stop the fallout.

One of the earliest versions of this strategy is the Fire Old People Hire Young People strategy. Companies such as GM and Ford have put this cynical practice to dubious use in recent years. The idea was to cut costs and, as a result, boost profits. On paper that looks great. Simple math is the best math. But, unfortunately for GM and others caught by this temptation, this isn’t checkers…it’s chess. There’s a hidden cost not immediately obvious in this transaction.

The key premise of the transactions makes two major mistakes. First, it devalues experience, then, insult to injury, it over values lack of experience. Workers with literally decades of practical experience are replaced with who they were BEFORE they got all that experience. Namely, book-smart kids without any perspective.

When workers see that happening it leads to a host of issues. First, older workers will perceive their worth as undervalued, so they will do just enough to keep their jobs. Why excel, if you’re just going to get canned anyway? Second, younger workers will come into the job with an elevated sense of self-worth. Hey, the boss thinks they have the same worth as some guy with 30 years on the job, they must be special and deserve special treatment. Paradoxically, these workers will also only do just what it takes to get by. They are already awesome, why try to be better than that?

In the end, companies may save money in payroll, but they lose money on the balance sheet because productivity and quality of work suffer. Eventually, people will make what they know to be wrong or bad decisions just to keep their jobs. Just ask GM how that works for you.

Jonah Engler is a financial expert and an entrepreneur who lives in the UES.

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