Pay and HRM Ethics - Research Paper Example

Pay and HRM ethics According to a report of the International Labor Organization in 2008, if share-based compensations are excluded, the pay of Chief Executive Officers (CEO) worldwide is about 71 to 183 times than the wage of the average worker (Ebert et al., 2008: 1). The same report say that when shared-based compensation is included, executive pay is between 103 and 521 times of the average wage of regular employees. CEO wage is several times a regular employee’s wage, is this just? Is this ethical human resource management practice (HRM)? Assessing whether the situation is just requires the adoption of a notion of a just pay and justice. On the other hand, scrutinizing whether our notion of justice is ethical from the standpoint of HRM requires an appreciation of the various notions of what constitute an ethical practice of HRM. Musgrave & Musgrave provided a useful framework for assessing what constitute a just pay as well as justice. According to Musgrave & Musgrave (1989: 76-82), there are several notions of what constitutes justice and the application of this covers our notion of what constitutes a just pay. Musgrave & Musgrave identified eleven perspectives on what constitutes justice and, related to this, just pay. One possible application of the eleven notions is that many of the eleven can be used in the design of the appropriate pay scale based on what society considers just or based on society’s dominant notion of what constitute justice. We identify only a few or six of the eleven. According to Musgrave & Musgrave (1989: 76-82), one option towards justice or a just pay is to pay labour only. This implies a Marxist socialist system and socialist firm. According to a Marxist perspective, only labour is the creator and wealth and, therefore, shareholders and investors do not deserve to earn from their shares in a company. This set-up is the one considered just because it is supposedly unjust for shareholders and capitalists to earn from the labour of another. There may be managers and administrators within a socialist set-up but they are supposedly part of the proletariat. The second option is to have a pay system that seeks to raise the welfare level of the lowest group. This is similar to a system in which employee pay is based on family need as in the dictum, “from each according to his ability, to each according to his needs”.1 The system is similar to communism but it is also possible that some socialist firm of socialist societies have the pay structure in this manner even if Marxist socialism only requires a pay system that is according to one’s work contribution and not needs. It must be pointed out however that when Musgrave and Musgrave (1989: 76-82) used the notion they were thinking of government welfare policies that seeks to target the poorest of the poor and were not talking of communist arrangements. The third option is to pay equally but this scheme is rejected not only by market economies but by socialist economies as well. Of course, some may have the mistaken notion that this is the rule socialist economies apply but the mistaken notion is not true. Even in socialist economies, there is inequality and the inequality is recognized by socialist authorities. The fourth option is a pay structure in which there is a floor wage and additional wage is provided above it for incentive as well as for various considerations. One consideration can be contribution to output or corporate performance. We can interpret the floor wage as a living standard that a society or even a corporation is targeting for its employees. Many developing countries have a minimum wage. Some developed nations also implements a minimum wage. Although the minimum wage does not represent a standard of living, the standard of living implied by a minimum wage is by no means decent. In the said countries, the minimum wage represents the minimum that has been politically acceptable. Minimum wages are usually products of struggle between labour and capital or legislation. The fourth option does not necessarily result to a large pay for CEOs. The fifth option is to pay based on one’s contribution to company profitability and the ILO report may be considered from this perspective. Some of the firms are paying their CEOs very high because shareholders believe that they are contributing very high to the profitablility of the company. The CEOs may be seen as indispensable to corporate operations. They may be deem irreplaceable in the organization. They may be seen the sector most decisive for the corporate output or for cornering a market. Finally, the sixth option is a combination of the fourth and fifth options. Here, some of the employees can have astronomical pay but a pay floor is observed. The pay floor corresponds to the company’s notion of a standard of living. The standard used to define a pay floor may be Aristotelian, Kantian, Rawlsian, or another ethic. The important characteristic of this pay scale is that it corresponds to a notion of justice where an employee is paid according to his contribution to work and, at the same time, there is a recognition, assertion, and appreciation of his or her humanity. In 1998, K. Legge raised the questions on whether HRM is ethical and whether HRM can be ethical. Legge pointed out that HRM encompasses values and her answer to the first question is that HRM involves ethics but how ethical HRM is would depend on the ethics that one adopts for HRM (1998: 131, 160). For this writer, however, HRM really involves questions of ethics because as decisions have to made, an HRM professional has no option but to consider the ethical dimensions for making decisions. If ethics fundamentally involves the question of right and wrong, then ethics should define the parameters of our freedom of action or the latitude of decisions that we can make. For Legge (1998:160), the options on what ethical rules to follow in HRM are several. One ethical perspective that can be followed is Kantian. The Kantian ethic is to treat people with respect and treatment of people constitutes as an end by itself (Legge, 1998: 160). In other words, this means that our perceived ends unavoidably always include what ends we have for people and the same cannot be separable from objectives or goals even if our objectives or goals do not make a statement on how we want people to be treated. For example, suppose a firm’s objective is to maximize profit. If the profit is made at the expense of people then de facto the real objective is to maximize profit even at the expense of people even if there is no part of the statement explicitly states that profit making can be at the expense of people. Another ethical perspective that can be adopted is Rawlsian or that with the perspective of stakeholders (Legge, 1998: 160). In Legge’s interpretation (1998:160), Rawlsian ethics hold that goods may be distributed in a consultative manner such that no one is a complete loser given that others are complete winner. In other words, in the Legge’s interpretation of Rawlsian ethics, everybody must benefit at least something in the way that the HRM policies are carried out. The third ethical perspective that can be followed is utilitarian. For Legge, the utiliarian ethics constitute in the greatest good for the greatest number and actions should be judged based on their consequences for the greatest number (Legge, 1998:160). This means that in analyzing whether it is ethical to provide the CEOs a pay that is 183 times than that received by an average employee, the ethical uprightness of the policy can be considered based on the ultimate consequence of the policy to the whole. In other words, the ethical uprightness of the policy that allows a CEO pay that is 183 times higher than the salary of the average worker should be assessed based on whether the policy would redound to the ultimate benefit of the greatest number even if at first it does not appear that way. “Consequences” is the key word in this ethical principle and not what is apparent or what takes place at the first instance. Fourthly or lastly, an ethical perspective that can be followed is Aristotelian. In the Aristotelian perspective of ethics, as per Legge’s interpretation, what matters most is whether the organization provides an environment that will enable individuals to achieve self-actualization that contributes to social harmony. This implies that the ethics that must be followed by an HRM professional is to see to it that the organization provides an environment that promotes individuals to do their best. Seen in this light, it may be possible to see a CEO pay that is around 183 times the average pay of employees in the said consideration. If the policy can create an environment that would motivate individuals to do their best then the CEO pay that is 183 times than the typical employee's can be justified based on ethical consideration, particularly Aristotelian ethical consideration. Meanwhile, a year after Legge opened up the discussion on the ethical issues involved in HRM, R. Warren warned against the encroachment of paternalism in the ethical consideration of HRM professionals. (1999:50). Against the paternalism encroaching in the ethical standards of the HRM professional, Warren (1999: 50) recommends to aim for striking a balance between the economic interests of employers and employees, and the need for justice to foster mutual cooperation in pursuing a common purpose (Warren, 1999:50). In interpreting history on the emergence of HRM, Warren (1999: 50) said that several years before HRM was personnel management (Warren, 1999:50). The stress of personnel management was on “striking a balance between the demands for economic efficiency on one hand and the demands for justice in the organization on the other (Warren, 1999: 50). According to Warren (1999: 50), implicit in personnel management was the belief that there are two aspects in an organization: an economic and a moral aspect. However, according to Warren (1999:50), somewhere in the transition from personnel management to HRM, the two aspects have been forgotten and the emphasis has been on the demand for economic efficiency and away from the just distribution of rewards between employer and employee. Warren (1999: 51) argued that with HRM, “loyalty to the company is no longer emphasized, and employees are only employable because they are useful bundles of skills and knowledge.” According to Warren (1999: 51), one important emphasis of HRM is the explicit recognition that market is global and competitive and “organizational efficiency and flexibility are the keys to competitive advantage, and HRM policies are about getting people to adapt and accept a strictly contractual relationship”. Coinciding with the transformation, however, is that shareholders and management consolidated their power. However, “power is not always used to increase contractualism in the employment relationship, but is instead often used to re-establish a new paternalism between employer and employee” (Warren, 1999: 51). According to Warren (1999: 51), simultaneous in the shift from personnel management to HRM, “HRM policies are designed to elicit employee commitment and team-based productivity improvements by the creation of a new moral bond between employer and employees.” Citing the works of several scholars and his earlier works as well, Warren (1999: 51) argued that HRM “has been criticized because of its limited understanding of the nature of the employment relationship and because of its long-term destruction of social capital both inside and outside the firm”. In other words, the “approach to HRM does not provide a way of life that is acceptable or stable enough for the ordinary person (except perhaps for the young and talented)” (Warren, 1999:51). The approach to HRM referred to includes a paternalist approach that has developed within HRM over the years as shareholders and management consolidated power. According to Warren (1999: 52), “paternalism began to be associated with authoritarian employers who combined strict discipline and efficient methods with amiable and sentimental treatment of their employees”. Warren elaborated that paternalism offered employee security and protection against a volatile labour market under a “more powerful and better educated management” (1999: 52). Warren also pointed out that authoritarianism in paternalistic HRM has been on the increase (1999: 53). Although we note the several options within which we can consider what constitute HRM ethical practice based on Legge (1998), this writer consider that what can be considered as an ethical practice of HRM is the set of practices that allow an organization to survive and fulfill a useful function in society and in a manner that does not contradict society’s values. Thus, this implies that SURVIVAL comes first before anything else. However, it must be emphasized that it must be a survival in which the organization does not contradict society’s values. The HRM setting can be in a competitive business world in which the organization must be both competitive and profitable. People’s contribution to the goals or profitability of the organization can vary. For the organization to survive, HRM must be able to attract the best people who can make the organization profitable or perform optimally. Management must have at its disposal a prerogative to organize the pay structure that would enable the organization to acquire the best talents that can make the organization competitive and profitable. HRM must recognize that other organizations have the same thinking and are seeking to acquire the best people for their organizations to make their organizations both competitive and profitable. HRM cannot afford to pay the best people with the lowest pay because other organizations are out to get their best people. HRM must be able to attract the best people through a pay structure that is proportional or commensurate to the individual’s potential or actual contribution to the profitability or performance of the organization. Even if the organization does not need new people for its organization, the pay structure must be one that allows that discourages talents to move out of the organization and seek greener pastures elsewhere. The cost of replacing talents is high even if it is possible to replace that talent with people from the outside who have the same skills as the previous talent at a lower or equal salary rate. This is because the previous talent or personnel may be already familiar with the organization and with the trade, crafts, and protocols of the organization. These are only some of the things that a new talent usually cannot have immediately even if the new talent would be simply replacing personnel with the same or even inferior skills. In some cases, some of the elements that are irreplaceable with the old talents are the goodwill and team play that they have built within the organization. Further, in some cases, the talent can have a network of clientele (or a market) that he or she will be bringing with him or her out of the organization should he or she decides to leave the organization. For the organization to survive and remain competitive and profitable, HRM must be able to structure the organization pay scale in a manner that talents are not tempted to go out of the organization and seek greener pastures. HRM must be able to retain the talents. If HRM ethics follows the ethical principle then it can be argued that the consequences will be compatible with Kantian, Rawlsian, utilitarian, and Aristotelian ethics. Most importantly, the ethical principle will allow the organization to survive and serve a useful and positive purpose in society. If resignations or transfers to greener pastures are not monitored and appropriately acted, the cost can be terribly high. According to Mitchell et al. (citing a Businessweek study, 2001), the replacement cost for workers in about half of all jobs was about US $10,000 and over US$30,000 for about 20% of all jobs.2 That replacement costs for employees are high were also confirmed in the study of Kacmar et. al. (2006). The CEOs with the highest pay are widely-believed to be in the United States. The reasons for this may lie in the demand-supply data. According to Deloitte Research (2008: 3), there were only 198,000 graduates in the United States that were supposed to occupy the jobs of of around 2 million scheduled to retire between 1998 and 2008. Further, Frank and Taylor (2004) estimated that the cost job turnover been costing the US economy around $5 trillion per annum. Deloitte Research estimate that 80% of manufacturers in the United States face a shortage in key personnel with special skills and Deloitte allege that the same is also true for Australia, Germany, and China (Deloitte Research, p. 3). These figures explain why some job offers or retention offers or the wage rates for CEOs are high. A research of Heinen and O’Neill (2004) indicate that reduction in turnover leads to a $3,800 increase in profit per employee. Except for the current global recession, the research of Luftman and Kempalah (2007: 130) indicate that the job market for skilled professionals and EO has overcomed the downsizing/rightsizing years of 2000 and 2002. Further, the turnover rate for that part of the “human resource” that are highly skilled can average at around 15% for a developing country such as Vietnam (Navigos Group Salary Survey, 2008). Meanwhile, the lectures notes that the streams of theory involved in HRM ethics are far more complicated that those suggested by either Legge (1998) or Warren (1999). According to the lecture notes, ethics involve questions on morality, particularly about goodness and badness, right and wrong, justice, and virtue. In particular, the class lectures say that HRM ethics cover employment ethics, the ethics on work promoted by then Prime Minister Margaret Thatcher, the ethics promoted by the early earlier advocates for a human resource management perspective rather than simply management of people perspective, capitalists and Marxists ethics, and normative theories. At the same time, the normative theories cover deontological and teleological perspectives. The deontological perspective covers Kantian and contractarian viewpoints. According to the lecture, the employment ethics applies general moral principles to the management of employees’ wages and benefits. The class lectures elaborate that capitalist ethics covering HRM ethics revolve on the concept of freedom, autonomy, efficiency, and equality of opportunities. In contrast, the Marxist perspective stresses on class inequality, exploitation, and alienation. According to the lecture, with regard to normative dimensions in HRM ethics, the deontological component judges the morality of the action based on adherence to a set of rules. The lecture says that the teleological component stresses on the consequences for valid judgment of morality: a morally right action: a morally right action is that produce a good outcome or consequence. It is the opinion of this writer that the sixth notion of justice that we have discussed earlier suffices to explain the existence of a wide disparity between a CEO pay and the pay of an average employee. However, there is a problem, what evidence do we have that the CEOs really deserves a pay that is several hundred percent over the employee pay? Is it not the case that what R. Warren’s (1999) notion of paternalism in the corporate world is what is in the works? This is something that is for investigation because disparity itself can be understood as the absence of fairness and justice. This can serve as a cause for demoralisation in a company. The absence of fairness can cause the breakdown of corporate solidarity and can be counterproductive in the long-run. This can be a source of demoralisation among employees. Worst, it can provide the basis for employee rebellion. For instance, corporate performance is the performance of the whole and not of the parts. How sure is management that the CEO pay corresponds to the CEO contribution to the company? Are not ordinary employees also important for the contributions made by the CEO? If a company will allow attributing corporate performance to one or a few CEOs in the company, will not the act lead to the growth of resentments? More importantly, will it be ethical? Will it be just to attribute positive corporate performance to a few when we fully know that the corporation performance has been achieved through the cooperation of many? Ethics is about correctness, justice, and morality. Will it be moral to attribute corporate performance to the performance of just the CEOs knowing that every corporate performance is a collective performance? What the questions suggest is that in the ethical consideration of the ILO report, what is also important is to develop a notion of how we can justly or morally consider corporate performance. Will it be justified, moral, or correct to attribute positive corporate performance to a few CEOs? For instance, in Musgrave & Musgrave’s fifth and sixth option that we have discussed earlier, would it really be possible to separate the “marginal contribution” of each and every employee of the company? This does not seem to be possible even if it appears to be sound from the standpoint of theory. For this writer, what seems to be basically at work determining the pay scale will not really be determined by an HRM professional’s assessment of “marginal contribution” of employees. The market situation will unavoidably influence how the pay scale would be shaped. In view of this, it may be important for the HRM professional to focus his or her sights in seeing to it that members of her organization enjoy a living standard compatible the prevailing notions of decent and comfortable living standards. Of course, it is also important that in implementing this, the HRM professional should see to it that company profitability or efficiency is not undermined and that employee turnover or outmigration is not encouraged. Other than salaries, other factors promote employee retention. Several scholars on HRM have identified the role of organizational culture, working environment, relations with colleagues, and several other variables (Borstorff and Marker, 2007; Neff, 2002; Logan, 2007). In enforcing corporate justice and equitable pay scale, the HRM professional can rely on these tools in order to promote a condition in which pay disparity will be considered inequitable if not unjust. Bibliography Borstorff, P. and Marker, M., 2007. Turnover drivers and retention factors affecting hourly workers: What is important? Management Review: An International Journal, 2(1), 14-27. Deloitte Research, 2008. It’s 2008: Do you know where your talent is? Part 1 of a Deloitte Research Series on Talent Management. Deloitte Research, 1-15. Ebert, F., Torres, R., and Papadakis, K., 2008. Executive compensation: Trends and policy issues. Discussion Paper DP/190/2008. Geneva: International Labor Organization. Frank, F., and Taylor, C., 2004. Talent management: Trends that will shape the future. Human Resource Planning, 27 (1), 33-41. Gramberg, B. and Menzies, J. 2006. Ethical decision making of HR managers: Juxtaposing ethical egoism, the interest of the firm and employees. Working Paper No. 1. University of Victoria, Melbourne: Center for International Corporate Governance Research. Heinen, J. and O’Neill, C., 2004. Managing talent to maximize performance. Employment Relations Today, 31 (2), 67-82. Kacmar, K., Andrews, M., Rooy, D., Steilberg, R., and Cerrone, S., 2006. Sure everyone can be replaced…but cost? Turnover as predictor of unit-level performance. Academy of Management Journal, 49 (1), 133-144. Legge, K., 1998. Is HRM ethical? Can HRM be ethical? In Ethics and Organizations, ed M. Parker. London: Sage Publications. Logan, H. (2007, Feb. 20). Stressing the Value of Loving the Work. Evening Gazette, 4. Luftman, J., Kempalah, R.M. (2007). The IS organization of the Future: The IT talent challenge. Informational Systems Management, 24 (2), 129-138. Musgrave, R. and Musgrave, P., 1989. Public finance in theory and practice. New York: McGraw Hill. Mitchell, T., Holtom, B., Lee, T., 2001. 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