International Reward Management - Essay Example

International Reward Management Areej K Almeshari ID 140652323 Module: BUS 049 Word Count: 2558 The main criticisms of orthodoxeconomic theories of pay and reward; a reference of the influence of social factors on reward structures in global labor markets Introduction Since the early rise of modern economics back in the 18th century, Adam smith in his book “the wealth of nations” explained the economic-labor relationship, by highlighting the prevalence of labor as the fundamental source of value. More so, was the development of the idea of “the division of labor” better explained as dividing labor into as much parts as possible to achieve competitive advantages in the labor market (McNulty 1984). One of the leading successors to Adam Smith in the classical economics era was David Ricardo, a radical thinking economist who put much emphasis on theory neglecting real world outcomes better known as “model building”. Ricardo’s theories included free market economy and wage control. These theoretical ideas have been significant in formulation of policies (O’Brian 2004). The period after the Second World War, known as the neo classic economics era saw the emergence of new arguments. John Keynes defined and explained “fiscal policy” as a measure that governments can adopt to stimulate the economy and solve unemployment issues (Braman 1996).The differences in economic arguments and thoughts across the eras provide different analysis, critiques and solutions concerning pay and reward systems. The contribution of economists to the compensation of labor debate has been fundamental in designing and forecasting the consequences of the different approaches to employee rewards and compensation (Beaumont and Hunter 2000). On the other hand, sociologist criticized economists’ contributions for being too abstract and lacking concrete empirical evidence (Wootton 1955). Nevertheless, these orthodox theories are core to the economic theory of pay and can help solve problems that experts face in cases of executive compensation and profit sharing schemes (Beaumont & Hunter 2000). This essay focuses on the critique of the three major orthodox economic theories regarding pay and reward structures, that is, the classical wage theory, human capital theory and efficiency wage theory. Additionally, this paper relates social theory to these critiques by tackling the social factor of equal pay. The paper also discusses gender pay gaps and the inequalities and discriminations that arise from reward structures in the global labor market. Orthodox theories definition, explanation, and critiques Classical wage theory JR Hicks first defined the classical wage theory in his publications of “the theory of wages”. In his studies, Hicks tackled wage problems in a free market economy and came up with a model of determining wages based on previous analysis of theories of value. Hicks’ conclusion was that wages are the price of labor, and like all other commodity prices in a free market they are determined by the interaction of supply and demand (Wootton 1955). Further modification of the classical theory explains wage and salary rates relating to certain jobs in the market. The classical theory is an individualistic theory with no room for collective bargain (Wootton 1955). A good explanation of this theory is the scenario of a firm that demands certain amounts and types of workers at certain wage levels to make profit in a chosen product market. The firm increases the number of employees until wages are equal to the marginal product. On the other hand, the supply of laborers eager for employment will increase until the next employee considers the wages as insufficient and the job not motivating. If this were the case in a purely competitive market, with workers having the freedom of exit and entry at any given time, there would be an equilibrium wage where supply and demand are at an equalized condition (Bryson and Forth 2006). Researchers criticize the classical theory of wages for being too rationalistic, setting the stage for increased amounts of inequalities in the remuneration process and career prospective. Additionally, it also implies an increase in flexibility stemming from a free labor market. Social scientists argue against viewing wage behavior in a purely rationalistic demeanor but rather in a much broader sense of social entities and factors that influence wages (Beaumont and Hunter 2000). One of the weaknesses of the theory is the hypothesis of the labor market as purely competitive and one of acquisition, which is not the case. Based on concrete empirical evidence, “long term exits” from full employment serves as a means for wages to be inflexible (Wootton 1955). The theory ignores the aggregated consequences on the economic system when changes in the general wage levels occur. When assessing theory against realistic outcomes, difficulty of mobility and monopolistic schemes hamper classical wage theory’s attempt to provide evidence of equality in all jobs (Wootton 1955). Despite these critiques, the classical wage theory has led to the emergence of other economic theories such as efficiency wages, bargaining models, internal labor markets and agency theory (Beaumont and Hunter 2000). Human capital theory Human capital theory developed in the 1960s. This theory emerged to contribute to the rationalization behind growth rates and the study of investment in human capital. These two factors have been significant in the outlook of pay and compensation (Beaumont and Hunter 2000). The human capital theory argues that many productive investments depend on the foundation of a set of skills and knowledge acquired by the worker and the application of these skills as a means of capital. Such skills or knowledge includes schooling background, training, and attitudes concerning work. These acquired or innate skills lead to differences in pay and wages in the labor market (Kwon 2009). Many workers invest in education and training to ensure maximization of lifetime earnings as these earnings are perceived to be their own capital and they most probably will invest in them (Beaumont and Hunter 2000). Researchers continue to use the human capital theory to explain labor market scenarios such as implications on gender, ethnic minority wage gaps, and the pattern of job searching. Critiques argue that the Human Capital theory is essentially a supply-side theory that gives a vague explanation on the existing wage structure on which investment choices depend upon (Polacheck & Siebert 1993 in Beaumont and Hunter 2000). Additionally, this theory lacks explanation of how human capital “rental rate” is determined. In conclusion, the human capital theory has many shortcomings including answering questions regarding existing wage structures (Beaumont and Hunter 2000). Efficiency wage theory The efficiency wage theory is based on the notion of efficiency by paying above the market rate to promote employee productivity, organizational success, and profitability (Beaumont and Hunter 2000). Employers are free to choose different wage levels, which explains the different wages presented to other colleagues with nearly same attributes (Bryson and Forth 2006). Efficiency wage theory also argues that the freedom in raising the bar in wages helps an organization to recruit better employees, minimize turnover rates, and enhance workers’ morale. This is important in establishing a more productive entity. However, wages do not have to rise too high because skills and effort can rise only to a certain level (Bryson and Forth 2006). Bryson and Forth further explain the efficiency wage theory through a study of efficiency wages, where the “Marginal cost of increasing the wage equals the marginal gain in productivity” (2006). This implies that the structure of wages is determined independently outside the forces of the labor market. Efficiency wage theory has four distinct versions as described in Beaumont and Hunter (2000) work. First is the “Shirking Model”: a worker’s productivity is difficult to measure and might lead for the employee to shirk, however if the employer presents the employee with high wages that are difficult to achieve elsewhere, shirking will be minimized to almost non existing for the employee’s fear of losing such wage premium. The second version is the “Turnover Model” in the case of workers who have received earlier training; wage premium aims at reducing labor turnover, which may be pricy to the employer. The third version is the “Superior Job Applicant Pool”: Since identifying and attracting potential workers is no easy task, the goal of this model is to gain a higher pool of candidates so that when randomly hiring applicants, a more productive workforce is evident. The fourth version is “Fair Wages”: an increase in wages means an increase in productivity. The reason for this assumption is quite simple, in exchange for good services and morale the employee receives high remuneration most of which is an indication of utmost fairness and equality to the employee. Critiques argue that the efficiency wages theory is “old wine in new bottles” particularly because of morale and fairness aspects of the theory. Another shortcoming of the efficiency theory is the difficulty in obtaining measurable empirical evidence to back its arguments (Beaumont and Hunter 2000). However, previous evidence sparks an optimistic view on efficiency wage theory, especially in the case of Henry Ford’s contribution to the positive aspect of the theory by linking pay to performance as stated by Ford as “one of the finest cost-cutting moves we ever made”. Other critics differed in that aspect by questioning the time managers consume on planning a rewards system with the aim of more productive outcome. Other arguments support the criticism of the theory and refer to it as unequal to mutually skilled and qualified employees (Bryson and Forth 2006). Social theory and Equal pay in a global context Social theory is the scientific study of social life that explores ideas of the development of societies, explanation of social elements such as behavior, structure, class gender, and ethnicity (Harrington 1966). Socialists contested the orthodox economic theories of wage and rewards systems by first advocating the idea of social forces being the dominating impact on remuneration processes as opposed to the believe of economic theories that market forces have the upper hand in determining wages. Second socialists believed in the importance of collective bargaining for negotiating wages and unions’ interventions as inevitable. Thirdly, the pure rationalistic approaches of economic theories are too abstract as an idea and they lack in empirical evidence (Wootton 1955). Recent empirical evidence shows that global pay structures affect social factors. Ethical concerns continue to arise because of MNCs continuous search for cheaper labor, and exploitation of developing countries’ resources. This essay tackles one of the many social concerns scientists have been exploring, which is equal pay and the consequent development of global gender pay gaps. Gender pay gap is the differences in pay between men and women based on the average differences in hourly gross earnings of all workers (European Union 2013). Studies surrounding globalization effects on the global gender wage gap have been speculating on the relationship between gender and wages using ILO inquiry database (Oostendorp 2009). In the EU, women earn 16% less than men do and women comprise of the majority of the part time workers with 32.6% compared to 9.5% men in flexible working jobs. This has a negative implication for career prospects, training opportunities and welfare benefits, which contribute to the widening of the gender pay gap (European Union 2013). On a larger scale, empirical evidence from 61 countries show that there is still a huge wage gap between men and women, reaching 23% in developed countries and 27% in developing nations (World Bank 2001, pp. 55–57 in Oostendorp 2009). The literature on wage gaps is divided on whether globalization had a narrowing or worsening effects on gender pay gaps. According to neoclassical wage theories, for competitive reasons, neither firms nor individuals can afford discriminatory actions under narrowing effects. A boost in job opportunities would enable more women to be incorporated in those new jobs, hence the assumption of less of a wage gap between the sexes (Cagatay and Berik 1990; Wood 1991; Joekes 1995; Anker 1998; Standing 1999; Ozler 2000 in Oostendorp 2009). On the other hand, scientists perceived globalization as having a hindering effect on the closure of gender pay gap. In pursuit for cheaper labor, MNCs disproportionately employ women in lower skilled jobs and flexible working arrangements to gain maximum production with the least cost possible (Seguino 2005 in Oostendorp 2009). The estimated “occupational gender wage gap” is 0.11 and the study made by Oostendorp (2009) confirms that occupational wage gap tends to reduce by an increase in economic prosperity in rich economies but results show little evidence of the same conclusion for poorer countries. On a closer note, certain social factors contribute to the gender wage gap such as “work place discrimination”, where men are favored over women in case of promotions and senior positions. Another contributing factor is the “pay system” where many women face a “glass ceiling” due to cultural beliefs on acquiring senior positions, explaining the higher bonuses and allowances for men. Moreover, employers underestimate women’s skills and as a result, categorize them in lower paid jobs. Domestic responsibilities drive women to accept flexible work arrangements, with less working hours and less paid jobs to care for their dependents at home. All these social factors contribute to the widening of the gender pay gap (European Union2013). Other studies also confirm that the overall pay structure has an influence on the gender pay gap due to the positioning of women in lower paid jobs (Blau and Kahn, 1992; 1996 in Grimshaw el 2000). These findings also contributed to the relationships between the amendment of pay structures and equality of pay between both genders and concluded that a focus on the occupational level will help in understanding “inter-country differences and trends” (Grimshaw EL 2000). Furthermore, there is the issue of organizational role alongside the legislative framework and both their contributions to either widen or narrow the wage gap (Fawcett society 2010). Conclusion Orthodox economic theories have no doubt contributed to the pay system policies and structures we enjoy today, but criticism of such theories shed light on so much equality and discrimination issues that the theories do not address. This paper sought to define three of the major orthodox theories such as the theory of wages, human capital theory, and efficiency wage theory. The paper explains each theory alongside critiques regarding one of the main social factors relating to the theories such as “equal pay” and the link between gender pay gap and remuneration structures, social ideologies, and cultural beliefs. Studies have shown that these economic theories lack in concrete empirical evidence and they are too abstract for manifestation in the real world (Wootton 1955). Evidence from 61 countries indicate a huge gender wage gap that is 23% in developed countries and 27% in developing nations (World Bank 2001, pp. 55–57 in Oostendorp 2009). These results are as a arise from the interrelated relationship between wage structures and the widening of the gender wage gaps due to the concentration of women in lower skilled/lower paid jobs, which results from wage structures and cultural behaviors and beliefs regarding women (Grimshaw EL 2000). References Braman, C. (1996) The Theories of John Maynard Keynes http://www.chuckbraman.com/theories-of-john-maynard-keynes.html Bryson, A. and Forth, J. (2006) The theory and practice of pay setting, NIESR Discussion Paper No.285 European Union, (2013) Luxembourg: Publications Office of the European Union, ISBN: 978-92-79-29690-1 Fawcett Society, (2010) Closing the Inequality Gap, Equal Pay: Where Next? Grimshaw et al, (2001) changing pay systems, occupational concentration, and the gender pay gap: evidence from Australia and the UK Harrington, A. (1966) Modern Social Theory, Introduction. What is Social Theory? Oxford University Press Kwon, D. (2009) Human Capital and its Measurement, the third OECD World Forum on “Statistics, Knowledge, and Policy” Mcnulty, P. (1985) The origins and development of labor economics: a chapter in the history of social thought, the Canadian journal of economics vol.18, No.3 pp.688-690 O’Brian, D. (2004). The Classical Economists Revisited, Princeton University Press Oostendorp, R. (2009) Globalization, and the Gender Wage Gap World Bank Econ Rev (2009) 23(1): 141-161. Thorpe, R. and Homan, E. (2000) Strategic Reward Systems, chapter three: Labor economics, competition, and compensation, PP.45-61. Pearson Education Limited Wootton, B. (1955) The Social foundation of Wage Policy, chapter 1: the Economists’ theory of wages. PP. 11-27. Allen & Unwin Publications Read More