Organization Salary Determinations

Productivity Interpretations

Productivity may be interpreted in a number of ways.

• Lower labor costs: Productivity may be interpreted to mean that increases in labor productivity at constant pay levels will lower labor cost per unit.
• Performance pay: Productivity may be employed in the narrower sense – that a productivity increase attributed to increased performance by employees calls for an equivalent increase in pay (as with merit increases and incentive plans).

Increasing global competition has dramatically increased the emphasis on productivity as a salary determinant:

• Human Resource practices, not just pay practices, have been changing in an attempt to increase productivity and not just worker satisfaction.
• Evidence shows that individual incentive plans can improve productivity substantially, and also contribute to higher profits.
• Pay-for-performance and other forms of company-wide incentive plans have gained in popularity.
• The focus on pay for performance through the 1990s and 2000s suggests that productivity has been perceived as the primary consideration in pay increases.

For more information on pay for performance, please see Distance Learning Center Course 77: Pay-for-Performance.

A final word on productivity

Although productivity increases are often mentioned in salary-level determination (especially in labor negotiations), their effect as a separate consideration is probably minimal.

Perhaps enough problems have been cited to argue against raising salaries in strict accordance with productivity increases. Different industries and organizations have varying rates of change in productivity and to make pay decisions based solely on productivity does not factor in other salary considerations. Higher-productivity industries would be penalized for their higher productivity, and this would harm the economy.