6: Wages
Wages are the fundamental reason that an individual accepts employment: he understands that his time and skills are being traded for money, which he requires to purchase the necessities and conveniences of life. This all seems very simple and straightforward if you are to consider the rational and functional benefits of the arrangement, and completely ignore the psychology.
Man and His Attitudes
Philosophy is the study of ideas from an aspect of abstract reasoning, and is pointedly devoid of emotion. When dealing with mankind, philosophy alone is insufficient - it explains his behavior when he is being thoughtful and restraining his natural impulses, which are entirely emotional. This is the reason philosophy is so divorced from actual human behavior.
To understand human behavior, you must go outside of reason to consider emotions - the reactions a man has and the attitudes he maintains toward the things he encounters in his life - as well as understanding that man does not enter into many decisions with a grave, somber, and methodical process of reasoning, but reacts emotionally in the great majority of instances.
Scott presents for consideration his own attitude toward snakes. He utterly reviles them. If he happens upon a "little harmless snake" he finds his won reaction to be "most absurd." He can hardly refrain himself from killing it, even though it poses no danger or threat to him. This is an attitude in defiance of reason.
He likewise has an attitude of "unselfish devotion and a desire to be of assistance" to his students and tends to be too lenient and too permissive with them. He is well aware that not every student is earnest in his scholarship, that many have ulterior motives, and that some will take great advantage of a gentle instructor - yet he insists on treating his students as if each and every one of them is earnest in his studies, and refuses to yield to logic.
As a teacher, he also notes that he has very little success with students until he has influenced their attitude toward the subject of their studies. A desire to learn and an attraction to the subject are necessary for education to take place - and desire and attraction are psychological concepts, not philosophical ones.
In all of life, "nothing but failure can result from the mental attitude which we designate variously as laziness, indifference, indolence, apathy, shiftlessness, and lack of interest." Meanwhile, it can be noted that men who achieve success demonstrates attitudes of interest, application, perseverance, enthusiasm, and diligence toward their work.
To get around to the topic of this chapter: it should be noted that much ado is made about wages and the ability to motivate men by offering them money or by threatening to deny money. But the way in which wages function as a motivational factor has less to do with the objective and rational value of the money offered for work, and more with the way in which wages influence the attitudes of the workers.
Motivation in General
Human beings undertake action for a reason. Though in some instances we may act irrationally and on impulse, most of the actions we deliberately undertake are motivated by a desire to accomplish something, even if it is merely our own amusement. (EN: to be more precise, we are motivated by our expectation of an outcome - because before the action is undertaken we can only "expect" what the outcome will actually be.)
Man is motivated to act to satisfy his needs and fulfill his desires. A primitive man would hunt, not for the pleasure of hunting, but because by so doing he would obtain meat to sustain himself and his tribe. A man hunts or plants to satisfy the need of hunger, makes clothing for need of warmth, builds a house for need of shelter, and so on.
He pauses to observe that mankind is efficient in his actions, in a manner that might be categorized as laziness. The primitive man in a forest hunts because game is plentiful and easy to obtain, whereas the primitive man near the shore fishes because fish are plentiful and easy to take. It is entirely possible for the forest-savage to fish and the shore-savage to hunt, but the efforts are more laborious and less certain of success given the natural resources in their environments.
It is also true that primitive men work only when work is necessary. This too is a factor of efficiency or laziness, but a man will hunt or farm no more than is necessary to feed his family, and weave no more cloth than is necessary to clothe them. To work to produce more than one needs is pointless and quite wasteful.
Primitive man struggles inordinately to merely maintain his existence, but struggles no more than he must. Outside of the civilized world where trade enables men to amass useless possessions beyond their basic needs, personal possessions are very scarce: aside of food, clothing, shelter, and the implements necessary to create them, primitive men possess very little - and desire very little.
But in the civilized world we work to produce more than we need, and trade the excess for things that are produced by others. The benefits of the specialization of labor, which occurs when men may focus all their attention on making a given thing rather than having to make a variety of things, have resulted in great abundance and prosperity. But hey have also resulted in greater waste - in that production beyond need is wasteful, and the mass of possessions that render no benefit (luxury) require a great deal of toil to obtain.
Money, specifically, is one such phenomenon. A fisherman will catch as much as he needs to eat and no more, as fish rot promptly. Even a farmer who puts up food for the winter amasses only as much as he will need to consume until the next harvest. But it seems that man can never have enough money to satisfy himself, and the embodiment of wealth in the form of money causes him to become and remain steadfastly ignorant of the reason he undertakes effort. And it is here that the trouble with wages begins.
(EN: This brings to mind the story, perhaps legend, of the firm that offered production bonuses to workers in South America. The men worked hard to make their quote, enough to gain their regular wage, on Thursday. Management expected them to show up Friday to earn the bonus - but not a single man showed up to work. They had made enough money for their needs, and saw no need to earn more. This is a clear indication of the cultural difference between protestant North Americans who want more and more money and the catholic South Americans who do not possess the same love of wealth and money.)
The Meaning of Wages
The primary function of wages is self-preservation. The worker seeks as a bare minimum a wage that will provide the amount of money necessary to sustain himself and those who are dependent on his income.
(EN: "sustain" is a fuzzy concept, as it implies the bare minimum necessary for existence, as in his immediate survival needs at the very base of Maslow's hierarchy. But workers also seek security in the form of a wage that can be relied upon for some time, or to provide excess to save for future needs, or both. There is also the matter of sustenance at a given level of comfort - a great deal more thought should be put into the consideration of the worker's perspective on wages. While Scott will likely elaborate, I have a sense he won't return to the notion of the functional requirements of wages.)
A loose note: it is the inclination of man to seek efficiency by producing the greatest benefit with the least amount of effort. The good hunter spends as little time and as little exertion as necessary to provide meat for his household. Likewise, the laborer will seek to spend as little time and exertion as necessary to earn the wages he requires to sustain his household.
From a psychological perspective, a man's attitude toward wages extends beyond their functional elements - it is a matter of esteem. A man regards his ability to produce as an indication of his self-worth, and others who observe him grant him esteem. There is an expectation that a competent person will produce a certain amount of results for his efforts, and that an exceptional person will exceed that output. A farmer who can produce twice the amount of grain from an acre of land is considered to be an exceptional farmer - one who takes pride in his ability to produce, and one who is respected by his community for the very same reason.
Wages function in a similar manner, as they are the only evidence and reward for an individual who is employed by another person, especially one whose daily toils do not give him evidence of the result of his effort. It is assumed that an employer gives fair value for the labor he receives, and thus it is assumed that a worker receives a wage that represents his productiveness and competence. In so doing he gains both self-esteem and the respect of others in society.
Sidebar: Hoarding
Scott briefly mentions the concept of hoarding, which can be seen in certain creatures. The squirrel collects and stores nuts with great enthusiasm, even though as an animal it does not understand that it is doing so to provide food for the winter. It does so simply because the act of gathering food is "the most interesting process in his experience" and the creature is motivated by instinct to collect nuts as an end unto itself.
Many people display a similar tendency in accumulating things they do not need for the mere pleasure of accumulation, which can be seen in the excess of possessions for which they have no apparent use. It can also be seen in the pursuit of collecting as a leisure activity - many people will hoard buttons, spoons, stamps, and other items that are not necessary to survival, and take great satisfaction in amassing a collection.
It is very common in western society for men to develop a fondness for hoarding money. In youth it can be claimed that the savings are for future needs, but it can be observed that even an octogenarian will amass money "with unabated zeal" even if he happens to be childless and has no plans for it. Few are aware, and fewer still will admit, that they are hoarding money for the simple pleasure of collecting.
How Employers Determine Wages
In deciding what wage to offer workers, most employers are entirely self-centered an unconcerned with the needs or desires of their employees. To the employer, wages constitute and expense that must be covered by the revenue of the business - they cannot sustain their operations or turn a profit if they pay more in expenses than they collect in revenue, nor can they charge more for their products than the market can bear. Hence, accounting for revenues and expenses, the employer determines how much it can afford to offer its employees, regardless of what the employees may require.
But in a free market, the employer is also a customer of labor: like any customer, it must offer a sufficient price to obtain the services it needs. An employer who offers too low a wage will find it cannot attract the employees it needs to operate the business, nor retain the employees it has because they will sell their labor to another employer who outbids them for the services of labor.
It must also be recognized that neither employment nor labor is a commodity. Labor is not a commodity because workers are highly individualized in terms of their capabilities and skills - some are more suited to certain tasks than others and command a higher wage as a result. Employment is not commoditized because every job and workplace is highly individualized. The work of a carpenter requires more skills than the work of a porter, and the work of a porter is more unpleasant than the work of a clerk. And beyond that, the working conditions of a clerk in one firm are more unpleasant than the working conditions of a clerk in another firm.
As such, the negotiation over the price of labor is impossible to accurately determine in the aggregate. To say that a person who does a certain task merits a certain wage is to ignore the difference in individuals and workplaces. When an employer is hiring, he seeks specific qualities in a worker. When a worker is seeking to be hired, he seeks specific qualities in a job and workplace.
Sidebar: Salary, Hourly, and Commission
Scott notes that the first step in determining wages is to determine the basis of compensation, of which there are four basic types:
- Salary - Pays a worker a fixed amount per week, regardless of the amount of time he works or the amount of output he generates
- Hourly - Pays a worker a fixed amount per hour, regardless of the amount of output he generates
- Commission - Pays a worker a set amount according to his productiveness.
- Combination - Combines some elements of two or more of the above in determining the total compensation paid to the worker.
The author mentions a "survey" of employers which found that there is a great deal of variety in the manner in which employees are compensated. In general, laborers are paid a commission (piecework) or hourly, clerks are paid hourly or salary, and managers are paid a combination of salary and commission (bonuses).
(EN: my sense is that much depends on the nature of the work. If the output can be measured in terms of production or profit, commission can be paid - e.g., the number of units produced by a factory hand or the amount of sales generated by a salesman can be readily observed and measured, but the value created by an accounting clerk cannot. Also, the stability and predictability of a business may be a factor, as a business whose volume fluctuates would offer wages that also fluctuate, which is highly undesirable to workers who demand security in their ability to predict their income.)
Variable Wages
Variable wages include paying factory workers by the piece, paying salesmen a fixed percentage of the value of their sales, paying mangers a bonus based on the profitability of the operations they oversee, and the like.
Scott's take on variable wages is that they are highly motivational: the reward for action is constantly present and observable to the worker. When he seems the connection between his work and his reward, he will work all the harder to earn greater rewards, and is thus "beckoned to greater accomplishment."
However, this arrangement requires a great deal of attentiveness on the part of the employer. He must at the very least be able to identify the amount of work that has been done. He must also be attentive to matters of quality, as a worker may take short-cuts to produce a higher piece count by reducing the quality of the pieces he produces. And he must also be attentive to ethics, because workers may engage in unethical behavior to increase their compensation - such as a piece-worker who steals other workers' products or a salesman who deceives clients to make more sales.
(EN: Scott does not mention the drawback to commission, namely in its lack of security for the worker. The salesman who lacks training an experience may not be able to make a single sale in a given month, which means he earns nothing. Or a worker who is highly efficient at making products is limited by the employer furnishing the supplies and being able to sell the worker's output. Commission can offer high rewards, but the risk is too great for many employees to be comfortable with a pure-commission arrangement.)
Reconciling Variable Wages
The author addresses the uncertainty of some men to accept a variable wage by an example in which it was demonstrated to them that it translated into a fixed amount of income.
The example was a negotiation at a stove factory, where the employer meant to offer men six cents a range for bolting on the back panel. The men demanded fifteen, and set their bottom price at twelve. To settle the dispute, the foreman pulled a worker off the floor to have him fasten the backs onto ten ranges, working at a moderate rate, and the job was finished in less than an hour - indicating the men could easily earn a wage of $4.50 a day (a very reasonable wage for assembly workers at that time) if paid six cents per range.
After this demonstration, they agreed upon a price of eight cents, when they previously expressed reluctance at charging twelve.
Fixed Wages
Fixed wages include any amount paid to a worker, whether hourly or annually, that remains constant and is not dependent on the output of his work.
Scott's take on fixed wages is that they are not motivational: the worker with a fix wage does not appreciate, on a constant basis, the connection between his effort and rewards, and he believes that a person on a fixed salary will not be as productive.
He does concede that there are behaviors that are discouraged by a variable wage. A worker who is paid by the piece does not take particularly good care of his equipment or the workplace environment and shirks or refuses any duty that distracts him from making his piece-count. His attitude is highly mercenary ad he has no concern with or fidelity to his employer, merely to his compensation and is often indifferent to the long-term welfare of his firm.
Fixed wages create a sense of ongoing and long-term concern, not merely for the immediate activity of producing items, but loyalty to the firm and commitment to his workplace. While he is less infatuated with productive activity, it is still of concern to his long-term welfare to be productive enough to keep his position, and to tend to other duties that will maintain his shop as a source of future income.
Scott also mentions that there are many forms of labor that do not have a visible output or one that can be immediately measured - such as many of the administrative and maintenance duties necessary. The mechanic who repairs and maintains equipment cannot be linked to its output in a precise manner. The accounting clerk who merely takes inventory and records transactions cannot demonstrate how his task relates to the income of the firm. As labor becomes more specialized, there will be increasingly fewer positions that can be linked directly to the level of production.
The Amount and Manner of Salary Adjustments
It is common for workers who receive a fixed salary or hourly wage to have their compensation evaluated on an annual basis and adjusted in light of their performance. Scott suggests that the manner in which this adjustment is delivered matters more than the amount itself.
He recollects meeting a worker who had received his annual increase. He had been called into the office of the factory manager, who spoke to him in very specific terms of the quality of his work, praised his performance, and gave him an increase in salary. The worker was well impressed by the fact that his superiors had taken note of him, and took the time to speak with him - even more so than the amount of the raise he received. Double the amount would not have increased his satisfaction with the experience, as he was most gratified by the recognition he had received.
Where wage increases are delivered impersonally, on in a cold-blooded manner, they fail to have such an impact on the morale and loyalty of the workers - and in those cases the amount alone is his sole reward. But because recognition matters so much to self-esteem, the genuine and warm nature of the encounter does more to improve the sentiment of the worker than the amount of money he receives.
He posits that the same is true of demotion or discharge of workers: the face-to-face encounter even when being criticized and disciplined mitigates the impact, and a man can better tolerate unfortunate consequences when he is apprised of the specific reasons and treated with concern and a modicum of dignity.
The importance of delivering recognition or correction in a personal manner is all the more important in a sizable firm, as many workers feel depersonalized and lost in the crowd. A face-to-face discussion not only explains the reason for the action, but causes him to accept it as fair more readily than an anonymous note or an action with minimal discussion or explanation.
He reiterates the effect of sizable organizations on morale: it was not so long ago that one man, or two working together, fashioned a farm wagon, steam engine, or some other article from start to finish. In the modern factory, a hundred mechanics or machine tenders may each have done some small part of the work, and loses site of their contribution to the finished product, which diminishes the satisfaction of their work. In such instances the personal recognition of their effort by a supervisor or manager substitutes from the direct feedback of seeing the work of their hands to completion.
The Desire for Security
It is generally maintained that offering the best wages attracts the best workers, but Scott contends it to be otherwise. The skilled and dedicated worker will demand a fair wage for his efforts, but not an exorbitant one.
The shiftless man will focus his attention on his next pay envelope, with no regard for the future, and negotiate for the highest wage he can get. He will not hesitate to bid employers against one another for his services, and to leave his position for a marginally better salary.
The dedicated man will always rate his wages around par, as he recognizes that the continuity of his firm depends on its profitability and competitiveness of price in the market for finished goods. Since his interest is in a steady job, he is willing to accept a fair and sustainable wage.
However, to satisfy a man who demands a stable income, the employer must be willing to provide that stability - even to sacrifice his profit in bad years to take care of his men. Loyalty is reciprocal, and an employer cannot expect loyalty from his workers if he fails to demonstrate loyalty to them in exchange.
Maintenance of inventory is useful in providing steady employment. Rather than employing hands temporarily for the busy season and then discharging workers afterward, an employer will calculate a rate of production necessary to build a surplus of goods in advance of the busy season, thus providing steady employment for the workers throughout the year.
He mentions the example of a small house that was able to drain the most talented laborers from a larger rival using exactly that method: by managing the workload to provide steady employment, they were able to lure away the best talent from the larger firm in which seasonal layoffs were a common practice. Even though the smaller firm paid thirty percent less, those men who seek steady employment accepted the lower rate for more security - and in addition to paying a lesser wage, the smaller firm benefitted from decreased training expenses from having a stable body of workers.
Wage Increases, Morale, and Motivation
A common concern among employers is that any raise or bonus creates an expectation among workers that they will receive similar raises or bonuses in future. This is entirely true, and it can be entirely positive.
Any action is undertaken with the expectation of achieving a result. And whereas companies often consider wage increases to be a reward for past behavior, their motivational factor is in the implication that if the employee continues to improve his service, he will receive improved compensation in equal measure.
First of all, that is or should be an entirely fair assumption. If a worker who is paid by the piece increases his efficiency to produce more pieces, his reward will greater accordingly, and if he increases his efficiency to produce even more, he will be rewarded even more. Workers who earn variable wages are thus guaranteed better pay for better work and are motivated to provide it. Workers whose compensation is fixed have the same expectation, and it is just and fair that expectation should be fulfilled.
Second, and more germane to motivation, is that the worker who expects rewards in the future will work harder in the present than the worker who received rewards for his performance in the past. The only reason for the latter man to feel motivation is expectation of future reward.
As such, rewards must be clearly linked to performance to maintain their motivational power, and the company must hold up its end of the bargain: if employees receive a bonus for achieving a certain level of production this month, they will indeed expect it next month - and the company should certainly pay it if it wishes to sustain their motivation.
(EN: I have a sense this is true of bonuses, but not necessarily of regular wages, because an increase in regular wages is ongoing. That is, a bonus is a one-time reward for a one-time action: a man who normally produces four units produces six one day, and is rewarded for that day's effort and cannot expect a bonus if he produces only four the next day, but only if he produces six. Wages are ongoing rewards for regular actions. If a man who produced four units a day for three months finds a way to routinely produce six a day, his salary is increased to compensate him for ongoing performance. He should not and does not expect his salary to be continuously increased if his performance levels off at six a day, but will likely and justly expect an increase if his performance increases to eight.)
Employee Promotion and Development
Promotion also serves as a stimulus, which are understood to happen far less frequently than bonuses because they are significant. (EN: more likely, because the structure of a business requires a position to be vacated before someone is promoted into it.) Promoting from within builds loyalty and motivation because the man promoted, and all who witness his promotion, get a clear sense that the firm values its people and rewards their growth. Hiring from external sources rather than promoting from within has the exact opposite effect - men get the sense that their good work and progress will be unrewarded, and their morale and motivation are sapped.
It is for this reason that employers should hire from outside only when it is absolutely necessary to do so. It would be better for the morale and motivation of their workforce to hire from within, even if outside candidates are more skilled and capable, and develop the skills of a less qualified individual who is already employed at the firm - because like salary increases, promotions have motivational power: if a man expects there is a possibility of promotion in future, he will apply himself to earning it; if he expects there is no such possibility, he will not.
Companies will only have the ability to successfully promote from within if they develop their workers. While it may be argued that men may develop themselves through study in their private lives, the firm has a better idea of which skills it values and has better resources to provide the education necessary for their development.
The author gives the example of an anonymous firm in which selected workers took courses in physics, chemistry, and metallurgy at the expense of the firm so that they could become qualified for openings in the factory laboratory, developing their talents in anticipation of promoting them in future. This did much to encourage those men to increase their knowledge and skills, and had an effect on others in the workforce who recognized the company's devotion to their future careers.
Another example is given of a manager who was transferred to another position for which he was obviously unqualified - he did not know the product or the field in which he would be managing, but nor did anyone else. The department head not only provided for his education, but also made it clear that the company would be "willing to lose money in the department for the first year rather" with the expectation that the man would gain competence from his training.
In this sense, development of employees is a demonstration of the company's long-term loyalty to retaining them and helping them improve themselves - and this loyalty is reciprocated not only by the few who benefit from training, but from the masses who recognize the character of their company.
Location as Wage
When constructing and locating a factory, the needs of the workers must be considered. Traditionally, factories located near cities to benefit from the abundance of labor in those environments, which was an economically valid chose for the employer, but was detrimental to an employee: there is great expense in living in a city, which diminishes the value of wages, and they are unhealthy and unpleasant environments in which to live.
He assert that in his time, some industries "have removed boldly to country towns" where labor is more scarce - but living expenses are lower and living conditions are better. This has considerable appeal to workers, whose nominal money-wage is less important than the purchasing power it represents (a wage can be half as much in a town where rent, food, and other items cost half as much) and the quality of life that a worker will have, even in his non-working hours.
The success of this idea is reflected not only in the profitability of the firm, but in the willing migration of the population to more rural areas. It has even been observed that a town will grow around a factory - though many such towns were constructed and subsidized by the company itself for the benefit of its workers until the town grew to a size in which it became self-sustaining.
(EN: History shows that this is not always done well. Consider the fate of American coal miners living in company towns where the company set rent and the price of goods at the company store to a level that their wages were insufficient - such that the conditions of life for many workers became a form of indentured servitude.)
The author goes a bit further in mentioning benefits such as retirement funds and health benefits as being supportive of the morale and fitness of the workforce. It is not an act of wasteful charity to tend to the needs of workers in general, as freedom from troubles in their daily lives renders them more productive in their work.
In all, the loyal and long-term worker is more attracted to a company that provides him with a good life, rather than a high wage. This is particularly true in areas in which a high nominal money-wage does not afford the employees with a good lifestyle.
Detractions to Wage
It has been observed by economists that unpleasant work commands a higher wage, but it seems to have been unnoticed that unpleasant work also has a high turnover rate. No matter how high the wage, people simply do not wish to occupy themselves in a position that causes daily misery - and many will accept a lower wage to escape poor working conditions.
As such, whatever reduces hazard, discomfort, loss of time, uncertainty, or the cost of living for workers adds value to their wages as a means of having a pleasant lifestyle. Which is again to state that workers do not seek a wage, but a good life - toward which goal their wages are but one method.
Positive versus Negative Approaches to Setting Wages
Scott asserts that most employers take a negative attitude toward wages - they will pay only as much as is necessary to prevent their workers from leaving the firm. Instead, employers should be encouraged to take a positive outlook on wages, and investigate what manner of life a given wage provides - and pay sufficient wages for their men to have a lifestyle befitting their contribution.
Similarly, many employers take the lack of grumbling about wages as a sign that wages are sufficient. However, a better approach is to measure and witness the degree to which wages influence productive behavior and reduce employee turnover. Workers may claim to be satisfied with their wage to appease management, but their behavior is more telling of their attitude toward their compensation.