Stop Picking Workers' Pockets The first--and worst--thing companies do when they run into money trouble is to start squeezing their employees for wage concessions.
By Jeffrey Pfeffer

(Business 2.0) – When large companies slip into financial quagmires, it always amazes me to see where they turn first for a hand up--to their hourly workers and other front-line employees, who are asked to take pay cuts. During the past few years, US Airways, American, Delta, and United have all dug into workers' pockets to lower costs and to survive or avoid bankruptcy.

Of course, it's not just airlines that ask employees to work for less. After enduring a four-month strike by Southern California grocery workers, Albertsons, Kroger, and Safeway ultimately managed to freeze the pay scales of existing workers, hire new employees at lower wages, and raise health-care payments. Why? To meet Wal-Mart's low-cost challenge in the grocery business. Meanwhile, hundreds of firms have shipped jobs to China, India, and other countries to find cheap replacements for pricey American labor.

But if you think hourly rates of pay determine a company's--or a country's--competitive advantage, you're wrong. Japan runs a trade surplus with China, despite the fact that Japan pays far higher wages. High-wage, high-cost countries like Canada and Germany also run trade surpluses. You might assume that Italy--a high-wage country and a major manufacturer of clothes and shoes--would have a tough time competing in a global market where clothes and shoes are made predominantly by workers in low-wage countries. (Levi Strauss has closed all of its U.S. plants, and Nike continually fends off critics of worker conditions in the Asian factories where its shoes are made.) But Italy, too, boasts a trade surplus in those markets.

For many companies, the difficult truth to acknowledge is that hourly pay rates have little to do with company success, and that forced givebacks can often be a losing strategy. Consider the airline industry, where pleas for salary reductions ring the loudest. Are the successful carriers--Alaska, Continental, JetBlue, and Southwest--somehow better at getting people to work for less per hour than the struggling majors like United and Delta? Not necessarily. According to pilot-maintained website Airlinepilotpay.com, the captain of a 737 or A320 with 10 years of seniority makes an hourly rate of $194 at Alaska, $175 at Southwest, and $155 at Continental--but only $143 at United, $149 at US Airways, and $154 at American. Yes, Southwest pays a higher rate than United or US Air, even though US Air is running scared as Southwest enters its Philadelphia hub.

Here are two reasons that companies' obsession with hourly wage rates is misplaced. First, being successful depends less on price and costs than it does on innovation, product and service quality, and customer loyalty. Many of the low-cost airlines aren't just low in cost; they're higher in service. Recent customer satisfaction surveys show American, United, and US Airways ranking well below Alaska, JetBlue, and Southwest in service quality and reputation.

Second, labor costs are a combination of two factors: how much an employee is paid per hour and what that worker accomplishes while on the clock. Wage givebacks often reduce discretionary effort and the employee's willingness to enhance productivity. Pilots, for example, can alter costs and revenues dramatically: A highly motivated pilot can constantly seek shortcuts from air traffic control, improving on-time performance, and use fuel-saving techniques such as taxiing with one engine on takeoffs and landings. The unmotivated pilot, on the other hand, "works to rule"--no shortcuts, no extra customer service, no savings. The slowdown at United in 2000, which forced hundreds of flight cancellations and delays, illustrates the downside of an unmotivated workforce that doesn't trust management. Alaska, JetBlue, and Southwest illustrate the upside of having a workforce interested in making the company successful.

Instead of punishing hourly workers, companies ought to consider targeting senior executives, withholding not just raises but also retention packages and retirement benefits. Instead of blaming every strategic error and poor performance on labor rates, look at the usual suspects--quality and service--and focus on fixing these proven ingredients to success.

Business 2.0 columnist Jeffrey Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at Stanford University's Graduate School of Business.