Question

Many employers offer their employees a choice of plans, paying a fixed share of the cost of each. What inefficiencies does this introduce? Some employers, such as Stanford University, have instead offered a fixed payment, regardless of the plan chosen, and have insisted that all programs offer identical coverage. Within three years, the cost of providing this standard coverage fell by 20 percent in real terms. Explain why this may have happened

Answer 1

Employee compensation needs to established by all organisations , primarily as a value placed on the productivity of the job. It could be wage ( salaries, commission on sales , variable pay and so on ) as well as non wage rewards like family holiday , housing facilities, insurances and so on. A fixed share of costs may be paid on a timely basis as a specified , in most cases, negotiated by both parties. These are generally formulated in compliance of the labour laws prevailing and are set at a competitive price –market prevailing wage .

However, such a fixed plan as much as it is certain and forms a fixed proportion of the total costs of the production for the firm is not without its disadvantages. They are evident in cases of lack of productivity on part of employees, a rise in costs of production due to other reasons like rise in costs of raw materials and so on that increase the total costs, changes in the demand and supply of labour especially in cases of specifically skilled labour, legal amendments made and so on .

This is specifically evident where the employee productivity is low, in such cases the productivity levels may not match upto the pay plan , this may lead to an encouragement of inefficiency in the organisations. Public sectors are especially prone to such inefficiencies, where seniority in career is given importance and a preference over merit, senior employees of the organisation often take advantage of such a pay plan prefer to be lax in their contributions to the over all organisational productivity.

In case of Stanford University’s pay plan, the cost fell in real terms due to the fact that the fixed payment becomes a part of permanent costs or fixed costs of the organisation, in such cases as output rises , the variable costs may form a greater part of the total cost structure rather than the fixed costs. Since the plan was a fixed payment, it became easier to calculate the proportion of the fixed costs to the total costs, the per fixed costs fell and formed a smaller proportion to the total cost structure. This is because they are constant in nature. It may also be noted that as Stanford’s revenues rise( higher enrolment and hence a greater collection of fee ) the proportion of such fixed pay plans will be progressively lower to the total costs.