Gap between CEO salaries and average employee pay

 

Abstract

With invention of steam powered engine, during the industrial revolution there was a massive change in how people worked and how factories functioned. Transition from manual to steam power, invention of machines, expansion of rail roads and boats made the daily commute of a worker possible – all these factors helped the industrial revolution,

Increased size of workforce, People working with machine, fast growth of industry and demand for productivity were few challenges organizations were facing.

And this was the birth time of classical management theories. Max Weber, Henri Fayol, Herbert Simon and Frederick Taylor came up with different theories but in nut shell they tried to addressed concerns such as hierarchy in organization , division of labor, standardized approach to work, centralization and decentralization of authority, separation of personal and work life, identifying the best employees and fair pay for employees.

The foundation of organizational theories are still valid today especially in manufacturing, service, production line industry and have heavy influence on knowledge driven industry sectors such as Tech sector.

Keywords: scientific management, administrative theory, bureaucracy and organizational structure, administrative behavior

 

 

 

Analysis of Influential Organizational Theories

And Finding the Most Influential One

Scientific Management: Frederick W. Taylor (1865 – 1919) a mechanical engineer who stepped into management consulting, saw a huge need for standardization, efficiency and productivity boost in rapidly growing industries. He believed that there is “one best way” of performing a task. And any work process could be broken into small simple and separate tasks. Then each task can be performed by different employees. In the “Hierarchy” designed by him there was a clear chain of command led by the managers, who designed the work process and gave directions to the employees at the bottom of pyramid. He advocated hiring the best talent and providing them best suited opportunity. His belief was to compensate most productive employee accordingly and firing low or nonperformers. One huge problem with his method was, he treated employees as machines. But his scientific management was an impressive methodology to boost productivity and hence profit, so no wonder it was adopted by large mass producers like Ford Motors.

Administrative Theory: Henri Fayol (1841 – 1925) came up with administrative approach that had 2 overall principles. Coordination that was essentially hierarchical pyramid, spoke about a group of employees with routine work, reporting to only one supervisor, and the supervisor having control only over that group. The Specialization or the grouping of organization’s activities was based on formation, purpose, process, customer size and geographical location. Henri Fayol’s administrative theory was severely criticized for being overly simplified by Herbert Simon. (Laegard, & Bindslev, 2006)

Bureaucracy model:  Max Weber (1864-1920) father of sociology also developed a great understanding of bureaucracy. And he defined bureaucracy as a specific administrative structure, which is based on a legal rule-oriented authority (Scott, 1998: 48) and has following features –

Fixed division of labor among participants / employees, Hierarchy of offices, set of general rules that govern performance, Separation of personal life from professional life to avoid favoritism, Selection of personnel on the basis of technical qualification, equal treatment and Employees view employment as career.

His model is followed in both government and private organizations today but it is not perfect as people take advantage or the system and the bureaucratic red tape slows down process. Sometimes rejects anything that is out of the line and that might make the employees feel like they are caged within the rules of the organization.

Theory of Administrative Behavior: Herbert Simon (1916 – 2001) was awarded noble prize for his contribution on business education on a foundation of fundamental studies in economics and behavioral science. (Lindbeck, A., 2014) I feel this is most influential from both historical and managerial perspectives because Simon’s central point was that decision making is the heart of Administration. (Simonsen, 1994). Taylor, Fayol or Weber had given more importance on process, principle and structure of an organization and did not give due importance to the fact the organizations are built with people. And the importance fact is that these people take decisions and the decision run an organization. Simon observed that decision making is a 3 step process –

Intelligence activity or information gathering, recognizing and defining the problem

Design Activity consists finding alternative solutions and impact analysis

Choice activity or the last step includes finalizing choice and implementing it to fix the problem. According to Simon any decision is taken based on values (that is subjective) and facts (which is objective). And according to him there are 2 main types of decisions to be made –

Routine decisions – which is mostly fact based and major decisions or those are not routine – are driven by both value and fact. That is why he concludes it is not possible to take 100% of the time to take rational decision. Herbert Simon has shown administration is a science and not just an art.

How these concepts impacted the development of the current organizational theories

Each of the above stated theory pointed out the importance of productivity increase, hierarchical structure and bureaucracy in organizations. Current organizations are more than just production line or factory. And for these knowledge driven or service industries Simon’ Administrative Behavioral theory is more relevant. In today’s world of information technology data and information are abundant. More and more organizations are moving away from hierarchical organization model to team based model. It is important to form a highly effective and functional team. Each team member should have responsibility, accountability and has to be empowered to take certain decisions. Centralized decision making or in other words if only manager has to take all the decisions in team, then that can cause bottle neck and can slow the team down. As long as each member of the team is aware of the common goal and working towards achieving it, manager can focus on only removing impediments and help the team progress more smoothly. And routine decisions can be automated with help of information technology and that would free up managers time, and manager could better utilize his / her time.

 

References

 

Laegaard, J. & Bindslev, M. (2006). Organizational Theory. Ventus Publishing & Bookboon.com

Scott, Richard W.: Rational, Natural and open Systems, 1998.

Lindbeck, A. (2014): “Herbert A. Simon – Biographical”. Nobelprize.org. Nobel Media AB 2014. 20 Nov 2017. http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1978/simon-bio.html

Simonsen, J. (1994). Administrative Behavior. 19 Nov 2017, http://www.jespersimonsen.dk/Downloads/Simon-introduction.pdf

The Hawthorne effect and what it does not tell

In our readings it suggests that individuals tend to change their behavior if they believe they are being observed-this is called the Hawthorne Effect. As Organizational Leaders what does this phenomenon tell you about observed behaviors and those you may not see? How does this impact the broader context of an organization, particularly when trying to gather authentic data on organizational behavior?

 

The Hawthorne effect and what it does not tell –

“Hawthorne effect” is the term coined by Henry A. Landsberger, after analyzing Elton Mayo’s study on worker productivity during 1924 – 1932.

Elton Mayo studied correlation between the lighting on the factory floor and productivity of factory workers of Hawthorne Works near Chicago. Elton Mayo made an observation that change in any physical variable (including lights on factory floor) boosts worker productivity. With this observation he concluded that productivity goes up when worker realizes that he is being noticed or observed.

The study by Elton Mayo produced very compelling results and the organizational leaders will never be able to discount the “Hawthorne Effect” ever in future.

When a worker is part of a study in an organization, is aware that his/her actions are being monitored, he / she is likely to do better. But depending on the circumstances the reason behind the performance might vary. For example if the outcome of the study is a reward of incentive / bonus, workers might try harder. But the reason behind the performance changes when the study outcome is punishment such as “no bonus” or “loss of employment”. In first instance the performance is reward driven and for the later instance it is fear driven.

 

It is hard to conclude reason behind the increased productivity of workers in Elton Mayo’s study. Because

We do not know number of worker participated throughout the study

If anyone was fired or hired during the study

If the compensation was fixed during the study

And there are many more unknown factors, so it is hard to conclude what made those workers feel like they were the chosen ones, was it just the fact that they were aware about the study being conducted or did the management fire all low performers and kept high performers, hence with time the average output kept increasing? Or may be higher productivity was being rewarded with higher bonus, so everyone worked harder. Assuming that no one was hired or fired during the study, did Elton Mayo try to make the workers feel that they are special in some other way, if only making workers feel special increases productivity, and in that case Elton Mayo would have gotten similar result.

 

Impact of Hawthorne effect –

While performing a study, it won’t be possible to ignore the impact of Hawthorne effect. Since it is plausible that workers (if aware about the study) productivity might get a boost. The first logical step might be discounting a part of total productivity during the study. For example – before the study began the total productivity of the group of worker was 100 and during the study it is “100+x”, it might not be accurate to deduct the “x” amount of productivity, considering that is due to “Hawthorne effect”. The reason is, some of the worker might gain skill and experience (with time) resulting in increased productivity “x”. So my point is, it is hard to quantify the exact amount of increased productivity caused by Hawthorne effect. So either the leaders can let the workers know about the study and risk some up / downside of productivity before or after the study which is hard to quantify.

 

Or leadership should not inform the workers or employees about the study. In that case different teams can be formed and later it would be easier to compare data from different teams and go with the best result.