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Utilitarianism: an ethical framework for compensation decision making.

According to the U.S. Chamber of Commerce (1986), employee benefits in 1985 made up an average of 37.7% of a firm's total payroll compared to 24.7% in 1959. Grossman and Magnus (1988) predict that if this trend continues, then benefits as a percentage of total compensation are projected to reach 40-45%. This prediction bears out the report issued by Kneeling, Kallaus, and Neuner (1978) that benefits, as a percentage of total compensation, are increasing faster than wages and salaries. It also confirms the trend reported by Hanna (1977) that benefits have risen at a rate nearly four times greater than base wages from 1955 to 1975. While a portion of this rise was due to the increase in legally required benefits (9.5% of payroll in 1985 compared to 3.5% in 1959), employers are increasingly turning to benefits for compensating employees.

A parallel trend has been an increase in the number of part-time employees, defined as those employees who worked less than 35 hours per week. In 1973, The Wall Street Journal reported that 15% of the working population was made up of part-time employees and that the trend toward hiring part-timers was increasing. This finding was confirmed by a 1979 study by Allen, Keavney, and Jackson who reported that about 21% of the U. S. labor force was considered part-time. In the Statistical Abstract of the United States 1990, the U. S. Department of Commerce reported that a total of 21,097,000 individuals (approximately one out of every five workers) were considered part-time employees (p. 387). However, despite their increasing number, fringe benefit packages are often not made available to part-time employees. Perhaps the increase in the percentage of part-time workers can be attributed to cost savings benefit reaped by businesses that employ primarily part-time help.

This paper's purpose is to examine the possible differential compensation treatment received by part-time employees and to investigate whether such a treatment is justifiable on ethical grounds.

Employee Compensation Policy

Except for certain compensation payments and other benefits that are mandated by law, each business organization determines its own policy on whether to offer additional benefits, how much these benefits should be, and which of its employees should receive fringe benefits. Examples of fringe benefits not mandated by law appear in Table 1.
Insurance Coverage Pay for Time Not Worked
 1. Life 1. Sick Leave
 2. Major Medical 2. Personal Leave
 3. Dental 3. Holidays
 4. Vision Care 4. Jury Duty Leave
 5. Accident/sickness 5. Military Leave
 6. Long-term Disability 6. Funeral Leave
 7. Mental Health Care 7. Vacations
 8. Retirement 8. Rest time
Bonus Payments Other
 1. Overtime Premiums 1. Educational Assistance
 2. Holiday Premiums 2. Employee Discounts
 3. Shift Differential 3. Profit-sharing Plans
 4. Incentive Payments 4. Subsidized Meals
 5. Payment for Work 5. Relocation Allowance
 Away From Office 6. Prepaid Legal Services
 TABLE I Types of Fringe Benefits
 (U. S. Chamber of Commerce, 1990)

The compensatory discrepancy between full- and part-time employees also can be examined in monetary terms. To calculate the difference in total compensation, the following equations are presented based on the findings of Keeling, Kallaus, and Neuner (1979):

Full-time Compensation Package = Base Wage/.67 (1) Part-time Compensation Package = Base Wage/1.0 (2)

Note that the equations are consistent with the general labor statistics for the year 1986, as reported by the Chamber of Commerce. The difference in the denominators of the equations (1-.67= .33) represents the difference in benefits between full-time and part-time employees. This difference also can be calculated by subtracting the legally required benefits (8%) from the average full-time workers' total benefits package (41%). Thus, full-time employees on the average, receive 33% more benefits than part-time employees.

If both full- and part-time employees are paid the same base rate of $12.00 per hour and the employer maintains the typical compensation standard (as outlined above), what is the result of this differential treatment? In reality, the full-time employee is receiving $17.91 in total compensation per hour, while the part-time employee is only receiving a base wage of $12.00 per hour. Although the two types of employees may be performing essentially the same work, the compensation difference of $5.91 is due to the additional dollar amount of fringe benefits paid only to the full-time employee. Therefore, the full-time employee costs the organization an additional 33% more than the part-time employee. To examine whether this discrepancy in compensation is justifiable from an ethical perspective, the application of an existing ethical framework will be proposed.

Development of An Ethical Framework

Ethics and ethical behavior are usually defined using such words as: just, equal, right, fair, etc. The problem with such definitions is that what is perceived as equitable by one person may be viewed as inequitable by another person. An ethical standard is adopted depending on the mores, values, beliefs, and attitudes held by an individual. The ethical standard chosen may or may not be consistent with the standards of other individuals. One area where ethical standards sometimes clash is in the business arena. Barry (1979) has identified the ethical problem associated with many business decisions and suggests that:

"At a time when the moral content of business

decisions is increasing, agreement on an ethical

standard or norm is declining ... Because business

people do not have a clear-cut standard of approved

ethical action to rely on for making specific

operational decisions, they usually turn to their

own moral devices." (1979:9-10) However, if decision makers rely on their own personal ethical standard, then which of the many different ethical systems should be used?

One response to this question is the use of the ethical system of Utilitarianism as the proper standard to be used in business decisions (cf. Bentham, 1789; Brandt, 1959). Utilitarianism has been defined by Barry (1979:43) as:

"... the consequential doctrine that asserts we should

always act so as to produce the greatest ratio of

good to evil for everyone."(1979:43) The features which make utilitarianism appealing as a basis for business decisions has been noted by Barry as follows:

1. Utilitarianism provides a basis for formulating and

testing policies.

2. Utilitarianism provides an objective way of resolving

conflicts of self-interests.

3. Utilitarianism recognizes the four primary claimant

groups in business activity: owners, employees, customers,

and society.

4. Utilitarianism provides the latitude in decision making

that business seems to need (1979:45-46).

Another reason for advocating such a standard is that utilitarianism closely resembles cost/benefit analysis. Cost benefit analysis, like utilitarianism, suggests that decision makers should only undertake those actions where the benefits exceed the costs. By doing so we ensure that the organization and its various constituencies will get the greatest possible benefit. Because most business people are familiar with cost/benefit analysis and its logic, the utilitarian philosophy can perhaps be more easily carried out than other ethical frameworks.

Applying Utilitarianism to the

Compensation Decision

In examining the compensation issue from a utilitarian ethical basis, an estimation of both the tangible and intangible costs and benefits incurred must be made. A major problem associated with the assignment of values to a particular cost or benefit is the difficulty of measuring |utility' (Mitchell, 1950). The values to be used in this study are for illustrative purposes only and do not represent a specific measurement theory. Rather, they provide a framework for analyzing a business' compensation practices. In the examples that follow, values are assigned on a scale ranging from -100 to +100. A value of 0 represents a neutral point where no utility or disutility exists. Values on either side of 0 represent differing levels of utility or disutility. Values approaching +100 represent high levels of utility, while values approaching a value of -100 represent high levels of disutility.

The purpose of the following example is to illustrate how utilitarianism may be applied to the compensation decision. It should be noted that the particular alternative chosen as the |best' will vary depending upon 1) the circumstances of the organization; 2) the number of possible alternatives generated; 3) the number of costs and benefits identified for each alternative; 4) the corresponding values assigned by the individual decision maker. The purpose of this paper is not to advocate one proposed alternative over another. However, its purpose is to introduce and explain the process by which utilitarianism can be applied to the employee compensation decision.

The allocation of employee benefits is a concern for all organizations. What follows is an example of how utilitarianism may help resolve the issue. To simplify this example, only the following three alternatives are presented:

1) Extending full benefits only to full-time employees.

2) Extending full benefit coverage to both full-and part-time


3) Extending benefits to part-time employees on a prorated

basis, based on the number of hours worked. Although many variations of these three basic alternatives can be generated, they make up the primary solution set.

In evaluating the alternative of extending full benefits to full-time employees, the possible disutilities might include:
 TABLE 11 Alternative 1 Value Analysis
 Disutilities Value
1. Possible lower morale and productivity among
 part-time employees due to equity analysis
 by employees -20
2. Increased part-time employee turnover rate -30
3. Attracting and training new part-time employees -40
4. Burden of part-time employees in financing
 their own benefit coverage -30
5. Societal strain associated with providing benefits
 part-time employees are unable to provide
 for themselves -30
6. Balancing the conflicting utility maximization
 of the four claimant groups -20

Possible utilities realized by the firm might be:
 TABLE Ill Alternative 1 Value Analysis
 Utilities Value
1. Compensation Savings +80
2. Possible higher morale and productivity
 among full-time employees due to equity
 analysis by employees +40
3. Lower priced products/services +25
4. Increased ability to remain price competitive +35

Therefore, the net effect of extending full benefits to full-time employees only would be a utility of 10.

In evaluating the second alternative, providing equal benefits to all employees, possible disutilities might be:
 TABLE IV Alternative 2 Value Analysis
 Disutilities Value
1. Compensation Expenses -80
2. Possible lower morale and productivity
 among full-time employees due to equity
 analysis by employees -40
3. Higher priced products/services -25
4. Decreased ability to remain price competitive -35

Possible utilities realized might be:
 TABLE V Alternative 2 Value Analysis
 Utilities Value
1. Possible improved morale and productivity
 part-time employees due to equity analysis
 by employees +20
2. Decreased part-time employee turnover rate +30
3. Recruiting and training savings +40
4. No need for part-time employees to finance
 their own benefits +30
5. No need for society to provide benefits for
 part-time employees unable to provide for
6. Balancing the conflicting utility maximization
 of the four claimant groups +20

Thus, the net effect of providing fringe benefits to all employees would be a disutility of 10. It can be concluded from this example that providing equal fringe benefits to all employees does not meet the utilitarian principle of the greatest good to evil for all. Hence, alternative 2 is not in the best interest of all. Comparing these first two alternatives, alternative 1 would appear to be the preferred course of action.

The third alternative suggests that fringe benefits should distributed on a pro-rata basis. Under this plan, a part-time employee would receive a percentage of fringe benefits based on the number of hours worked. An example of how this alternative might be carried is as follows:
Number of hours worked by part-time employee 30 hrs.
Number of hours worked by full-time employee 40 hrs.
Fringe benefits prorated for part-time employee 75%.

Under this scenario the part-time employee would receive benefits equal to 75% of those received by a full-time employee.

In evaluating the third alternative, providing prorated fringe benefits, possible disutilities might be:
 TABLE VI Alternative 3 Value Analysis
 Disutilities Value
1. Compensation expenses -50
2. Possible lower morale and productivity
 among full-time employees due to equity
 analysis by employees 5
3. Higher priced products/services -15
4. Decreased ability to remain price competitive -20

The net effect of providing prorated coverage would be a utility of 20, as compared with a utility of 10 for alternative 1, and a disutility of 10 for alternative 2. Since alternative 3, providing prorated fringe benefits, exhibits the greatest level of utility in this instance, it would be chosen as the proper action. In applying the utilitarian ethic of "the greatest good for the greatest number," the third alternative appears to be the |best' option for everyone (the employer, the employee, the business' customers, and society).

Possible utilities realized might be:
 TABLE VII Alternative 3 Value Analysis
 Utilities Value
1. Possible improved morale and productivity
 among part-time employees due to equity
 analysis by employees +10
2. Decreased part-time employee turnover rate +20
3. Recruiting and training savings +30
4. No need to provide their own fringe benefits
 unless additional coverage is desired +20
5. No need for society to provide benefits +15
6. Balancing the conflicting utility maximization
 of the four claimant groups +15

The values assigned in the preceding analysis were based upon the following assumptions: 1) The first two alternatives, of either full coverage or

complete denial of coverage, are direct opposites of

each another. Thus, the valuations and enumeration

of costs and benefits would be reversed (i.e. direct

cost of providing benefits, -80 for full coverage and

+80 for the denial of coverage plan). 2) The third alternative would only require a prorated

coverage in which employees would have the freedom

of choosing to participate. Therefore, the valuation

and enumeration of costs and benefits must be

changed to reflect these circumstances. 3) A full-time employee's worth to the organization is

valued more highly than that of a part-time employee.


Business decisions are increasingly being subjected to more stringent ethical standards. Society's expectations of a business' responsibilities have changed, with businesses now being expected to take a broader viewpoint than just that of a ledger book. It is no longer enough for a business to earn a profit while providing a good or service. Business must broaden their cost/benefit framework to include not only employees, but society and its interest groups as well.

The preceding discussion is intended to stimulate thinking as to how decisions are formulated as well as provide an analytical framework for choosing a proper course of action, in this case, compensation decisions. At a minimum, using Utilitarianism as an ethical basis for making decisions, the decision maker or group of decision makers are compelled to specify the costs and benefits for various alternatives; and, such specification clarifies the argument and promotes rational discussion. However, the possibility of using Utilitarianism to settle an issue with |mathematical precision' is very unlikely.

To aid decision makers in dealing with ethical dilemmas it is suggested that businesses adopt an ethical philosophy, not necessarily Utilitarianism, to guide the actions of its managers. Benefits of adopting such a philosophy would include: 1) decisions which are consistent with the overall organizational ethical philosophy, thereby reducing reliance by decision makers on a personal ethical perspective, 2) identification of important criteria in arriving at the |best' or optimal solution for everyone, and 3) ensurance that the organization's actions are consistent with society's needs.


[1.] Allen, R. E., Keavney, T. J., and Jackson, J. H. "A reexamination of the preferred job attributes of full-time and part-time workers," Journal of Management, 1979, 5, 2, 213 - 227. [2.] Barry, V., "Moral Issues in Business," Belmont, CA: Wadsworth Publishing Company, 1979, 9 - 10. [3.] Bentham, J., "The Principles of Morals and Legislation," Oxford, England, 1789. [4.] Brandt, R., "Ethical Theory," Englewood Cliffs, NJ: Prentice-Hall, Inc., 1959. [5.] Grossman, M. E., and Magnus M., "The Boom in Benefits," Personnel Journal, November, 1988, 50 - 55. [6.] Hanna, J., "Can the challenge of escalating benefits be met?" Personnel Administration, 27, 9, 1977, 50 - 57. [7.] Keeling, B. L., Kallaus, N. F., and Neuner, J. J. W., "Administrative Office Management," Cincinnati, OH: South-Western Publishing Co., 1979, 372 - 388. [8.] Mitchell, W. C., "Bentham's Felicific Calculus" in "The Backward Art of Spending Money and Other Essays," New York: Augustus M. Kelley, Inc., 1950, 177 - 202. [9.] "Temporary Duty: Employees and Employers Both Discover the Joys of Part-time Positions," The Wall Street Journal, March 7, 1973, 1. [10.] "Who's working part-time these days?" Occupational Outlook Quarterly, Summer 1979, 14-17. [11.] U. S. Chamber of Commerce, Employee Benefits 1985, Washington, D.C.: U. S. Chamber Research Center, 1986. [12.] U. S. Department of Commerce, Statistical Abstract of the United Stales 1990, Washington, D. C.: U. S. Department of Commerce, 1990. [13.] U. S. Department of Labor, Employment and Earnings, Washington, D.C.: Bureau of Labor Statistics, 1988.
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Title Annotation:Symposium: Ethics in Business
Author:Hollingsworth, John A.; Hall, Ernest H., Jr.; Trinkaus, Robert J.
Publication:Review of Business
Date:Dec 22, 1991
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