Question: Cisco Systems, Hewlett-Packard, American Airlines, and General Motors are examples of companies that have cut employment or cut wages and/or benefits to reduce labor costs in hopes of becoming more competitive and more profitable. Indeed, American and GM went through bankruptcy in part to gain control over labor costs. In contrast, some companies- Southwest Airlines, Nucor, and Lincoln Electric-have a no-layoff practice and do not appear to have cut wages or benefits even in years when sales have declined significantly (They have also not gone through bankruptcy). What is the difference between these two sets of companies? Is it simply that one set of companies cares more about its employees than the other set of companies cares about its employees?

Or, is it also the case that Southwest, Nucor, and Lincoln Electric have set up their compensation strategies in a way that makes them more able (than Cisco, HP, American, and GM) to cut labor costs when times are tough? (For more background, go to google.com or another search engine and conduct a separate search for each company using its name and the term "layoff.") What about protecting investment in employees and employee relations? What can an employer do to make labor costs flexible so that profits do not take as much of a beating during difficult economic times and so that fewer employees need to be laid off?

If you were in charge of designing a compensation system for a company that is fairly new but is now reaching a stage and size where it needs a formal compensation system, how would you design the compensation system to have labor cost flexibility? To what degree would you have others at the company participate in the design of the new compensation system? Who would participate? Would you follow a policy of pay openness in communicating your compensation system? Provide a rationale for your decisions.