21.         According to the statement, in order to ensure high productivity, companies
should base their employees' salaries and job security solely¹ on job performance, and
not on length of service to the company. I agree that salary increases and job security
are powerful incentives² to high achievement and should generally go to those who do
the best work. However, to ensure employee productivity, companies must also reward
tenured employees with cost-of-living raises—though not with job security.
      On the one hand, rewarding average job performance with large pay increases or
promises of job security is a waste of resources—for two reasons. First, complacent³
employees will see no reason to become more productive. Secondly⁴, those normally
inclined to high achievement may decide the effort isn't worthwhile when mediocre⁵
efforts are amply compensated⁶. Companies should, therefore, adjust their pay schedules
so that the largest salaries go to the most productive employees.
      On the other hand, employees who perform their jobs satisfactorily should be
given regular, though small, service-based pay increases—also for two reasons. First,
the cost of living is steadily⁷ rising, so on the principle of fair compensation alone, it is
unjust to condemn⁸ loyal employees to de facto salary reductions by refusing them cost-
of-living raises. Secondly, failure to adjust salaries to reflect the cost of living may be
counterproductive for the firm, which will have difficulty attracting and retaining good
employees without such a policy.
      In the final analysis, the statement correctly identifies job performance as the
single best criterion for salary and job security. However, the statement goes too far; it
ignores the fact that a cost-of-living salary increase for tenured employees not only
enhances loyalty⁹ and, in the end, productivity, but also is required by fairness.

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