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Myths About What We’re Paid

The conventional wisdom that people are paid based on the economic value that they bring to a company and that their salaries should reflect their individual performance is a myth.

Kevin Delaney

The following is an excerpt from Reset Work’s latest newsletter, written by Kevin Delaney. You can read the full newsletter, as well as past installments, here.

It’s conventional wisdom that people are generally paid based on the economic value that they bring to a company and that their salaries should reflect their individual performance. 

In his new book, You’re Paid What You’re Worth, Jake Rosenfeld argues that conventional wisdom is a myth. Rosenfeld, a professor of sociology at Washington University in St. Louis, says that factors such as opacity around salaries have weakened the link between the value workers contribute to their employer’s revenue and their compensation. And, provocatively, he believes that it’s a fruitless effort to measure an individual worker’s performance in most jobs, because their contribution is so interlinked with that of others.

Here are excerpts from my recent conversation with Rosenfeld, edited for space and clarity:

How would you fix how workers’ pay is determined? There are a series of actions needed both in the policy realm, especially in regulation, but also on the ground within firms themselves. There are textbook business school cases out there to draw from for employers who are wanting to move in a different direction. And there has been in the last couple of years movement, at least rhetorical movement, with the Business Roundtable coming out in 2019 saying they wanted to move away from a system of shareholder capitalism towards a more stakeholder model, a model that predominated in the past. There seems to be a thirst for new ideas for many organizations out there. But still it’s the exception rather than the rule.

For firms that have been able to remain profitable, remain successful, and pay their workers more fairly—Costco comes to mind. Costco was in the news the other day for raising their starting pay up to $16 an hour. That’s remarkable. Costco has been in the game for a long time now and is often used as this kind of strange and far-off example—but there’s no reason why other firms couldn’t follow suit. 

One of the dynamics I trace in the book is how so much of pay determination, how we set wages and salaries, is simply firms copying one another. It’s them looking around and saying, ‘What are my competitors offering?’ and especially ‘What are the successful competitors offering?’ Well, here’s an example of a successful firm that’s been around for a long time that pays their workers quite well and still has managed to stay in the game despite shareholders grumbling from time to time. Firms should recognize that there are well-documented positive benefits to treating workers well, to retaining them, to providing them with schedules well in advance, to instilling the loyalty and the goodwill that comes from recognizing that these are human beings. They have families to feed and they have all the other concerns we do. Everyone wants to be treated fairly and feel like they’re getting a fair shake at work.

The current practice, as you say, is a comparative one. Companies get salary surveys that detail what competitors pay. If you say don’t decide based on these surveys, how do you suggest determining pay? I wouldn’t be the one to recommend moving away from seeing what other firms are paying. All firms are in some sense operating blindly here and they need signals from other firms in terms of pay practices. But what I would say is aim high, right? So you get a sense of what the distribution is out there. Instead of trying to do what you can to just maintain your workforce and copy what the bottom-road firms in our industry are doing; rather try to say, okay, we’re going to take the top 75th percentile or what have you and benchmark there. They should see it as a deliberate strategy to pay a bit more than your competitors. And if enough firms begin to do this, then all of a sudden you have a new norm in which bottom-rate pay has been raised, where wages for the middle grow as well through a number of dynamics. 

What’s your recommendation for how people should think about the balance of seniority versus performance in determining pay? This was part of the book in which I tread lightly. Seniority-based pay is seen as stodgy and outdated, as in what you did when you had no quality measures of individual performance. I would urge employers and others to reorient their thinking on this. A lot of the book comes down to the fact that measuring individual performance in most jobs out there is often a fruitless task. Measurement problems are ubiquitous, and then there are disagreements about what we’re measuring. Seniority-based pay, once you wrap your head around the difficulties in capturing individual performance, is a measure of performance. We get better at our jobs over time. There’s plenty of literature to back that up. You can think of Europe, or you can think of your own experiences here.

It also accords nicely with our life courses. When you’re just starting off and maybe have no other family members to feed, maybe just a dog, you can afford to be paid a bit less. Your middle years at a firm, you can have more responsibilities to take care of outside of work. So seniority-based pay tracks that life course quite well as management theorists recognized early on,. But it also gets at core equity concerns we have. We hear a lot about equal pay for equal work. One you look under the hood of that particular slogan, complications arise—what exactly do we mean by equal work?

Seniority-based pay took that phrasing very seriously and it meant equal pay for doing the same job, right? Based on how long you’ve been at a firm and what your job title is, people within your rank were paid relatively speaking the same. A lot of workers out there see it as fair. It does actually mean equal pay for equal work. And it’s not perfect by any means, but no compensation system is, which is one of the key lessons of the book. It’s one that has been unnecessarily cast aside, especially given the thinking that we have some other great alternative out there, which I think I’ve made clear in hundreds of pages: We just don’t.

The obvious counter-argument is that performance-based pay is how people are motivated to do their best work. And if they just know what they’re going to get paid just by occupying a seat—endurance, as opposed to performance—are you going to see that people just will be less motivated? The research is increasingly clear that pay based mechanically on measures of individual performance oftentimes isn’t that motivating. It frequently leads to a set of unintended consequences, and is exceptionally rare despite what we think and talk about. If you ask American workers—I’ve done a survey of employers, HR managers, and the like—what’s the number one factor determining workers’ pay, individual performance comes through loud and clear. But if you ask people, does your pay very mechanically by some measure of individual performance? The vast majority say, no, absolutely not. We know from the research that incentive-based pay structures really ramped up in the 1980s, peaked around 2000, and have been declining ever since.

Most of us aren’t paid based on some individual measure of our productivity, and that’s for a number of good reasons. There are motivation issues that arise—but there are a whole suite of other well-established means of motivating your employees to do the best job. You’ll have to think of those when your pay structure is anchored in terms more of experience in job title versus individual incentive structures, which we know are incredibly rare.

What advice would you give employees about how they should think about pay and how to best ensure that they’re fairly and maximally compensated? One issue that comes up a lot and that I’ve done a lot of research on is transparency and how information does matter. At the very least you should arm yourself with relevant information when it comes to what the firms in your industry are paying and what your coworkers are making. I’m not advocating violating workplace policies around this. Although, as I made clear in the book, many of these workplace policies that prevent you from talking about pay or asking are actually illegal. But the first step is to find out if you’re being underpaid relative to the person in the cubicle next to you, or on the Zoom call, who does the same job as you do.

That’s important, to see whether you are being paid fairly based on a conception of fairness that you should be paid more or less what the people doing your same type of work are getting. One other thing I do try to make clear in the book is that the power dynamics are certainly tilted, and not in your direction. That’s where you need some kind of collective help. That’s oftentimes not there, especially in the contemporary United States where the organizational actor that has provided that collective help, labor unions, has just been devastated.

You can read a full transcript of the conversation, which includes discussion of the proposed $15 minimum wage and other policy approaches, and order a copy of Rosenfeld’s book, You’re Paid What You’re Worth.

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