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 is a transcript of my recent conversation with Rosenfeld, edited for clarity:
Is how organizations today decide what they should pay employees broken?
Call me Pollyannaish, but I absolutely believe that most employers out there don’t want to mistreat their employees and want to pay them fairly. But for far too long, the incentive structure we’ve had in place has motivated many employers to focus too much of their attention on redistributing revenue upwards and doing everything they can to hold wages down. That represents a real break in terms of what the norms were if you dial back to the post-World War II decades. So that’s been the fundamental change, and it’s a kind of messy, complicated story of how we’ve gotten there. But that’s where we are today and why we see so much about runaway inequality.
How would you fix it?
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.
That’s been Costco’s model all along. There are other firms out there that are doing it now. 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. Benchmarking is completely fine and you see it everywhere. It’s ubiquitous. And trying to move away from it might run you into trouble from many in your workforce as well, who are going to be looking around to see what else is out there. If they find out that competitors are paying much more, you’re likely to hear about it.
What about anchoring in what people need to live? There’s the MIT living wage calculator, and PayPal over the last few years has developed this metric called net disposable income, for example. Does that seem like an important approach as well?
Yes. The idea of paying a living wage has been around for a while. The calculations get difficult and there’s a whole lot of geographic variation in terms of how you define what’s the right geographic unit to focus on. But that’s a promising avenue. There’s a credit-card-processing firm out in Seattle that, to great fanfare, probably about a decade ago now, looked around at the fast0rising real estate in Seattle and said, ‘Okay, base pay here at our firm is going to be $70,000.’ That generated a lot of positive press, some negative press. The firm’s still around and doing quite well. The CEO is very charismatic and open about how that move helped his firm and—more to the point here—was the right thing to do.
The firm is Gravity Payments. Its CEO Dan Price appears in my LinkedIn feed seemingly every time I look at it.
He’s very active on Twitter as well.
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?
Whatever advice I can give, I can assure you I haven’t taken it in my career thus far. One issue that comes up a lot and that I’ve done a lot of research on—a hot topic on policy-making circles right now—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.
Has your work on pay influenced your own approach to your compensation?
It hasn’t really altered the compensation part of it all too much, but it has lent new insights into both what my employer and what other employers in my particular industry get right—and what they really, really do get wrong on this matter.
What do they get right and wrong?
I’ll start with the wrong. In academia today, if you want to get a sizable pay bump above and beyond say, cost of living increases, you need an outside offer. It shows just how the individual productivity model doesn’t work. It doesn’t matter how productive you are. Unless you can show an outside offer, you won’t be rewarded for that productivity. It also is a nice encapsulation of how other dynamics that are much more determinative of your pay operate; there’s a mimicry effect, where your organization or your university will just copy what that outside offer is, given that we don’t seem to have agreed upon a measure of individual productivity. We don’t even agree on what should be measured—whether it should be teaching, whether it should be research, service and the like—and so we have to outsource it to what another organization is doing.
And it also shows power. It shows that it doesn’t matter your individual performance, your organization’s not going to give you a dime more than you’re getting unless you can change the power dynamics in some way. There are real shortcomings there. Universities would do better if they were more attuned to the equity concerns of their faculty and try what they could to compress pay within rank, some measure of seniority-based pay tied to job title.
So that’s been a learning process. There’s a lot of variation in the landscape, and this has been true well beyond my particular field that you see universities and many other firms out there more concerned about other aspects of equity: gender equity, racial and ethnic equity in pay. That’s been a real sea change and that’s having real positive results.
You talked about the Gravity example and high minimum pay, and there are other approaches from history like profit sharing broadly within an organization. Are there any non-traditional or uncommon practices that you think are particularly good?
I’m glad you brought that up. Profit sharing is a way to assuage equity concerns and maintain motivation. The common knock on seniority-based pay or pay tied to job title is you’ll just have a bunch of loafers. They won’t be motivated to do their job because they can’t see a direct connection between their pay and their individual performance. For a variety of reasons, paying by individual performance is rarely done and probably shouldn’t be done at any large scale. But organizational performance pay measures are motivating. Workers know that their pay may go up a bit if the organization does better. And our measures of organizational performance are much better than individual performance, so it solves the measurement dilemma.
That’s a promising avenue. There are examples from not-too-distant history showing that you don’t want to wrap workers’ pay entirely up into organizational performance. We saw this in the Enron example, when workers’ retirement was entirely based on Enron stock. When Enron became worthless, their retirements went up in smoke as well. So a balance of standard wage and salary structures tied to job classification, tied to seniority. And if you want to add incentive structures on top of that and organizational performance as a component, I think that’s a really promising strategy.
Are there any companies besides Costco and Gravity that are leaders in terms of their approaches to compensation?
Looking across the landscape, the ones that are really trying to do something different and trying to counteract forces of greater inequality are the exception rather than the rule. But you have seen movement—Walmart has been our textbook case study of bottom pay, treating workers poorly, erratic scheduling, high turnover. They really set the standard for the greater retail and grocery industry. Even Walmart has moved in the last kind of year or two. Even Amazon—no one’s poster child for treating warehouse workers all that well. In terms of pay, they are starting to quietly behind the scenes, and in some cases now with Amazon quite overtly, lobby for higher minimum wages overall. There’s still work to be done, in a book to be written, about what motivated them to change a bit and there’s a lot more room for them to go. But there does seem to be movement even among the worst models out there in terms of employers.
Walmart recently announced that it was raising wages. About half of their hourly workers are now making $15 an hour and above, half are not. And upon that announcement, Walmart’s share price went down by 6%; in 2015, when they announced a wage hike would eat into profits, their share price dropped 10%. What do you do about that?
That’s the key question. When you’re not rewarded for treating your workers well, which has been the norm now for far too long, it doesn’t matter how benevolent an employer you are. You have to answer to those broader forces. There you have to widen the lens and think about regulations and policies and incentive structures in industries overall that can change behavior. That includes restraining some of the power of Wall Street in dictating how these firms will operate and what the model should be for how they treat their workers. You’re absolutely right. We saw this in the airline industry where American Airlines just sought to match what its competitors were doing, and so quietly tip-toed and apologetically raised pay to match Southwest’s wages and salaries for pilots and flight attendants—and Wall Street just absolutely hammered it. That’s distressing, when you have firms trying to do the right thing who are punished for doing so. That gives you a broader understanding of what employers are up against. One thing I would say in that regard is that we pay—and I plead guilty here too—a lot of attention to publicly traded firms. They’re important. They employ something like one-quarter to one-third of US workers; but the vast majority of us don’t work for publicly traded firms. And the vast majority of firms are not publicly traded. They still have to answer to their funders as well, but there’s probably more movement there than we generally presume given all the attention to the big publicly traded firms.
What is your view on the $15 federal minimum wage and other policy measures that could be significant?
There are three arenas where there’s real room to move here. The minimum wage is the first one—the debate here is so distressing at this point, because the academic research has in the last 10 to 15 years become overwhelming. For one thing, in policy debates and oftentimes in the economic academic literature policies that are being contemplated have to be all all upside and have no trade-offs. Anytime you could say hey, we found some disemployment effect of a minimum-age increase, then they just throw out the whole idea. But the real world is messy, there are going to be trade-offs, and even so the literature on the minimum wage has been so overwhelmingly positive. Many of these studies are finding no trade-offs whatsoever. That we’re still having this debate and that it looks like it’s not going anywhere at the moment is really frustrating. Because this is an example where there’s just not disagreement in the empirical literature anymore. It’s overwhelmingly one-sided and it all points in the direction of raising.
Although the Congressional Budget Office estimate gave some fuel to the critics of a $15 federal minimum wage…
Yeah. Small disemployment effects, and the CBO estimate was based on outdated modeling of the minimum wage. Some of our top labor economists have been capitalizing on the fact that states have moved on their own accord, that you can compare a city right across state lines. There’s just been a mountain of research that’s come out and found small and oftentimes negligible negative effects of minimum-wage increases. At this stage, even finding small negative effects is not a reason to halt a minimum-wage increase given the overwhelming positives. And then for those people who no longer can find work at terribly paying jobs, you do something to help them as well, like create better paying jobs that they can go into.
Of the other two arenas, one is that the massive sea change in American pay determination in recent decades has been around the boundaries of the firm. You’ve had firm after firm outsource, subcontract, hire temps for core functions and they can do that only because they’re allowed to do that given existing regulations. There is real progress being made on this front, basically telling firms that the workers doing the same work for your company right next to a core worker, the one wearing a company shirt, for a long period of time, and you have to treat them like an actual employee. And that means pay them like an employee. There was real progress being made in the second term of the Obama administration, but all that was halted. I certainly expect that to be taken up by the new Biden administration.
Then finally, as I made clear in the book, and as my previous book and research underscores, it’s just hard to imagine a fundamental change in our inequality trajectory without a revitalized labor movement of some sort. It need not look or act like its mid-20th century forebears. But some increase in worker power on the ground is finally the only thing we know from history and from looking across countries today that can really shake loose the dominant practices that we see now.
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