DealBook newsletter deals with a single topic or topic every weekend and provides reports and analysis that will help you better understand an important topic in the news. If you have not yet received the daily newsletter, register here.
Walmart announced last month that it was raising wages for some of its low-wage workers. Investors responded by beating up their stocks, sending them down more than 6 percent that day.
That wasn’t quite as bad as in 2015, when the retailer’s shares fell 10 percent after it was announced that a wage hike would hurt profits.
Walmart wasn’t fancy. Half of Walmart’s hourly employees, or about 730,000 employees, are still making less than $ 15 an hour after the last increase went into effect last week. The retail giant made $ 13.5 billion in profits last fiscal year.
In recent years, managing directors have publicly expressed their commitment to “stakeholder capitalism” and “doing good by doing good”. However, when it comes to paying workers wages that can support their families, investors send a clear message to executives: raise wages at your own risk.
That’s a problem. The share of employee compensation in our national production has declined sharply for decades, and in particular since 2000. Low-wage workers at companies like Amazon, McDonald’s and Walmart rely on public support like grocery stamps to make ends meet from the Government Accountability Office, according to an October report. A shocking 30 percent of Americans couldn’t easily come up with $ 400 on their own in an emergency, and women and people of color generally earn less than their peers.
However, two new books highlight good ideas for a fairer distribution of wages, some of which are new and some of which are no longer used. You may even be able to help investors accept this reallocation.
Set pay for positions, not people
Kim Scott is concerned about how bias affects employee pay. In her new book, Just Work, Ms. Scott, a former executive at Apple and Google, challenges managers to assess the gender, racial and ethnic pay gap. “Unless you believe that white men are superior to others and are paid more because of it, it is impossible to believe that bias is not a factor,” she writes. American women, for example, only earn about 85 percent of the earnings of men.
Ms. Scott’s recommendations are not common practice in most organizations, but they make sense. The first is to ensure that no person has unilateral power over the compensation. Companies should have fixed salaries or salary ranges for each role. People hired for the same job should have similar, if not identical, letters of offer. Job candidates can haggle for signing bonuses if necessary, but even then only within a scope that the company determines and discloses.
Another strategy for a fairer wage distribution that Ms. Scott advocates is compensation transparency, in which companies publish the compensation for a specific position. This is common with Buffer, a social media tools company, and many government agencies as well. “More and more companies are realizing that the easiest way to close wage differentials is to solve the puzzle,” Ms. Scott writes.
Ms. Scott also urges company executives to examine the gap between executive pay and that of their worst paid employees. Research shows that increasing compensation for low-wage workers is one of the most effective ways to narrow the persistent racist pay gap. “If you are responsible for the compensation, you can pay people who are paid less and less,” Ms. Scott writes. “I’m not talking about communism. I am speaking of general human decency. “
Some companies think similarly. Costco recently increased its starting wage from $ 15 to $ 16 an hour. The retailer has long been a case study of how higher wages can be a good business strategy to reduce employee turnover and theft and improve customer service. Best Buy and Target raised the minimum wage to $ 15 an hour last year. According to Amazon, Amazon benefited from higher work ethic and retention, as well as a significant increase in applications, after the starting salary for all U.S. employees was raised to $ 15 an hour in 2018.
PayPal for the past few years has focused on employee financial health, including a metric known as net disposable income, or what employees have left after taxes and necessary living expenses. It increased the company’s salaries and health insurance contributions for its worst-paid workers, resulting in greater employee satisfaction and retention.
Note that payment is not always linked to performance
Jake Rosenfeld takes up the myths about how companies give compensation in “You get paid for what you’re worth”. One of the biggest myths is that what we get paid reflects our performance, argues Rosenfeld, professor of sociology at Washington University in St. Louis.
In theory, workers should be paid based on how much money a company is making from their work, and this may be clear to some rainmakers. But that is often not the case. Mr. Rosenfeld blames several structural factors for undermining the bond between the value workers who contribute to their employer’s income and their compensation, including non-compete agreements, opacity about salaries, company performance, and market concentration.
In addition, Mr. Rosenfeld makes the provocative claim that measuring the performance of most individual workers is unsuccessful. “For many jobs today, the entire effort to measure marginal productivity is wrong – not because the right tools were not developed, but because there is no way to separate the productivity of one worker from that of others in the organization,” he said.
He argues that even if it is possible to link individual performance to sales, as is the case with salespeople and lawyers, performance-based payment has deep shortcomings, such as: B. the creation of cutthroat competition between colleagues.
What is the alternative when performance-based pay is so problematic? One way is to link pay to performance across the company. Profit-sharing programs, where companies give their employees a percentage of their income, were common in the US before the 1980s, but have largely disappeared since then.
Mr. Rosenfeld also suggests an approach where younger workers are unlikely to find fans: pay is based on seniority. It robs managers of their ability to play favorites, reduces the effects of bias, and rewards the experience. “The seniority-based compensation ensures that we are paid for our improvement,” argues Rosenfeld.
What happens next?
American political leaders play a role here. The federal minimum wage proposal of $ 15 did not make it under the latest economic legislation. But democratic leaders have vowed to pass it sooner or later. (President Biden has also committed to strengthening unions, the decline of which since the 1980s has helped weaken workers’ leverage over compensation.)
A significant majority of American voters have historically supported raising the minimum wage to $ 15. And even this level is not enough to provide workers with an income sufficient to cover basic costs in many parts of the country.
As Walmart was very clearly reminded, investors are not necessarily on the same page as the general public when it comes to better wages. This is myopic. Researchers like Zeynep Ton, a professor at the MIT Sloan School of Management, have shown that businesses can be just as profitable by paying higher wages thanks to benefits like higher quality goods and services and lower turnover. When workers struggle to make ends meet, it holds the economy back because they consume less.
In addition, fair pay is an important basis for a fair society. Now is a good time to reset assumptions about why we get paid, what we get paid, and how compensation is determined. There are new approaches for those who are open to them.
What do you think? How can fairer pay be made? And can it ever really be associated with performance? Let us know: firstname.lastname@example.org.