How New Pay Controversies Impact Business Productivity

The world of compensation is changing – with far reaching consequences.

Two big pieces of salary-related news hit the Internet recently. Credit card processing company Gravity Payments’ CEO was forced to defend his decision to standardize all employee pay to $70K, and the SEC finalized a long-delayed rule forcing businesses to share their “pay ratio,” or how CEO pay compares with that of the average company worker. How might these developments affect business productivity?

$70K Salary Policy Does More Harm Than Good

First up, Dan Price. Thirty year-old Price is the founding CEO of Gravity. He made headlines when he decided to fight income inequality by raising the minimum salary of his 120 employees to $70K. About 70 people got raises and another 30 had their pay doubled instantly. It might have seemed like a good idea at the time.

But, problems were apparent immediately. For one thing, a lot of talented mid-level and senior-level hires quit right away. Entrepreneur’s Steve Tobak can see why: “An entry-level new hire who just clocks in and out is suddenly making almost as much as a veteran supervisor who busted her hump for years.”

“Leveling the playing field all at once as he did breeds resentment and virtually eliminates the merits of meritocracy. You simply can’t raise the minimum salary that high without it having a negative ripple effect throughout the organization.”

From a productivity standpoint, I don’t know that raising people’s salaries when the act has nothing to do with achievement will have the hoped-for effect. Some employees may be motivated to work harder for a CEO who has proved himself to be a nice guy, but those who got jacked up salaries likely have no incentive to push themselves or do more on any given day.

Junior-level employees want to be rewarded, but the purpose of the reward is important. I believe that most people are more satisfied and engaged at work when they are recognized for actual accomplishments. And when they are satisfied and engaged, they are more productive.

If I were a mid-level manager, on the other hand, I think that unconscious negative feelings associated with income fascism would either directly or indirectly decrease my productivity. After all, why should I go out of my way to share my expertise and acquire new expertise on behalf of a company that doesn’t really value it? Someone should do an experiment on this, ideally before any other companies pull the trigger on standardizing pay.

SEC Mandates Pay Ratios Be Made Public

Next, we have the recent SEC decision that forces businesses to publicly share their pay ratios, or how much more a chief executive earns than the typical employee at their company. According to The Washington Post’s Drew Harwell and Jena McGregor, while the average American’s pay and benefits have been growing at the slowest pace in 33 years, executive wages have soared. Fifty years ago, the typical chief executive made $20 for every dollar a worker made; now, that gap is more than $300 to $1 and growing.

Most Americans, says the Post, currently have no clue. In a Perspectives on Psychological Science study last year, researchers found that Americans estimate the pay gap between executives and average workers is about 30 to 1 rather than 300 to 1.

They’ll know now, and the impact will be potentially disastrous. Forty years ago, management theorist Peter Drucker warned that a lopsided pay balance would erode teamwork and trust. A 20 to 1 ratio is the limit for managers who “don’t want resentment and falling morale to hit their companies.”

If morale does indeed plummet, it will negatively impact productivity. Comparing individual pay to the CEO’s is only the start of the over-analysis that is bound to infiltrate American offices. Now, employees will be obsessed with exactly where they fall in the company’s pay distribution, where their co-workers fall, and where they would fall if they worked for a similar organization. Imagine all of the wasted brainpower.

I’m not saying this information shouldn’t be public. However, I do think we need to understand that it’s bound to cause some disruption. Organizations would be wise to develop a plan around the release of this information, including open and transparent communication about the ratio and what it means from the CEO on down, as well as a forum for employees to express their opinions and ask questions. The best way to minimize potential difficulties is to get ahead of them.

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