Over time in my business, I developed an appreciation for the importance of pay equity for its significance to organizational health. This appreciation was an evolving perspective that increasingly became a conviction as the company matured. There were many layers to consider.
First, I increasingly appreciated the importance of pay level as part of a paradigm; the overall quality of employment we provide as employers is essential to our companies long-term health and durability. ‘Compensation level’ is one component of this quality. All businesses have their financial limitations and fiscal responsibilities, and the economic realities between companies are very different. It is a given that payroll costs have to be at levels that are fiscally responsible and have to fit within a company’s means – and of course, always have to be compliant with local and federal wage and hour law. As my business matured, I increasingly believed in higher wages as one component of higher quality employment.
It is also essential that a quest for this improvement, while staying within the constraints of fiscal responsibility, is a manifestation of conscience, compassion, and ethics – and not motivated by a return on investment. The return on investment should be a byproduct of the motivation and not the motivation itself. If we as leaders commit to being more conscious, we will transition our companies to be more oriented toward the stakeholders. This orientation will manifest itself in more compassionate workplaces and a higher commitment to the quality of employment – including wages. In this sense, the motivation for optimizing wages (within the confines of fiscal responsibility) is conscience, not return on investment. The return on investment is a byproduct.
But is there a return on investment when we take better care of employees? Consider that better engagement, reduced turnover, and improved morale are all positive indicators for business health. Unlike payroll, wage levels, and benefit costs, the benefits of higher pay levels are not easily quantifiable and are therefore easy to discount or overlook. Add to this that the additional income from higher wages facilitate more spending, which is also good for business. From IN-N-Out burger, to Trader Joe’s, to Starbucks, there are many examples of top-performing companies that provide superior benefits and pay levels that are well above their industry’s averages.
In a paper produced by the Roosevelt Institute, in February of 2019, Lenore M. Palladino demonstrates that shareholder primacy in public corporations suppresses wages and contributes to income inequality. This demonstration makes sense from the perspective that the relationship between shareholder and stakeholder primacy is cannibalistic. A shifting toward stakeholder primacy would likely better serve the purpose of both the shareholder and the stakeholder, over the long term. In December of 2010, the Ivey Business Journal published an article resulting from a six-year study. They concluded that the reduced cost of turnover, the attraction of higher-quality employees, and lower recruiting costs per employee hired can be sufficient to more than offset the incremental cost of paying higher wages. As an example, they compare Costco to Sam’s Club. Costco’s average wage was 42 percent higher, but they had profits of $13,647 per employee versus $11,039, for Sam’s Club. Costco generated $795 revenue per square foot compared to $516 revenue per square foot for Sam’s Club. As we cannot infer causation from correlation, these results could be a function of other things, including competition and general market conditions. Regardless, these results are noteworthy.
In January of 2015, I attended a two-day “well-being” conference at George Mason University. The keynote speaker was Daniel Pink – somebody with whom I was unfamiliar at the time. He was an extraordinary speaker.
Daniel Pink graduated from The Weinberg College at Northwestern University with a degree in Linguistics. He later went on to achieve a graduate degree from Yale – and had been a speechwriter for Al Gore. He has become a leading educator to teach an understanding of the relationship between compensation and motivation, with many podcasts and TED talks on his resume.
He spoke for roughly an hour. His presentation was funny, informative, and replete with wisdom. With the information coming fast and furious, I had one takeaway that was perspective-changing and would profoundly affect my organization’s health. It was that while the level of pay is essential, ‘pay equity’ is more important than ‘pay level.’ I called this the ‘equity principle.’ This principle is a tenet of organizational health and, at the same time, can be counterintuitive. In a prior post, I referenced Patrick Lencioni’s belief- that ‘organizational health’ is more important than ‘organizational intelligence,’ or I think better and more broadly stated, ‘organizational talent.’ There is a consistency in that ‘organizational pay level’ can be viewed in parallel to ‘organizational talent,’ while ‘organizational pay equity’ can be considered in parallel to ‘organizational health.’ If ‘organizational health’ is more important than ‘organizational talent’ – and health can beget talent, then so too is ‘organizational pay equity’ more important than ‘organizational pay level’ – and ‘organizational pay equity’ can beget ‘organizational pay level.’ There are, of course, conditions for this to be true. Most important is that ‘pay level’ has to be sufficient. However, only after the level is sufficient, a perception of pay equity is essential to cohesiveness and engagement.
I made a note during Daniel Pink’s presentation that companies that have pay equity will have better engagement at lower pay levels than companies at higher pay levels with inequitable pay or pay disparity. I do not know if Pink stated this in his presentation or if I surmised this to be the case, from the information he was presenting. Regardless, I believe this to be profoundly true, provided pay levels are sufficient. Regardless, this is an argument for the importance of pay equity, and it is not an argument for using pay equity as a path to lower pay levels. It is the opposite – that if an organization can achieve better health through pay equity, then the better health can potentially result in improved pay level.
Frederick Herzberg, the motivational theorist, developed his Two-Factor Motivational Theory in 1959. In this theory, he states that “basic needs” need to be met at a sufficient level before an individual can be motivated. Below this level are “hygiene” needs. Above this level are “motivational needs.” Hygiene needs can only lower motivation in their absence, while motivational needs can only raise motivation in their presence. Salary or pay in the Herzberg model is a hygiene need. If it is insufficient, it will only lower motivation. In this model, any link between salary and motivation is likely because pay is associated with motivational factors such as achievement, purpose, accomplishment, etc. But not because of the ‘pay’ itself. In the Herzberg model, individuals strive to achieve a level of pay because they are unhappy without it. This is different than being happy because of it. Herzberg’s model would explain why a sufficient level of pay is necessary before pay equity matters. Once a sufficient level of pay is achieved or provided to satisfy the hygiene need, pay equity becomes more important for organizational health than pay level – although ‘pay level’ remains essential.
As I increasingly saw the benefits of pay equity across the organization and came to appreciate the risks of discretion and subjective assessment within a system of pay, I also contemplated whether this principle for pay equity relative to pay level is uniform across all employee groups within an organization. As is typical of any business principle or paradigm, rarely are the rules simple. My intuition was that while this relationship between pay level and pay equity is generally true and vitally important, it may be less true as one moves up through an organization. At the highest levels of an organization, the “C-suite” is where it may be least true. Here we would expect talent and experience to be more important (and less abundant) to the well-being of an organization (although never more important than alignment with the company’s core values and working well together). At the same time, we would expect a recognition of this as part of a vesting in the company’s well-being instead of more dangerous ego-based motives. In fact, ‘acceptance’ of some level of pay inequity in exchange for talent and experience could almost be viewed as a litmus test for C-suite qualification.
An example of this was my hiring of our company president. There was a salary requirement outside of the range of salaries that would have been equitable with the balance of the C-suite or the company’s scale. At the same time, I recognized an extraordinary talent and, most importantly, an alignment with company values. I made the hire (against my advisors’ recommendation) at a pay level that a rigid adherence to the ‘equity principle’ would have precluded. As it turned out, hiring this individual for the company’s presidency was a great decision that facilitated stability and took the company to the next level.
Further, our new president was viewed with great reverence by the company’s employees in management and non-management positions. Even though the pay level was inequitable, there was an easy reconciliation with the pay level and the company’s culture and performance improvement. This reconciliation was essential and trumped the perceived comparative inequity within the C-suite. If there had not been a reconciliation with performance, the pay inequity would have negatively consequential.
Whether or not the ‘equity principle’ is less true in executive positions, I believe it is generally true across an organization.
My view is that the need for perceived equity is a way in which we are hardwired. We are hardwired for fairness, and perceived inequity or unfairness, makes us either angry or disengaged. We rail against the wealth gap in society. Sentiment among those that believe they are at a disadvantage is often to reduce their position if doing so reduces the the other’s advantage. Wealth gaps create political gaps and polarization. They are unhealthy for and destructive to our society. There is probably an argument that with better emotional health, we are more inclined toward our plight without the comparative measure. But we are by nature relational beings, and the differences between us are often more effectual than the acceptances within us.
I grew to realize in my business, that the relationship between pay equity and pay level is essential, but not intuitive. Pay level is important – pay equity is more important as it can beget pay level through the critical perception of fairness, resulting in its contribution to organizational health by way of engagement, morale, and a mitigation of unhealthy conflict.
