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Friday, August 03, 2007

Your Salary is Not Arbitrary and Capricious

My previous post on salary history generated several comments, two of which are below (both by anonymous posters, by the way).

What planet do you live on?? In a perfect world, people's salaries increase with responsibility. In the REAL world, however, people's salaries can stay the same or increase only slightly because a company's revenues are down the overall budget is tight. Salary history is an inaccurate way to assess the job applicant, because it may reflects corporate situations that the applicant had absolutely no control over.

and

I'd love to see research that connects salary to anything meaningful. It seems to be a poor element to base anything on, despite how convenient it might be to the process.

To address the planet I live on, it's called earth and despite what happens when Ms. Frizzle and the gang go into outer space, it really is the only inhabitable planet in our solar system.

Glad we've cleared that little bit of information up. Now, let's talk about salary. Our second anonymous friend wanted to see salary connected to anything meaningful. I am now going to do that (albeit without putting on a lab coat to be more scientific).

Everyone listen up: Your salary/benefits package is how much your company values you.

That's it. That is what your salary reflects. If they value you more, they'll pay you more. If they value you less, they'll pay you less.

Now, please note that I did not say, "your salary is how much your boss values you." Your boss and your company may have very different value systems. Ultimately, your company wins. Now, granted that value also includes your benefits, such as health insurance, vacation, flex time, etc. But, for the sake of simplicity, we'll use the term salary to encompass all that good stuff.

McDonalds values their CEO more than they value their burger flippers. How do I know this? Their salaries differ by a little bit. As they should. Just about anyone is capable of making hamburgers, but very few people are capable of running a company. If a company loses a good CEO they are in big trouble, as they are hard to replace. But they expect turnover amongst restaurant cooks to be high.

If a company's revenues are down the pool of money for increases will go down as well. Then it becomes even more apparent who is valued and who is not. Trust me when I say there is always SOMETHING available for the super-valued employee. (Extra vacation, flexible schedule, telecommuting--something if financial conditions don't allow for more hard cash.)

Now, sometimes (and I bet our first anonymous poster would argue that the word should be frequently, but I don't think so) the value the company places on you is dead wrong. Slackers get big raises and someone who is actually bringing in money to the company gets nothing but a pat on the back.

This, I think, is a problem HR should help solve. Having strong performance rating criteria (Like the SMART method discussed below) helps to get what should be valued actually valued.

So, if you came to me and said, "I didn't get an increase for 3 years because the company was having a down turn," I would ask these follow up questions:

1. Why did you stay with a company that was doing so poorly you didn't even get raises?
2. What did your company do to show that it valued you?
3. How did you attempt to turn the company around? How successful were you?

Good answers? The company gave me additional stock. With the stock being so low, there was nowhere to go but up. I believed that the company would eventually pull itself out of the slump and my stock would be of great value.

Bad answers? Ummm, I don't know, I thought it would get better.

Now, if you truly believe you are underpaid, ask your boss to re-evaluate your position. You need to point out why the company should value you more than they do.

Now, the world is not fair. Some things are even wrong. Everyone argues that teachers should make more money than movie stars, but the reality is? As long as there are people willing to take the teaching jobs at the salaries being offered that is precisely what they are worth. (Ironically, the unions keep schools from being able to place appropriate values on teachers. Therefore, those that could do better elsewhere leave, and those who couldn't, stay. It's a perverse system that encourages bad performance.)

So, if you didn't get a raise? It means that the company you work for values something else more than they value you. It may be shareholders. It may be paying the electric bill. It may be your co-worker.

Be someone who brings values and (in a relatively free market economy) your value will be worth dollars. If not at your current company, leave. Hit the job market. You'll find out pretty quickly what you are worth.

13 comments:

Corporate Whore said...

"Your salary is how much your company values you."

"As long as there are people willing to take ... jobs at the salaries being offered that is precisely what they are worth."

Economics 101. Supply and demand. Doesn't get much more difficult than that.

You want a raise? Prove you have a unique skill-set worth paying more for.
Or ....
Force people to quit their jobs and discourage external candidates to the extent that no-one applies.

If you can pull off the second one, you should be your own boss.
Or some kinda overlord.

Evil HR Lady said...

For some reason, I like the idea of being an Overlord. Probably my evil side shining through.

Anonymous said...

Hm... I have to disagree. I work for a large multinational firm and the CEO recently admitted last year during the annual company roadshow that compensation was on the low side, and was yet happy to say that it was the first time in 7 years that benefits have been given out. What does it mean when everyone is underpaid?

Laurie Ruettimann said...

"Your salary/benefits package is how much your company values you."

That's true in the sense that most companies see compensation as a fixed expense that drains from the bottom line profit, but they haven't found a way to both eliminate employees and get the work done. Not yet, anyway. So it's a clear message that colleagues are not worth much. There's also the challenge of having a consumption-based economy that can afford to buy the product you're selling. Corporations are in a bind. They need people to earn money to participate in consumerism, but they don't want to pay people to work.

What's not true (imho) is that companies will pay you what you're worth. Several large Fortune 50 companies have open compensation plans with the express policy of hiring in 25th percentile (total compensation), often regardless of what the best candidate was previously earning. These companies feel that a low-ball offer is competitive due to the company's reputation and brand. Often times, they are right.

Ask a Manager said...

This is such an interesting topic. I agree 100% with the Evil HR Lady, with one caveat: Some nonprofits turn this on its head, because (at some) you're expected to be there for rewards other than the money -- because the miniscule money available for salaries isn't going to attract anyone motivated by the money anyway.

My first "real" job was at a nonprofit with very low salaries. I'm talking low. The president got $25,000/year. I didn't mind; I was young and I loved the orgnaization's mission. I felt great about the work I was doing, even if I was getting poverty-level wages.

When I decided to move on, I of course got asked about salary history and expectations in my interview for the next job. I made it very clear that I had accepted a very low salary because (a) I was devoted to the group's mission and (b) I wanted to get experience since I was right out of school. I said that now that I was stepping out of that context, I didn't plan to continue on with such low wages. The woman interviewing me looked satisfied with that answer -- and ended up offering me a salary at double what I'd been making (which I accepted). I think this is an example of one of the few types of situations where you can escape salary history.

RJ said...

"Your Salary is Not Arbitrary and Capricious" but neither is it necessarily fair.

There has been research of late which found that the differential in starting salaries is multiplied over time. Women, in particular, are less likely to negotiate salaries.

For a perfectly competitive market to work, a worker needs to be able to move companies easily. Daycare, children, family ties make that less easy.

Personally, I think that past salary information can be an unreliable indicator of value to the company. My own information crosses different economies and currencies, and includes a time of self employment, so it's nearly irrelevant.

Past salary can be indicative of a lucky break (or bad break) or an over/undersupply of a particular skill in a particular place at a particular time.

And sometimes, the flashy outrank the steady too when it comes to performance review- it can be a matter of perception. I've certainly seen situations where someone who is perceived to do a lot actually doesn't when you analyse the metrics.

There's some interesting analysis of this in terms of salary to value ratios in basketball - I think Malcolm Gladwell has someething on his blog about it.

Founder: Lea Setegn said...

The last newspaper I worked for had an interesting way of handling salary increases. We had a bargaining unit with a contract, so when I started there we had set starting salaries based on years of experience. (Subsequent contracts have changed that.) The contract also set the annual cost-of-living raises that were across the board.

The "reward" part of your salary came in the form of "merit raises." I put those terms in quotes because management actually said during bargaining that those raises were meant to supplement the low COL raises that management proposed during contract negotiations -- because those "merit raises" were meant to be evenly distributed across the newsroom. Were they? I have no idea, to this day. If they were, then they weren't being awarded due to "merit."

I never had any personal complaints about this system, because I was paid more at this newspaper than any other I had worked for, and I received two or three appropriate merit raises over 5.5 years. But I never thought it made sense.

Last year, when I left journalism I lost $10,000 worth of annual income to change careers. This year, when I changed jobs, I took another $10,000 hit. Am I worth $20,000 less than I was two years ago? Personally, I don't think so, because my post-newspaper employers have used my newspaper training extensively in my new positions. But the newspaper was paying me about $15,000 above the local market value for writing positions and, interestingly, administrative positions. That actually made it really difficult for me to find a new position, because potential employers saw my salary and told me that I couldn't be happy making less money. (I'm actually the happiest I've ever been in my career.)

All of this brings me to my (long-winded) point: Market value is an incredibly important part of determining salary. Everything that can be done should be done to make the market value assessment objective. I would also take that a step further and say that starting salaries should be determined by market value and years of experience combined, and those should be set numbers that can't be negotiated. Let's make the salary discussion less based on gender and the ability to negotiate and make it objective.

Anonymous said...

If you live in a geographic area where jobs are scarce, it may not be realistic to leave just because you're undervalued. Chump change is better than zero.

Anonymous said...

I think all the above comments, which vary on salary, are a good indication that it's not a good metric. The fact that a candidate would have to explain why they were at a lower salary speaks to this as well. I'm not saying that it's bad they should explain, just that the process is flawed in this manner. Oddly, it doesn't happen in reverse: if a candidate had been paid more than what they were worth you run the risk of hiring a less-talented person over a more-talented person based on an inflated salary. This is partial to blame for gender differences, but also occurs in everyday instances - particularly tech and other areas of capital invested start-ups. It also happens most obviously in Hollywood entertainment positions, but that's sort of a different animal.

Chris said...

"McDonalds values their CEO more than they value their burger flippers. How do I know this? Their salaries differ by a little bit."

In high profile companies it seems like CEO salaries can be anywhere from $1 to $70 million (or beyond). Other compensation might contribute to the differences, but not always. Salaries, especially among CEOs, seem to be an issue. So much so, that legislation seems to be in the works, as this pieces talks about: How Much is a CEO Worth?

How much does that matter? I'm not sure. But I have to wonder how valuable salary comparisons are? Are they more arbitrary than we want to admit? Or are they only arbitrary above a certain level? How consistent is the salary measuring stick, or does it come with it's own rules and instincts?

The Career Encourager said...

Veyr interesting post and lots of food for thought. I agree with just about everything you have said here and plan to post a link. Keep on speaking the truth!
:-)

Evil HR Lady said...

What does it mean when everyone is underpaid?

August 02, 2007 11:34 PM


It means that the company doesn't value its employees at the same level other companies do.

That's all. They've just screamed at you, "we don't think you are worth as much as other companies do!" So, get a new job.

Ashley said...

An HR person at a corporation where I worked left a sheet of salary and stock option info on the printer. Someone I knew picked it up and brought it to lunch to share.

There was plenty on it that was awful but the most egregious was two guys in the same group doing the same exact job (not a high level one either) and one was at $35K and the other $85K. $50K difference; same job. The lower paid guy was even ostensibly doing more of the work though I didn't know the group personally. It gets better. The second guy had something like 70,000 more stock options; each of which was worth about $30 post-cash-out at the time.

Bureaucracies breed abuse and nepotism which is often capricious, if not arbitrary. HR can in these places become little more than a layer of black paint to make the petty dealings of the upper management too opaque for the shareholders and the peons to see.