Thursday, August 21, 2014

Why salaries shouldn't be secret

Jill Abramson, the former editor of the New York Times, got into a confrontation with management over her pay. Photo by Neilson Barnard/Getty Images for the New York Times

No one knows exactly why Jill Abramson was fired as editor of the NYT. But one thing is clear: she was fired not long after she started asking questions about the amount that she had been paid, over the course of her career in NYT senior management, compared to the amount that her male predecessor was paid.

Very few people like to talk about how much money they make — especially not people who earn a lot of money. Since companies tend to be run by people who earn a lot of money, the result is a culture of silence and secrecy when it comes to pay. Such a culture clearly served the NYT ill in this case. If the salaries of senior NYT management had not been a closely-guarded secret, then Abramson would not have been shocked when she found out how much Bill Keller made before her, and Arthur Sulzberger would not have reacted badly to Abramson’s questions about pay.

Felix Salmon is a senior editor at Fusion.

Indeed, secrecy surrounding pay is generally a bad idea for any organization. Ben Horowitz has the best explanation of why that is: it can’t help but foment poisonous internal politics. But there are other reasons, too.

For one thing, secrecy about pay is bad for women, who are worse at asking for raises than men are. If men secretly ask for raises and secretly get them, while women don’t, then that helps to explain, at least in part, why men end up earning more than women.

Secrecy around pay is also a great way to allow managers to — consciously or unconsciously — play favorites with their staff. When you’re deciding how much to pay your employees, you want to be as transparent as possible. A not-great way of being transparent is the civil service method: set narrow pay bands for every level of seniority, and then declare that the only way to get a substantial raise is to get a promotion. The problem with this kind of system is that it begets the Peter Principle: everybody gets promoted to a position of incompetence.

Still, there’s quite a lot to be said for a system, like the civil service, in which everybody knows what everybody else is making. It makes conversations around pay much easier, and reduces craziness like this:

He sat down opposite me and then he told me the job was mine. "Do you want it?" Yes, I said, a little startled. The job, he explained, came with a guaranteed salary for three years. After that, I would be on my own: I’d make what I brought in from my patients and would pay my own expenses. So, he went on, how much should we pay you?

After all those years of being told how much I would either pay (about forty thousand dollars a year for medical school) or get paid (about forty thousand dollars a year in residency), I was stumped. "How much do the surgeons usually make?" I asked.

He shook his head. "Look," he said, "you tell me what you think is an appropriate income to start with until you’re on your own, and if it’s reasonable that’s what we’ll pay you." He gave me a few days to think about it.

More generally, a system whereby salaries are set internally, according to the value of the person and the position, is a system which doesn’t find itself constantly buffeted by unpredictable exogenous factors.

We’ve all worked in companies, I’m sure, where the only way to get a substantial raise is to confront management with a job offer from somewhere else. That’s clearly a dreadful way to run a company, since it gives all employees a huge incentive to spend a lot of time looking for work elsewhere, even if they’re very happy where they are.

One of the problems is that virtually everybody in corporate America — from senior management all the way down to entry-level employees — has internalized the primacy of capital over labor. There’s an unspoken assumption that any given person should be paid the minimum amount necessary to prevent that person from leaving. The simplest way to calculate that amount is to simply see what the employee could earn elsewhere, and pay ever so slightly more than that. If a company pays a lot more than the employee could earn elsewhere, then the excess is considered to be wasted, on the grounds that you could get the same employee, performing the same work, for less money.

How is it that most Americans still believe in this way of looking at pay, even as we reach the 100th anniversary of Henry Ford’s efficiency wages? Ford was the first — but by no means the last — businessman to notice that if you pay well above market rates, you get loyal, hard-working employees who rarely leave. Many contemporary companies have followed suit, from Goldman Sachs to Google to Bloomberg: a well-paid workforce is a happy workforce, which can build a truly world-beating company.

Such companies are, sadly, still rare, however. That’s bad for employees — and it’s bad for the economy as a whole. We need wages to go up: they’ve been stagnant, for the bottom 90% of the population, for some 35 years now. We also need employee turnover to go down: employees become more valuable, in general, the longer they stay with a company — and it takes a long time, and a lot of human resources, to train a new employee up to the point at which they really understand how their new employer works.

There are two things I look for, then, in any company. The first is high entry-level wages. They’re a sign that a company values all of its employees highly; that it likes to be able to pick anybody it wants to join its team; and that it considers new employees to be a long-term investment, rather than a short-term source of cheap labor.

The second thing I look for is a system whereby managers regularly earn less money than the people who report to them. You shouldn’t need to get promoted to a position of incompetence just in order to earn more: you should get paid well for doing the job you do best, even if that doesn’t involve managing anybody. The whole "I work for you" rhetoric of touchy-feely CEOs is actually true, or should be true: value is created by talented workers on the front lines, not by middle management, and it’s management’s job to support those workers any way they can, including by paying them as much as possible.

If you have a company with high entry-level wages and where the front-line talent often gets paid better than the managers, then you’re probably in a pretty efficient industry with relatively low turnover. On the other hand, if you have a company with low entry-level wages and where pay invariably rises the higher you go up the org chart, then you probably have a company where managers spend altogether too much time hiring and training people to do jobs they could probably do better themselves.

If you work for a company where everybody knows what everybody else is earning, then it’s going to be very easy to see what’s going on. You’ll see who the stars are, you’ll see what kind of skills and talent the company rewards, and you’ll see whether this is the kind of place where you fit in. You’ll also see whether men get paid more than women, whether managers are generally overpaid, and whether behavior like threatening to quit is rewarded with big raises. What’s more, because management knows that everybody else will see such things, they’ll be much less likely to do the kind of secret deals which are all too common in most companies today.

So let’s bring pay rates out into the open, where they belong. Doing so will create better companies, staffed with better-paid and more productive employees. Which is surely exactly what America needs, in a world where it can never compete by racing to the bottom.

Felix Salmon is a senior editor at Fusion.

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