Business

You’re Not Paid Based on Your Performance

Take a moment and think about your salary and wages. Your bonuses. Your stock options. What explains how much (or how little) you make? Is it your education? Your experience or seniority? Your organization’s performance, the cost of living in your area, your occupation, or your own individual performance?

Over the past few years, I’ve surveyed over a thousand full-time workers and over 150 employers and other managers in the United States about what they thought determined wages and salaries. Specifically, I asked how important they believed the above factors are, among others. The results were unambiguous: no factor received as much support as individual performance. In my survey of full-time workers, two-thirds of respondents said it was a very important basis of their pay. Another 20% percent said it was somewhat important. Combined, a full 85% believed their individual performance was an important determinant of the number on their paycheck.

What about those who actually help to decide that number? I surveyed a variety of individuals in managerial and executive positions, all involved in pay-setting at their organizations. I asked them what factors they considered when setting compensation levels for employees. Similar to my survey of workers, the results were clear: no characteristic ranked higher than individual performance. Nearly three-quarters of this group of pay-setters listed it as a very important determinant of compensation.

These results aren’t particularly surprising. Americans’ belief in the importance of their own performance to their pay reflects a deep-seated cultural sentiment of individualism. It also reflects a longstanding, dominant tradition within academia that likewise views a worker’s individual performance as the core determinant of pay. Combined, these understandings reinforce a general tendency among ordinary Americans to locate individual economic success or failure within the self, rather than in broader political and economic structures.

The question is, are they right?

In a word, no. I argue that the individual performance account rests on a set of myths about pay that are widespread, often uncontested, and misleading. And together these beliefs have held back progress fighting rising inequality and all the corrosive effects that flow from it.

There are three myths in particular:

1. You can fully separate your performance from the contributions of others.

Paying you for individual contributions to your organization requires measuring what, exactly, it is that you contributed. For a few select jobs, like door-to-door salespersons, the task is relatively straightforward. Then there are the rest of us. We work in jobs in which our contributions to our workplace are intertwined with the efforts of others. This difficulty in disentangling one’s individual contribution to the organization is especially acute in group-centered, white-collar occupations that have grown in size over the past decades. As the journalist Derek Thompson has remarked, “The whiter the collar, the more invisible the product.”

There are millions of these jobs spread across the country today: corporate consultants, marketers, and mid-level managers of all kinds. For each of them, distilling individual performance into one quantifiable metric exceeds our capabilities not because we haven’t discovered the right measure, but because no such measure actually exists.

2. Your job has an objective, agreed-upon definition of performance.

As ongoing disputes in occupations ranging from policing, teaching, and journalism illuminate, rare is the job in which everyone agrees on what constitutes the core mission. If you can’t identify a clear mission, how can you define what a good (or poor) performance is?

Take my own field: academia. In 2010, Texas A&M set about measuring the cost-effectiveness of the Aggie faculty. It emerged with an algorithm that ranked professors according to two variables: number of students in the professor’s classes and the amount of grant money the professor generated. But what about the societal value of publishing path-breaking research? Or spending extra time with a struggling student to ensure she graduates? Not a factor, at least according to this analysis.

Even when a definition of performance is clear, it can lead to perverse incentives, and, at the extreme, criminal malfeasance. Wells Fargo once tied a portion of pay to a “performance” measure based on the number of accounts a worker persuaded each customer to open. The incentive system worked extremely well in bringing in cash for the firm. It was also one that encouraged workers to cheat customers leading to massive fines for the San Francisco-based giant.

Ultimately, there are a multitude of ways to define what doing a “good job” means. That’s because the definition of performance in any job involves choices and trade-offs, since there isn’t one true “objective” measure awaiting discovery.

3. Paying for individual performance leads to positive organizational outcomes.

Rare is the job in which we toil in total isolation, sending the fruits of our labor up the organizational chain at the end of each working day. In well-functioning workplaces, we learn from, cooperate with, and assist those around us. These interactions affect our own performance.

But when an organization allocates pay simply based on some measure of individual productivity, cooperative workplaces can turn competitive, which can lower overall productivity. In the 1980s, for example, Mayer Brown, the giant Chicago-based law firm, shifted away from a seniority-based pay system toward one where the firm paid partners based on the business they brought in. This might seem like a logical way to measure value: calculating how many hours a partner has billed her clients and the value of the business she has generated doesn’t take an advanced math degree. Yet few firms allocate pay solely on this simple equation. Why? The infighting, sabotage, and general feelings of inequity such a system spawns among workers.

As the journalist Noam Scheiber documented, Mayer Brown found this out the hard way, after partners stopped cooperating with one another. Given what the compensation system rewarded, this was perfectly rational. Asking a colleague for help trying to land a client meant you’d be splitting the proceeds, discouraging collaboration that might help the firm overall. Further, partners “competed aggressively not just against lawyers at other firms, but against one another,” trying to poach clients from their colleagues. Mayer Brown eventually backed away from the system.

What Actually Determines Our Pay

These three common myths blind us to a set of four organizational dynamics that actually shape the number on our paycheck: power, inertia, mimicry, and equity. These forces play out in the organizations in which various actors stake claims to some portion of the organizational revenue.

To start, wage and salary determination involves the exercise of power and represents the outcome of past and sometimes ongoing power struggles. Power has the force to settle claims made in organizations over slices of the pie. Because of this, organizational inertia often prevails: past power struggles legitimize a salary or wage for a particular job over time, which limits our room to negotiate. Organizational inertia is evident when we think of a job as “naturally” paying a certain amount; that of course a developer makes more than a designer.

Mimicry, where firms simply match the wages and salaries of their competitors, simultaneously simplifies the pay-setting process for employers while assuaging core equity concerns. Paying the going rate in a particular labor market helps stave off workers’ claims that the salary on offer is unfair. But pay norms change and vary between workers, meaning that employers must always be on alert for disgruntled workers believing they’re not receiving their “fair share,” which can result in lowered productivity among the demoralized employees. A tried-and-true tactic employers use to avoid equity complaints is to prevent workers from finding out what their colleagues make in the first place. My research finds that roughly half of all employees today are discouraged or outright banned from discussing their co-workers’ pay.

Uncovering these organizational dynamics helps us understand the core forces at work in determining wages and salaries. Of course, individual performance matters to a degree. If I were to sneak into an orthopedic surgeons’ unit and manage to pass myself off as a physician, my pay would soon plummet to zero based on abysmal performance in a job for which I lack all relevant skills. But once I had the training required to be hired, my skills would be just one potential factor among many influencing what I took home.

The bad news is that, in recent decades, these dynamics have reshaped our economy to benefit the few at the expense of the many, while the prevailing myth about pay and individual performance has helped justify unprecedented levels of inequality. If every dollar a billionaire takes home is seen as “earned,” then the low or stagnant pay for millions of hard-working Americans is seen as reflecting their inadequate performance. Attempts to remedy this inequality have been woefully inadequate, resting on an underlying (and, I argue, false) model of pay-setting that view wages and salaries as approximating an individual’s contribution to her firm. If what you take home simply mirrors your contribution, then efforts to raise or lower pay distort the workings of the market.

The good news is that, if pay isn’t some predetermined, rigid reflection of performance, then we can imagine a different world in which a dominant trend of our current economy — ever-rising inequality, marked by stagnant pay for average workers and runaway salaries for those at the top of the distribution — is reversed.

A fair economy demands three major changes: raising the pay floor, expanding the middle, and lowering the ceiling. Raising the floor requires a minimum wage high enough to live on; the current federal minimum of $7.25 is anything but. Expanding the middle means resuscitating the key organizations that empowers average workers: labor unions. This will require rewriting the nation’s labor laws, which have mutated into little more than tools of union suppression. Lowering the ceiling means reining in excessive compensation for the most privileged. The first rather obvious step would be to raise top-end tax rates, including the capital gains rate.

Collectively, these steps represent a straightforward answer to the question of how to ensure the economy works for all hard-working Americans: You pay them more. They deserve it.

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