Firms May Pay a Price for Wide Disparities in Salaries
See that young guy over there, at the desk by the window?
Brand-new hire, and he makes $10,000 more than you.
Um, are you OK with that?
If you’re like many people, maybe not.
The low unemployment rate and such factors as the growing importance of the Internet to business have created a superheated job market for certain kinds of workers, especially those with technology skills.
Companies that feel compelled to bid in this talent auction are paying what many consider scandalous prices, in terms of pay, benefits and perquisites, to fill positions from chief executive to line worker.
And some firms find they are paying a second, hidden price, in terms of workplace friction, if existing employees are made to feel undervalued compared with the glossy new hires.
Matt Bloom, management professor at Notre Dame’s Mendoza College of Business, hears about pay envy from managers when he speaks to industry groups. But he hears it even closer to home, in the halls of academe, where the high pay needed to attract young professors these days sparks resentment among older faculty members.
“Universities, like businesses, are struggling to create a fair pay system,” said Bloom, whose research specialty is how pay inequalities affect business performance. The effects are generally negative.
The dynamics of pay envy also are on display on Internet message boards where people gather to trade gossip, job tips and gripes.
One unhappy soul at a site called “Underemployed.com” wrote: “I got my M.A. and then just barely broke $30K in the Washington, D.C., area. I am hanging out with a bunch of computer people who don’t have any degrees at all and are making three times that. There is no justice in the modern technology economy.”
Pay Inequities and Performance
There are two kinds of pay inequalities, which might be termed vertical and horizontal.
Vertical disparities are the gaps between management and line workers or between the chief executive and the next tier of company officers.
Horizontal inequalities are those among workers on the same level, say, between new hires and veterans or between the sales force and the accounting staff.
In either case, such disparities can be corrosive to employee morale and ultimately, performance, experts say.
In a study of pro baseball teams a few years ago, Bloom found that the bigger the salary gaps between stars and journeymen players, the worse teams tended to perform, both on the field and financially.
He got similar results in a recent study of public corporations comparing salaries of chief executives with those of their closest subordinates. Problems can multiply when the executive is a new hire.
“When you introduce a new person as the answer to the company’s problems, you’re saying to the people already there, ‘You’re not the answer,’ ” said David Thomas, a professor of organizational behavior at Harvard Business School.
Sometimes a dramatic gesture can inspire bottom-up loyalty. When Lee Iacocca took over foundering Chrysler 20 years ago, for example, he took a salary of $1, plus a lot of stock options that would have been worthless had he failed to turn the company around.
Few Chrysler employees begrudged Iacocca the fortune he reaped when the auto maker’s fortunes reversed.
The situation is different at Conseco, the struggling insurance giant, where incoming Chairman and Chief Executive Gary C. Wendt was lured from General Electric’s CE Capital unit with a signing bonus of $45 million, plus a bonus of at least $8 million and up to $50 million, depending on how the stock performs.
Several compensation experts criticized the package for sending a message that the new boss is unwilling to share the same risks as those underneath him.
The issues are slightly different when pay- or status-related conflicts arise among people in the non-managerial ranks.
A classic current example is that of the “offline” company that wants to quickly create an Internet presence and then discovers what intense demand has done to the salaries for technology workers.
“Bright programmers right out of college, who used to get $30,000 or $40,000, are literally getting as high as $120,000 a year,” said Alexander Stein, co-founder of Internet research firm Gomez Advisors in Lincoln, Mass. “It’s like the spot market for fuels.”
Companies react in different ways, but the process often begins with denial.
“The company says, ‘This is our pay scale. Take it or leave it,’ ” Stein said. “But they’re so far off they can’t hire anyone. You see that go on until the company realizes that the Web is key to their future, then they go ahead and hire.”
To keep new hires with their fancy pay and perks from “infecting” the rest of the work force, some experts recommend a sort of quarantine, where the tech workers are kept in a separate physical location or even under a separate corporate structure.
San Francisco-based pay consultant Matt Ward recalled a client, a Bay Area biotechnology firm, that decided to create a new subsidiary based on a cutting-edge technology it had developed. If the technology was as promising as it seemed, the fledging firm could have an explosive initial public offering of stock within a few years.
As a matter of convenience and thrift, the parent company planned to locate the spinoff in some extra space at its headquarters.
Bad idea, Ward told them.
“These people were parking in the same lot,” he explained. Before long, Volkswagens belonging to the original employees could be joined by Lamborghinis driven by the IPO-rich employees of the spinoff--a mixture hardly conducive to workplace harmony.
Underwriting Workplace Harmony
Some firms recently have spun off divisions or issued “tracking stocks” at least partly in order to create a noncash currency to attract high-caliber employees. Tracking stocks are a class of shares that are meant to reflect the performance of a distinct part of the company, such as an Internet site.
Some firms also are pushing stock options deeper into the organization as a way of defusing resentment, said Jonathan Leonard, a professor at Berkeley’s Haas School of Business. Although studies show that options do little to increase effort among lower-level employees, Leonard said, companies feel they can at least reduce tensions by blunting feelings of inequality.
Companies also try to address the issue by creating new job categories. If the new hire has a slightly fancier title than you, the hope is that may in some way blunt the impact of his making more money for the same work.
Another time-honored strategy for minimizing pay envy is secrecy, but Notre Dame’s Bloom thinks it’s a dead end.
“If a company has built its pay system to reflect its competitive environment and the way it does business, it should be able to defend it to the employees,” he said. “But often they keep it secret because they know there are skeletons in the closet, arrangements they couldn’t justify.”
In cases where the high-salaried function--be it an Internet operation or a new research project--isn’t part of the firm’s core mission, companies can avoid pay-disparity issues by hiring outside contractors. A regional home builder, for instance, may want to reach customers via a Web site but probably doesn’t need its own information-technology department.
But if a firm needs to compete both online and offline, it may have to transform its culture to do so.
Mixing Work Cultures
Lands’ End, the Dodgeville, Wis.-based, catalog giant, recognized early on that the Internet would have a major impact on its business, but it didn’t want to create separate tracks for online and offline employees.
“We wanted to be a company where people start to develop skills that can be shifted as our needs shift,” said Bill Bass, the former Internet analyst for Forrester Research, who oversees e-commerce at Lands’ End.
The solution was to emphasize “bilinguality,” Bass said. When two design jobs open up on the Web site, for example, the firm hires one outside technology specialist and brings over one existing employee from the offline catalog operation. The tech expert and the retailer then teach each other their skills, and just as importantly, imbibe each other’s culture.
Conflicts rooted in status, culture and pay disparities are hardly confined to the “dot-com” world. Freshly minted MBAs and lawyers from top schools, such as software writers and electrical engineers, are commanding six-figure starting salaries and such perks as free meals, on-site gyms, concert and sports tickets, and favored parking spots.
Eileen Applebaum, an economist at the Economic Policy Institute, calls such superheated competition for labor a “tournament market,” where a few winners rake in most of the spoils.
Tournaments work fairly well for hiring companies in times of high unemployment because they can bid for the stars they need without fearing that others will leave. But in a tight labor market, Applebaum said, tournaments teach workers that loyalty is a losing strategy.
