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Why motivating employees through ‘startup salaries’ backfires for companies

The author and Nike’s director of compensation, David Buckmaster, says that startups’ abysmally low salaries are a recipe for inequality.

Why motivating employees through ‘startup salaries’ backfires for companies
[Photo: koya79/iStock]
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Those who oppose fair pay as I describe it—as an activity with both market and structural blind spots in need of correction—often worry that changing the way pay works will limit business innovation, or that business leaders will no longer be able to reward their truly outstanding performers. I see this often in start-up environments and in all companies with ambitious managers, and before we learn to parse the differences in how most companies assess paying most people, I want to address the topic to show how exempting certain types of companies or superstar employees from the ways of fair pay creates more problems than it solves.

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Regarding business innovation, I find Paul Graham’s 2016 essay titled “Economic Inequality” instructive, though likely not for the reasons he intends. Graham is a guru among founders and in his essay said that “eliminating great variations in wealth would mean eliminating startups.” Hyperbole aside, his argument was that business start-ups may, in fact, directly cause inequality, but that on the whole this was a favorable trade-off for a broader economic system that can create new wealth from nothing. Creating new wealth is a good thing, but I wish he would have also created daylight between helpful and harmful start-ups. Not all start-ups (or traditional businesses, for that matter) are built to sustain fair pay outcomes. Some are designed exclusively around the idea.

How can founders make sure they build the kinds of companies that value fair pay? Simply put, they should not write a business plan that creates new conditions for low wages and inequality to thrive. Founders, recognize that you get to choose your business model, and you get to decide whether you operate with pay sincerity from the outset. To apply pay sincerity to the mission statements of well-known start-ups (some of which have grown into behemoths), you’re not “connecting people with possibility” when you’re deducting tips from the base pay of delivery drivers. You’re not “igniting opportunity” when you’re leading the legal fight against independent contractor classifications that would give people a basic sense of security. And you’re not “elevating the world’s consciousness” when you’re handing the CEO a billion-dollar walkaway package for nearly bankrupting the company.

The same mentality—that innovation trumps fairness—permeates large companies, too. Laszlo Bock, the legendary former head of Google’s human resources (called People Operations), helped the company land on scores of Best Company to Work For lists around the world. Untold numbers of copycats have tried to replicate the Google culture and work environment, and I can think of few companies that have done more to influence and enhance the standard offering of pay and benefits for the entire marketplace (at least for office workers). But what Bock is best known for in the compensation world is an idea he admits is provocative, described in his book Work Rules, that companies should intentionally “pay unfairly.”

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To pay unfairly, as Bock describes it, is to acknowledge that “two people doing the same work can have a hundred times difference in their impact, and in their rewards.” He takes this literally, saying one person could receive a $10,000 stock award, while another in the same job could receive a $1,000,000 award. In his view, fair pay means being paid according to your contributions, with top performers contributing many multiples more than the average performer. This is meritocracy in its most distilled form, totally aligned to the prevailing views of pay-for-performance business models. It’s also risky.

To make paying unfairly work, Bock insists that pay programs have both “procedural and distributive justice.” In other words, people have to trust the process, the amounts given, and the worthiness of the recipients, or else the company risks breeding “a culture of jealousy and resentment.” He’s right: even the best companies who believe they can ensure both types of justice create risk with intentionally unfair pay, because for many companies, high performance is confused with frequent presence. Pay is too often associated not with results generated, but with the hours put in physically at the office. There is, of course, a gendered dynamic that results from this pay approach. As long as women are culturally expected to carry the greater physical and mental load of the unpaid work of family life, they risk losing out on the rewards of paid work. If pay sincerity means to help people seek the full rewarding of their contributions and potential, setting after-hours work activities and expectations that unintentionally reward presence and participation over performance will have to go. Men, the easiest part of being an ally is to achieve the lowest bar ever: leave the office at a reasonable hour and put down your work email until morning.

Paying unfairly assumes a company can accurately measure sustained multiples of outsized contribution in an unbiased way, and that they will be able to communicate these unequal awards to a broader employee population once the rumors start. Good luck. By paying unfairly, you might breed not only resentment but also a biased and potentially illegal pay system. Google, a company with some of the world’s smartest minds and that swims in an ocean of data like no other, can likely measure its ability to pay unfairly better than anyone, and yet it has still had problems in how its overall pay culture is viewed by employees (despite all the Best Place to Work awards). In late 2018, Google staff worldwide held a walkout over the company’s treatment of women. The second of five demands made by the protestors was for “a commitment to end pay and opportunity inequity.” The phrase “opportunity inequity” sounds to me a lot like presence mattered more than performance when setting pay. I will assume your company is not as good at data collection as Google, which means, in most cases, paying unfairly is unfair and unwise.

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David Buckmaster is the director of global compensation and market insights for Nike. He lives with his wife and daughter in Portland, Oregon. His first book is Fair Pay.

Excerpted from Fair Pay. Copyright © 2021  by David Buckmaster Reprinted her with permission from HarperBusiness, an imprint of HarperCollins Publishers