When it Makes Sense to Pay Workers More

When it Makes Sense to Pay Workers More

Salaries are rising in 2016. The Federal Reserve Bank of Atlanta notes that wage and salary growth has risen to more than 3%, versus a steady 2% annual pace between 2011 and 2014. 

“We’re at a turning point,” Mark Zandi, chief economist at research firm Moody’s Analytics told The L.A. Times. “I think it will be a breakout year [in 2016] for wage growth.”

Much of this increase is fueled by rising job growth (and hence greater competition in recruitment, especially for experienced, degreed, full-time workers) and rising minimum wages. 

The question we want to pose today: does it ever make sense to pay more than industry average?

Laszlo Bock, former SVP of Google’s People Operations, argues “yes” in his new book Work Rules! He writes that top performers should be compensated at disproportionately high rates in order to fuel their performance and help retain them as long-term workers loyal to the company. “The top 1% of workers generated 10 times the average output, and the top 5% more than four times the average." 

Dubious of that claim? The Harvard Business Review cites several examples:

  • The best developer at Apple is at least 9 times as productive as the average developer elsewhere
  • The best sales person at Nordstrom sells at least 8 times as much as the average retailers elsewhere
  • Before becoming U.S. Supreme Court Chief Justice, attorney John Roberts had a record 9 times better than the average of others arguing before the Supreme Court

In other words, high-performing workers really perform, and measurably so. 

As a result, paying more may make sense. And many companies do just that. According to research from the Society for Human Resource Management (SHRM), the top 8% of workers saw an average of 4.8% base pay increase, versus only 0.9% (or less) for the lowest performing 9% of workers. 

Now the key question: does it make sense to pay high performers so much more? 

If the goal is to increase productivity, the research is mixed. One study from the Rady School of Management at the University of California-San Diego found that higher pay produced higher output initially, but the improved performance quickly tapered off

Higher pay may make more sense as a retention tool. According to the 2015 PayScale Compensation Best Practices Report, “seeking higher pay elsewhere” was one of the most common reasons (21%) for employees leaving a company. And top performers would be in the best position to do just that.

One word of caution: don’t inadvertently fall afoul of discrimination laws. It’s one thing to pay more to workers who meet certain performance metrics. It’s another to systematically discriminate against certain protected classes in pay, even unintentionally. That can open your company up to serious legal and regulatory actions.

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