Every business wants to increase productivity, and every employee wants to be compensated fairly. But what is the link between employee productivity and salary? How is what we get impacted by what we pay?
At first glance, it’s easy to assume that the workplace is kind of like the department store. You get what you pay for. It seems like higher paid workers are more productive, and lower paid employees are less productive.
But that’s not true. We’ve all worked with people who were incredibly inefficient at their jobs but pulled down a healthy paycheck each month. And we’ve all seen people slaving away at minimum wage (or even as volunteers!) who produce incredible results. Maybe productive people are paid more in general, but it’s not an absolute rule. So what is the link between employee productivity and individual compensation?
This is an important question. We’ve looked at the psychology of pay for performance before here on The Methodology Blog. And we’ve even noted that increasing pay can often actually improve overall profitability.
But a blog post from the Economic Policy Institute studies the phenomenon of employee productivity and employee compensation as an economic activity. They write:
We don’t look simply at average compensation, but (generally) at median compensation, the compensation of a worker in the middle of the pack who makes more than half the workforce but less than the other half. This really matters; when, say, LeBron James walks into a bar average compensation rises a lot even though the compensation of the median person in the bar is likely unaffected.
(A quick refresher for those readers who have a few years since their last statistics class. The average is the weighted central value. To get the average, you add up all the elements and divide by the number of elements. So the average of 1,2 and 12 is 5, because 1+2+12=15, and 15/3 = 5.
The median is the middle number in the set. So the median of 1,2 and 12 is just 2, because that’s the number in the middle. The benefit of median is that it’s not really impacted by outliers, like an how an NBA basketball star’s salary wrecks the average salary of a typical restaurant.)
The Economic Policy Institute continues:
So, average compensation does indeed track productivity growth much more closely (though not perfectly) than does median compensation. But this is just another way to make what is the entire point of the compensation/productivity gap analysis: rising inequality has kept typical Americans from seeing their compensation track productivity.
Average compensation, after all, includes every workers’ compensation—including those at the very top (and whose pay often include exercised stock options and bonuses paid to corporate executives). Median compensation, conversely, looks at the worker in the exact middle of the wage distribution. Therefore, rising inequality (i.e., compensation at the very top rising much faster than everybody else’s, say) will result in average compensation pulling away from median compensation, and hence a growing gap between median compensation and productivity.
Let’s take that out of economist-speak and put it into plain English. The American economy is more productive than ever, but increases in productivity have not been matched by increases in compensation.
It might seem like these numbers are being skewed by unskilled laborers. But according to the author, “the bottom seventy percent of college graduates have not seen a raise in ten years.”
So what’s going on? Whatever the root cause, a major problem is that companies are not paying enough attention to individual contribution. Productivity and compensation both matter. And not only do they matter to employers, they matter to employees as well! Good workers care about getting things done. If you’re looking at results and nurturing people who care about producing something, you’re contributing to the gap and chasing away talent.
Focus on what people are actually doing and everything else will fall into place.