Often the most glaringly unfair part of a compensation system is the gap between the highest-and the lowest-paid person. There are practical as well as fairness benefits to not allowing this gap to get too big.
In his book Loonshots: How to Nurture the Crazy Ideas That Win Wars, Cure Diseases, and Transform Industries (purple flag!) Safi Bahcall explains that when the compensation step-up is too great at each promotion, people spend more time trying to get promoted and less time on their actual work.
When the gap between the compensation of senior execs and junior employees is not so great, it will “reduce the return on politics,” thereby encouraging people to focus more on innovation and less on pleasing their bosses.
One reason that the pay gap widens between the most senior executives and the rest of the company is that a CEO tends to be most aware of the gap between their compensation and that of their direct reports. They fix what they are most acutely aware of (how much more they are paid than their direct reports), rather than the problem that most needs fixing (that many employees are not paid a living wage).
This is called empathy bias. Often, this is how executive compensation grows while that of the lowest-paid employees doesn’t. CEOs compare their compensation to that of other CEOs and maybe that of their direct reports but rarely look at the gap between their compensation and that of the person working in the mailroom.
Measure the Gap
Leaders, take a look at the gap between the highest-paid and the lowest-paid people in your organization. Don’t let the gap get too big. You can pay yourself and your top executives less; you can pay the lowest-paid employees more.
When leaders measure the gap, look hard at it, and look in the mirror, the analysis can correct the empathy bias they feel for the people who work most closely with them. Spending time with line employees is another way to close the empathy gap — and generally a good idea.
When a board of directors thinks about fairness, don’t just compare the CEO’s pay to the pay of other CEOs. Compare the CEO’s pay to the pay of the lowest-paid employees. Of course it’s OK for the CEO to get more. But how much more?
When the CEO and top execs own private jets and the new employees are living in their cars or can’t afford health insurance, there is a problem. Ben and Jerry said nobody at their ice cream company would be paid more than five times the lowest-paid employee.
I’d be OK with 10 times or even in some cases 100 times. But in a number of places where I worked, it was more like 1,000 times and occasionally 10,000 times. The highest-paid people were worth billions and the lowest-paid people couldn’t afford to pay their rent — similar to giving billionaires tax breaks at the expense of folks barely keeping their heads above water.
That’s just not right. Many of the ways in which our economy has “evolved” to be more “efficient” have both heightened inequality and hampered our efforts to confront it.
Make sure even your lowest-paid employees get a living wage, especially when you are getting incredibly wealthy. I’m not talking communism; I’m talking basic human decency and common sense. Read this to learn about some other things you can do.
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