“Is your organization underpaying or overpaying employees? This is a critical, decisive question for most organizations.”
That’s the question leading into a description of a service on compensation research and reports. It’s a good question, isn’t it? Labor cost is always a challenge – regardless of whether you are a large organization or a small team of people. You don’t want to be overpaying employees, and thus driving up your labor costs unnecessarily.
On the other hand, if you are underpaying employees you always run the risk of them leaving to work somewhere else. While it is true that most people will leave a job because of a manager, they will take a job because of money (or other “safety” reasons – see my post on what’s important). And, then you have to deal with the cost of turnover – lost productivity, recruiting expenses, and the on-boarding/training ramp.
So the question of paying employees correctly is a good one (and makes you interested in the service provided). There’s only one problem: It’s the wrong question.
Competitive Pay versus Contribution Value
I will admit, I’m not a big sports fan; but I do keep up with enough sports to see some of the things happening in the sports arena. And I think sports is a great analogy for business because you have individuals, teams, stats, and scores.
What has the inflation rate been for the last 20 years? It has averaged just a tiny bit above 3% over the last 20 years. More specifically, since 2000, the inflation rate has averaged just under 3%. Fairly consistent.
What has been the growth rate of sports salaries since 2000? Let’s look just at one team in football. How about the Pittsburgh Steelers? Since 2000, the Steelers total payroll has increased an average of 12% per year (the median salary has increased at the same rate). That’s 4x the inflation rate. (Do the math of around 3% each year compared to around 12% each year and it’s startlingly clear that, on average, football players have more than kept up with inflation.)
So the real question is, no, not are sports salaries too high… a debate for another day, the real question is what is the contribution of the individual, and what is the value of that contribution? Not, what is the competitive wage or average salary for the individual. See, the Steelers won Superbowl XLIII (btw, I hate roman numerals above X!), and apparently the management of the Steelers organization believed they were getting the needed value from the players they were paying, at the rate they paid them; and presumably, they got a payoff for it. (And, I haven’t noticed any of the big sports teams needing government bailout money…)
Looking at the top-paid players in the league today, the top 5 make from $15.6M to $23.1M. But the average football player’s salary is $1M. What if all the teams looked at the competitive wage reports and said, “oh, we can only pay you $1.1M; you’re good, but our wage data says the average salary for a pro football player is $1.0M”?
Value Drives Pay, Not Competitive Wages
Why doesn’t this happen? Because football players and football team management realize that the value of the player is not the competitive wage the rest of the players make, but it is the individual contribution they make as a player - as an individual on the team, as a team member, and ultimately to the organization.
What about your team? How are you paying your employees? Are you paying a competitive wage? Or are you paying them for their contribution? Are you paying them based on the industry statistics? (Which, by the way, generally drive mediocrity based on averages.) Or are you paying them for the value they bring to your team – as an individual, a team member, and ultimately to the organization as a whole?
Now that you’ve thought about that, you can go back to the first question “Is your organization underpaying or overpaying employees?”
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