Have you ever heard of a customer service rep making $117,000 per year? At Less Annoying CRM, that's the going rate for someone with experience. In this post, I'm going to explain why.
The classic approach to employee compensation is for a company to pay every person the absolute minimum required to keep them from quitting. The market sets a rate for each employee, and companies need to pay that rate if they want good people. Why would a company pay any more than that?
That approach makes sense if the company is strictly trying to maximize shareholder value, which most businesses are (especially if they have investors to please). They'll pay employees as little as possible, charge customers as much as possible, and capture all that surplus value for shareholders.
But what if you don't want to maximize shareholder value? What if you already have enough, and rather than capturing all the value for yourself, you want to share the wealth equitably with customers and employees? In that world, employees should probably be paid more than the absolute bare minimum.
Then the question becomes: How do you share the excess wealth with employees? You could have a profit-sharing plan based on seniority. You could pay all employees a certain percentage above their market rate. You could pay performance-based bonuses.
Why pay more than you have to?
To answer that question, I think it's important to understand why you would ever choose to pay an employee more than their market rate. I guess we could all have our own reasons for wanting to do that, but for me, it comes down to the fact that I care about the people I work with. I value them as humans. And while I'm still a bit greedy and capture some of the excess value myself, I want to share it with those people I care about so that they can live happy lives.
Fundamentally, I'm sharing more wealth than I absolutely have to because I care about the happiness of employees.
The next question has to be: Do I care more about some peoples' happiness than others? Do more senior employees deserve to be happier? What about employees who do more valuable work (defined by what their market rate would otherwise be)? Or employees who work harder? I think the answer has to be no. Market dynamics might allow some employees to demand more money/happiness, but I don't think there's a moral argument that they deserve it more.
There are business realities that impact this a bit. An employee who is so unproductive that they're not accomplishing their job requirements can't work at LACRM, because otherwise the company would stop functioning and no one could be paid. Seniority should come with some benefits because loyalty is a two-way street, and incentives matter. Some employees likely do need to make more due to market realities.
But fundamentally, I think that we pay employees so that they can live happy lives, and everyone deserves happiness equally, so in my hypothetical utopia, everyone would make the same amount of money (and it would be enough that no one is underpaid).
The thriving wage
At Less Annoying CRM, we have a concept called the thriving wage. If the living wage is the amount of money a person needs to make to be able to cover their basic needs (food, shelter, etc.), the thriving wage is the amount of money a person needs to thrive (travel, hobbies, family, etc.).
Since everyone deserves happiness, everyone is paid at least the thriving wage, regardless of what job they do for us. Whether they're a janitor (not a position we have, but you get the idea), a customer service rep, or a software engineer, the thriving wage sets the minimum amount we'll pay anyone.
I'll admit that setting the thriving wage is a bit arbitrary, and it's largely a function of what we can afford to pay. As of this writing (June 2021) our thriving wage starts around $67,000/year, and comes with automatic $5k raises each year indefinitely. After 10 years, a person will be making $117,000. You might say, "you don't need to pay a janitor $117,000 per year no matter how experienced they are!" to which I'd say, "you do if you want them to be able to thrive."
*Note: We're based in St. Louis, MO which is important context when considering these dollar amounts.
If you're considering using the concept of a thriving wage at your company, the actual amounts can definitely vary from what we pay, but the point of this is that you care about everyone's happiness, and so there should be some minimum you'll pay everyone regardless of the work they do, and it should be enough for everyone to thrive.
Episode V: The market strikes back
Ok, enough with the utopian fantasy. The reality is that you can't actually pay everyone the same amount unless you're making so much money that you can pay every single employee the amount that your most valuable employee demands.
Put another way: Let's say your lead developer is constantly being recruited by other companies, and they know they could make at least $250k working somewhere else. It's unrealistic to expect them to make half what they could just because that's what everyone else at the company makes. Unless you can pay all employees the $250k it would take to retain the lead developer, you're forced to make a compromise.
The good news is, this isn't complicated: For anyone who has a market rate above the thriving wage, you just follow the normal playbook that all companies follow. Pay them what you need to in order to keep them.
Putting it all together
Simply put: You pay everyone at least the thriving wage, and on a case-by-base basis, you pay individual people if the market demands it.
There's really just one important thing I want you to take away from this: If you believe in paying people more than their market rate because you care about them and you want them to be happy, 100% of surplus wealth should go towards the lowest-paid employees at your company. The well-paid employees are already able to thrive. Shareholder capitalism has treated them just fine, and they don't need your charity. By putting excess money towards raising the thriving wage rather than sharing the surplus in other ways (e.g. giving everyone a bonus, instituting a profit share, etc.) you create more total happiness and a more equitable compensation structure at your company.