Opinion: Companies should eliminate bias in their compensation processes
Racism and sexism are a part of today's corporate compensation model. We need to do better.
I don't speak for Amazon, Facebook, Bezos Academy, or any of my previous employers. The intentions behind company policies are my interpretation, nothing to do with official statements. The below is strictly my opinion.
I spent years working on employee compensation with HR, recruiting, and employees. Amazon's and Facebook's compensation policies are no different than the majority of large corporations. They interview candidates, decide who they'd like to hire, and then they negotiate with potential employees to reach an agreement regarding how much employees will be paid for their services.
Employee pay falls into what is called a salary band. This is the range of pay for a certain role / level. For example, a web designer level 5 might be paid between $50k-$100k. Different roles have different bands, and each level has a higher or lower range. This range determines what amount a new hire can be offered for that job, and is also a cap on compensation for raises.
Employees want to be paid well; both in absolute terms, as well as relative to their co-workers. Companies want to hire and retain employees at minimal expense. Companies reduce compensation paid to employees by taking advantage of those who are already paid less than their peers, those who are less experienced in negotiation, and those who are less financially secure. By paying some employees less, it lowers the average compensation rate, and also enables companies to pay higher compensation to those who negotiate well and are already paid more than their peers (and therefore expect more).
If a company announced that they intended to pay minorities and women less for the same jobs, that would be illegal. That company would also be roasted by public opinion. Yet this is exactly the output of our current system. Racism and sexism is not only about intention, it's also about results and actions taken. If you have purposefully implemented a system with the intended result of paying some employees less than others for the same work, you are acting racist and sexist. Intentional or not.
Proposal: Companies should adopt a compensation model where they have strict documented roles and levels, and at those roles and levels, employees should all be paid exactly the same amount.
Note: I'm going to ignore location for this article, as that is a complex topic which would make this article far too long.
Every role / level has an exact compensation level. This can be salary, or a combination of other compensation (e.g. stock, options).
If external candidates cannot be hired at this compensation level (or if employees are leaving due to low compensation), the company has the option of raising the compensation for that role / level. For the whole company.
Every role / level has a clearly documented set of expectations. As this is the only path for employees to increase their compensation, the company will need to focus on supporting career growth.
The key to this proposal is that a clearly defined role / level definition which defines how much someone is paid is more transparent and auditable than a black box compensation scheme. Minorities and women can't know if they're underpaid with a secret compensation system. Roles and levels are usually known by employees. This allows them to compare their abilities and responsibilities with the roles / levels definitions, and determine if they're being treated fairly. The entire system would be auditable (easily viewed, compared, discussed) without secret data being involved.
I don't believe that the individuals setting negotiation policies at companies intend to create biased compensation. Yet the results speak for themselves.
...employers may discriminate in pay when they rely on prior salary history in hiring and compensation decisions; this can enable pay decisions that could have been influenced by discrimination to follow women from job to job - americanprogress.org
If you have participated in salary negotiation, you know that candidates with a solid current job negotiate better than those without a job. Candidates with lower current pay receive less in their new jobs. Even if the current company is not biased in how they negotiate compensation, past bias will travel with candidates.
When I left Amazon for Facebook in 2014, I had a secure position at Amazon with great compensation. As a confident white male, I was able to repeatedly push back at the negotiation table, demanding significantly higher compensation. I received higher compensation than other peers hired to the same role. I was not more valuable to Facebook, instead I had negotiation privilege.
This bias is not strictly related to race and gender. In contrast to my above example, my career had started in Illinois, where the pay is significantly lower than the West Coast. When I received my original Amazon Seattle offer in 2007, I was astounded by how high it was. I accepted the offer without negotiation. It wasn't until I started working at Amazon that I realized that I was paid less than my peers. Not because I was less valuable to Amazon. Instead my pay was lower in Illinois, and I didn't have experience negotiating. While bias against lower income regions is not a protected class, it is still bias unrelated to job performance.
If you believe that women and minorities are likely to have lower pay currently, then your company is likely to carry that lower pay forward into their next job. Unintentional racism and sexism.
Company - "we need flexibility"
Companies will state that they need flexibility in compensation. Their argument is that they need an ability to offer more to top candidates. They claim that without negotiation, they would lose on these top candidates to other companies. To be clear, these are candidates who do not qualify for a higher level, where the compensation would be higher.
If they offered this high compensation to all employees at that role / level, it would make the average employee too expensive, ignoring the possibility of increasing payroll. Assuming no increased payroll costs, I agree that top candidates would need to receive lower offers for the same role / level.
Candidates expect to negotiate specifically because companies negotiate. It's like going to a car dealer where you know you'll be ripped off if you don't counter their first price. There are also car dealerships which have large signs saying that they don't negotiate. This may send away a few people who love negotiating, but I would guess that most customers prefer to skip the haggling.
Imagine that these top candidates instead received an excellent, but non-negotiable offer. Perhaps the offer is lower than they might have otherwise negotiated. I believe many candidates would accept the offers, happily knowing that they have received fair compensation. I agree that companies would occasionally lose candidates to competitors, but if the company's pay is competitive, this shouldn't be an issue. If you need to regularly offer employees more money than their peers at the same role / level to win them from competitors, you have a larger problem.
And now a brief pause for a personal note
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Company - "We want to pay for performance"
Many companies will argue that they need to have flexibility in compensation to be able to pay people for performance. They want to give Elena a 4% raise for her excellent work, while Tasha gets a 2% raise.
Financial rewards don't work. Studies repeatedly show that increasing pay does not improve performance. This increased pay may be appreciated, but it does not change behavior.
When it comes to producing lasting change in attitudes and behavior, however, rewards, like punishment, are strikingly ineffective. - https://hbr.org/1993/09/why-incentive-plans-cannot-work
You reward employees to retain them. Past a certain point, higher pay does not increase retention. Once an employee is paid competitively, they stick to a job because of a positive culture, great managers, recognition, respect, and the ability to grow themselves over time.
If you would like to reward employees for doing a great job, focus on career growth. This could be providing mentorship and coaching towards the next level. However, career growth doesn't necessarily need to be about a promotion. An employee may find career growth in learning new skills, such as public speaking. It could be education in a new field. The key is providing a path of growth.
When employees pay is determined by their job and level, and if they have a clear and documented path towards the next level, it incentivizes the right behaviors. Employees are encouraged to step outside their comfort zone. They're encouraged to grow their skills to provide more value to their company. Employees would have more personal agency in their compensation than a black box system where they need to beg their manager for more money.
Employees happy with their roles can relax about compensation, knowing that they're paid competitively with their peers. There is no perverse incentive to change jobs, simply to force companies to re-negotiate.
Compensation and happiness
Nothing upsets an employee more than learning that their peer makes more than them. People care about being treated fairly. You might be thrilled with your $50k salary, but find out that Sally at the next cube over makes $51k and it will throw a wrench into your joy.
A report on the inequality of work suggests that lower pay than peers impacts employees negatively, but higher pay than peers does not provide measurable benefits.
We find an asymmetric response to the information treatment: workers with salaries below the median for their pay unit and occupation report lower pay and job satisfaction, while those earning above the median report no higher satisfaction.
below-median earners report a significant increase in the likelihood of looking for a new job, while above-median earners are unaffected
The slight potential joy of an employee being paid more than their co-workers is easily overshadowed by the frustration of employees knowing that they're not paid as much as their peers.
It's time to take responsibility for the outputs of our systems
There are always going to be excuses for why each company adopts the black box system of compensation for employees. They need flexibility. Some employees demand more money. Some employees are happy with less money. Their budget can't support paying everyone that much. There's a huge financial benefit to paying some employees less. These are all excuses to explain away a biased, racist, and sexist compensation system.
Humans will always be biased. Both consciously and unconsciously, it is unavoidable. Humans will be biased when setting compensation, and when setting the levels of hired employees, and when determining if someone deserves a promotion. Yet which is more easily identified and fixed? A transparent and documented leveling process which appears to be biased again certain races or genders? Or a black box compensation process where only a small set of employees has visibility into the data?
We need to take responsibility. Instead of relying on excuses for why we have adopted bias systems, we need to demand more from ourselves and our companies. Instead of saying why we can't possibly move to a transparent system, we need to ask what it would take for us to make this change. We need to take a deep breath and demand that we find a path towards a better system.
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