The financial side of company loyalty

I had intended to do a post discussing the fact that the reason employees have no company loyalty is because companies have lost their employee loyalty.  But then I went for supporting material and found that the topic had been done over and over.  And usually with better writing style than I possess.

So instead I decided to drill down further to make it less abstract and more concrete.  Hopefully, if any management types get their hands on this post, it'll give them something to think about when doing the budgets for the next year.  First, let's set some baselines.  

A low income, front line worker at our company makes roughly $10/hr.  That means $20,000 per year at full time before taxes or benefits.  The poverty rate for a family of 3 is $19,790 so this person must pay the lowest tax rate and carry health insurance.  Tax works out to $2,546.25 so that leaves $17,453.75 for this employee to live on, purchase health insurance, and support up to two more people.

We're going to create a fictitious CEO, not at all like the one at my own company, and say he receives a base salary of $1 million and further compenation of $9 million in stock and other forms of compensation.  Remember that at any publicly traded company the salaries of the top executives must be made public so they can be found in the SEC filings.  Also, several financial sites list out the compensations most major companies, with Forbes nearly always being at the top of the google search.

The view from the cheap seats

One year, at this company, the word came down that the average raise would be 2.5%.  That means each front line manager has the authority to give out yearly raises as they see fit so long as the department's total pay rose exactly 2.5%.  Should they wish to reward someone financially for going above their normal duties, they would need to take that money out of someone else's raise.  Since everyone knew that the standard was 2.5%, whoever received below that amount knew that their money had been given to someone else on the same team.  

Also, by simply checking the internet every employee could see that the CEO's pay had gone from $4.2M to $10M for a total of nearly 250% raise.  Just his base salary went up by 15%.  The inequity isn't in the straight dollar amounts, it's in the fact that he got 100 times the award allocated to the employees.  Not that a CEO isn't an important and difficult job, but can you really classify their work as equivalent that of 100 people?

That is the point where loyalty dies.  Not only is your own raise merely a rough toss towards yearly inflation, reducing your real dollars gained to nothing at all, but then you watch the people on the upper deck reward themselves with ludicrous raises.  Yes, they deserve their own raise, but everyone in the company works towards its success.  I'd like to see an executive fix a server outage as efficiently as 100 of their employees.

Big Buck Ballparking

The realm of executive compensation is complicated.  In grad school I ended up doing three different research papers on the subject for different classes, so I consider it one of my specialties.  I am here to tell you that is worse than you think.

When the Board of Directors sets the CEO's pay for the next year, what they do is look at other CEOs in the same industry, and of companies of a similar size, and they come up with a pay range that their CEO position would fall into on the open market.  Then they pick a spot in the 50th to 75th percentile of that range, and that becomes the CEO's new pay.  I'll say again, for doing an adequate job without special merit, their next year's pay is above the average for their industry.  That adjustment hikes up the entire pay range for the next company that ballparks.  And by the time a whole year has gone by, CEO compensations have leapfrogged each other to a much higher level..  

economist.com

This has a lot to do with scope, too.  A potential CEO will move anywhere to take an inviting job.  That makes the market for CEOs national or global in scale.  IT specialists though, we can't move nearly as easily for a nice offer.  Your compeition for a good salary is determined by how far people will move to take your job.  For my job that means I am competing against my city's metro area.  Which is also why I can't ask for pay that would be competitive in San Jose.  On the macro level this is a good thing because businesses will migrate to places where the talent is less expensive.  On the flip side, it means that companies will attempt to maintain those attractive conditions and that means suppressing employee pay.

Getting engaged

The words of the day in HR circles are "employee engagement".  When your employees are engaged in their jobs and the company mission they are far more productive.  This is easy to see in companies with very powerful missions.  Boeing, NASA, Tesla, Google, Apple, all of these employers have a very engaged workforce because their core mission is to change the world.  When you have a plan to make the world a better place, it becomes easy to get people on your bandwagon.  

Not every company has such a dynamic mission, though.  Banks, insurance companies, credit companies and other such places may do good works but they aren't building the future.  A recent survey at my company asked what the employees thought the business's purpose was, and the most common answer was "to make money".  That's true in a strict sense, but betrays the fact that the vision of the company hasn't been communicated to employees.

Fortunately, some companies do respect the contributions of their employees and share success with them.  Some engineering firms I have spoken to are employee owned, with the employees getting "stock" which lets them benefit when the company makes a profit.  Other places are publicly traded, but reward stock to employees for both longevity and for merit increases.  A steel mill I worked at gave the line workers pay equal to the percentage of the quota that was produced.  (The workers regularly produced 250% of their quota and the parking lot was chock full of big shiny trucks.)  If working harder creates a reward in a way that matters to the employee, then they will devote themselves to the task.  If the reward for exemplary work is given to someone else, then you have created active disengagement.  These people will sink your company.

Now you're hitched

Who moves your cheese?

The team you hitch your wagon to makes all the difference.  Would you like your cart to be pulled by the Budsweiser clydesdales?  Or by Eeyore?  This hitch reference also works on the marriage side.  On a given weekday I spend 9 hours at work, maybe 5 hours with my family and 1 hour in commute.  I spend more time with my employer than with my wife and that's not counting being accessible for emergencies at all hours.  Employers need to take this relationship seriously.  Picture getting some sort of financial windfall or huge raise and telling your wife that she wasn't allowed to benefit from any of it.  It is fair to say that you would no longer enjoy domestic bliss.  So if that wouldn't work at home, why do executives think it would work better to say that to the people who run all the ins and outs of your business?  A wife may make you sleep on a couch, but a disengaged workforce will take all of your trade secrets to the highest bidder and leave all the doors unlocked on the way out.

Does this guy run your data center?

It simply makes no business sense to fail to share the profits with the employees or to skew them so grotesquely towards the top of the corporate ladder.  It sends the message that the skills and efforts of the employee are not valued and were only purchased for the bargain of their normal salary.  

Here's an idea to lower costs.  Give everyone a 15% raise.  What you'll see is a greater than 15% boost in productivity and the ejection of dead weight from your company.  Low level employees understand the revenue minus costs formula as well as any executive, and if you get them invested in generating profits then they'll do so in a way that will make your head spin.  But so long as you are taking your employees' lunch and handing it to the top suits, you shouldn't be surprised when you get mediocre results and the loss of your top talent.