Over the past couple weeks I’ve had a number of conversations with co-workers and others about whether pay and compensation aligns with our job performance.
My friend tried to make the argument that in corporate America you get paid not based on how many hours you work but on what you produce. I disagree with him, for the most part, for a number of reasons:
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Saving money for a company doesn’t equal higher pay/less time at work
- Programmers and non-programmers alike automate tasks or create programs that sometimes can literally cut a full-time employee’s expense out of the budget. They don’t get paid twice as much whenever they save the company a full-time employee expense, nor do they come in only two and a half days a week. Can you imagine the uproar if someone used this logic to justify only working 20 hours instead of 40?. Instead they usually just get more work piled on them, or expectations increase for what they should be producing on a weekly/monthly/yearly basis.
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Company politics come into play
- A company may really want to invest in a certain part of their business but will cut costs as much as possible in another part of their business. I’ve seen this firsthand, and workers who are producing literally twice as much value are certainly not being compensated twice as much as other employees; in some cases they are even being paid less.
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Cost of living has to be factored in
- Let’s say we have two accountants, one working in America, one in India. Let’s assume they provide exactly the same value to the company and can produce the same reports in the same amount of time. Even with everything else being equal, the worker in India is likely getting paid about half what the American worker is getting paid.
Let’s look closer at a few different categories of employees, and how compensation varies from one to the other.
1) Corporate Employees
One issue with corporations is that the 40 hour (or 40+ hour) work week, as much of a relic as it is, has become a staple of all full-time employees. While I predict that this will change in the future, I’m not sure if it will ever change at the corporate level. Workers would be questioned if they came in only twenty or thirty hours a week, even if they are producing the same as the guy who is in the office sixty hours a week.
The biggest defense companies have if employees get upset about having to put in forty hours regardless of whether they really need to put in forty hours to “get the job done” is that employees know this when they sign up for the job. You don’t sign up for full-time work, at least not in the United States, and expect to work less than forty hours. Everyone knows if you can’t stay busy, you need to find something to do that is productive and of value for the company.
One last note – because many jobs have well-documented market rates, it’s difficult for companies to pay someone significantly more or less than another person on their same level. For example, if one senior accountant was making $50,000 and another $70,000, even if the one making $70,000 was producing more the one making $50,000 would not be amused to find out this information and would likely start applying for jobs elsewhere. Also, if you make too much you are at risk of being cut when there are layoffs. Sometimes even having a higher level of education, such as a masters degree in management, can also put you at a disadvantage because employers might assume you are going to have higher salary demands. When it comes to compensation at large businesses, there’s a lot of variables that come into play.
2) Self-Employment
Some ambitious and high-performing corporate employees realize that there is potentially a lot more money in self-employment than there is in the 9-5 corporate grind. Beyond that, if you are a contract worker you essentially protect your time because you can take on as much or as little work as you want (assuming there is demand for your work) and the hours you work are all directly tied to your compensation.
Self-employment can be a great choice if you have a marketable skill, have enough business savvy to do all the extra work (marketing, communications, contracts, etc.) that comes with being self-employed, and are able to make enough money to live off of.
Self-employment isn’t for everyone; there are many individuals who would make less attempting full-time contract work, especially once all the benefits of being a full-time employee are factored in.
3) Small Business Owners
I categorize small business owners as separate from self-employment because small business owners are able to leverage the work and efforts of their employees. There is the potential to work zero hours while still bringing in enough money to live off of. While there are a lot of risks that come with owning a small business, it has the best potential for being compensated not based on hours worked but on value produced. Again, this requires leveraging the talents and efforts of employees and contractors, and there are no guarantees of any compensation.
I think most people would agree that if you want to get compensated not for the hours you put in but the value you produce, self-employment or small business ownership is the way to go.
How about your job? Is your compensation tied directly to your performance and output?
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Photos by Joey DeVilla
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I would rather get paid as a percentage of the amount of money I both save and make for my workplace. I think that would really make me interested in staying at my current job and would promote people to work harder rather than just going through the motions and doing their 40 hours.
@MonsterPiggyBank When you start looking at some jobs that are entirely based off performance, you can see how it takes motivated individuals to fulfill those jobs. Not surprisingly, some people who take these incentive-based jobs can became very wealthy and even minimize the number of hours they work. I understand the limitations at some jobs as far as tying compensation to output, but I would consider getting into an area in the future that has some sort of performance-related compensation.
Our compensation is generally based off of the current market rate. My wife being in the industry for roughly ten years prior helped he understand what the market is and what we can charge our clients and still make a decent living. We’re also trying to expand our business beyond the city we live in to bigger cities so we can charge more to those clients.
@FrugalRules I love hearing about your business! There definitely seems to be more money in certain markets, depending on the industry.
No, not really. We all seem to get the same raise no matter what. Still, I’m happy to get a raise!
@Holly at ClubThrifty I’ve heard about your job and some of it’s perks, it sounds like such a great place to work.
If I work I make money so you could say it is tied to my effort but I have done super easy jobs that were well paid and some harder ones that weren’t. It is annoying when you bring a lot of money to a company and don’t see a reward in the end. Sure they have costs and other people to maintain, like a secretary or cleaner that is not producing anything but if you bring them money your salary should be tied to your earnings.
@RFIndependence Accountants come to mind ;) Keeping track of financials is very important and can be a huge regulatory hurdle for small and large businesses. I once heard complying with being a publicly traded company costs about $3M minimum in staff wages for accounting and finance.
My pay is tied to market pay and output. It’s a mixture of many things!
@SenseofCents I think a mixture is the best sort of compensation package.
For now, it is related somewhat to performance. Our business makes more if we have more volume and produce more sales, but I usually only take my same salary and dividend. The rest generally goes back into the business, although sometimes I will take an end of year bonus if we’ve done well. In a few months, I will be salaried only. While I guess it could happen that you’d work 0 hours, in my experience, owning a small business takes tons of time, and I can’t wait to be done with it.
@Eyesonthedollar I understand, and I’m definitely excited to read more about your transition away from small biz owner.
Thanks for this article it was very informative!
It would be nice to be paid based on performance and how much you save the company, but I think it comes down to more of performance and market rate for me. Still love my job.
In my last corporate job the only real part of my pay that was tied to performance and output was our annual bonus. The formula that was used to calculate each person’s bonus included a number of variables and performance was one of them.
I wish companies did this because then everyone would have a lot more incentive to get their stuff done. The question is, if your company doesn’t do this, do you become one of the lowest common denominator or do you work your butt off and get 1% a year raises above (or no additional increase) your peers?
Nope, and it makes me nuts. I could (and typically do) work my butt off everyday and there’s no way for me to be compensated. My company (a large-ish non-profit) offers pay increases based on years of service, not performance. It’s pretty demotivating.