Income inequality is a big topic in American politics today, but what’s not getting as much press is that inequality is growing among businesses, not just among households. In the Harvard Business Review, Walter Frick observes that “the majority of the increase in income inequality in the U.S. and elsewhere is driven by differences in how well different firms pay,” and that this gap between high-performing, high-paying organizations and the rest is still widening:
That pay gap seems to be linked to rising inequality in corporate performance. But there are two explanations of why it is happening. It could be that different companies are paying more generously or less generously for the exact same sort of work. For an extreme example, take Chobani. In April the yogurt company’s CEO decided to reward full-time employees by giving them stock, based on tenure and other factors, amounting to an average of $150,000 each. If you’re, say, an HR manager who happened to take a job at Chobani early on, your compensation suddenly looks considerably better than many of your peers.
It could also be that more-productive, higher-paying companies are hiring better workers. Engineers at Google might be getting paid more than engineers elsewhere because they’re better engineers. If these highly sought-after workers are increasingly clustered at top companies, that could explain the rising pay gap between firms. It’s safe to say that a significant part of the growing gap in how well different firms pay can be attributed to the latter “talent sorting” effect — but exactly how much continues to be debated.
A couple of our team members found this concept of “corporate inequality” fascinating, and Frick’s article got us to thinking about the impact it might have on how organizations compete for talent:
Research Leader at CEB
What’s interesting about this from a talent perspective is that it’s not all rainbows and unicorns for the company that provides outsize compensation relative to the market—especially if they need a nice churn of talent coming through the organization to stay competitive. Employees at such companies are more likely to try to hold onto their jobs, even if they are disengaged, not learning, or adding less value, because of the compensation premium over the market. In other words, for the winners, the talent issue won’t be too many people leaving, it will be too many people wanting to stay for much longer than perhaps they should.
Senior Executive Advisor at CEB
Part of the answer to the problem Adam raises, then, is to offer generous packages but with a significant “pay for performance” component, with high performers receiving the most generous offerings. In theory, many organizations say they do this, but the best probably ensure they have systems in place to make that differentiation a reality, and also are more transparent about having such a system. This helps keep the best performers around, rather than the free-riders.
Also worth noting is that this article focuses solely on pay. As we’ve discussed before, our findings at CEB (and that of other researchers studying trends in total rewards) indicate that benefits are becoming increasingly valuable to employees, especially when they come in customizable packages to meet their individual needs. Even if cash is king, it isn’t the only differentiator.
By the same token, the implication of the “talent sorting” idea is that everyone is competing for the exact same talent. I’m not sure that’s always true—and even when it is, those groups that everyone does want are not necessarily driven solely by compensation and brand recognition.
Research Director at CEB
This paragraph from Frick’s piece caught my attention:
The most digitized sectors in the U.S. economy — especially software-intensive sectors such as media, professional services, and finance — tend to be highly profitable as well. Over the past 20 years, their average profit margins have grown two to three times as much as those in less digitized sectors. Even within these sectors, the margin spreads between the top-performing companies and the lowest performers are two to four times as large as in non-digitized sectors. In other words, the most digital sectors are developing a winner-take-all dynamic.
This raises two questions in my mind:
- Does this mean that we will see talent migrate from low-margin industries to high-margin ones over time?
- Will digital industries attract more risk-prone people given the higher returns and higher risks that come with working in those industries?
You could argue that this already happens, with teaching and financial services representing the two extremes of the labor market in terms of risk, but maybe this digital divide will change the answers to these questions in ways we can’t anticipate.
What do you think? Get in touch and let us know.