Felt Fair Pay

You'll find few people who would disagree that higher wages would help stimulate our economy. With more money to spend, pent-up demand for goods and services would quickly spur buying behavior. And that creates jobs. And most would agree that many companies can afford to pay their people more right now. Yet we're still in the grip of a management philosophy that elevates immediate shareholder earnings as the ultimate measure of a company's success--and a CEO's future.

This outlook took hold in the 70s and has never loosened its grip on the way we envision the mission of private enterprise--to enrich shareholders now. In many ways, it makes sense to maximize shareholder value over the long term. A company needs to turn a profit steadily, and reliably, over many years, to be viable. Yet in many cases higher share earnings have become a short-term target, incentivizing management to cripple companies with cost-cutting and downsizing for the sake of faster profits at the expense of a firm's integrity and strength as an organization.

Higher wages are one of the best ways a company can invest in its long-term future. Yet how can a CEO justify raising wages in an economy where there aren't enough jobs to go around for all the workers who need them? Our problem is a surplus of workers and a dearth of jobs. Yet there is research that shows, to get the greatest productivity, management needs to offer wages that workers consider fair--not simply the lowest possible wage they'll accept. It's a crucial distinction.

This is where the theory of "felt fair pay" comes in. We have a man named Elliott Jacques (pronounced Jacks) to thank for the notion. (He also happens to be the fellow who created the term "mid-life crisis.") Jacques was a psychoanalytically trained professor at George Washington University, with a 55-year-long career as a consultant, authoring 18 books.

Based on his research into what he called the "requisite organization", Jacques created a model for how responsibility can be divided into seven tiers within an organization. Each tier's mission involves an increasingly longer "time horizon" and level of complexity--with the CEO charged with the need for a vision that penetrated far into the future compared to a front-line worker. (Sadly, most executives now have shrunken their sense of responsibility to the next quarter, rather than the next decade.)

Along with this insight, Jacques theorized that, at each level, employees had an innate sense of a level of pay that was "fair." The closer you got to that level, the higher the motivational power of compensation. Here's how it breaks down:

1. Humans have an intuitive sense of fair compensation for what they do.
2. Multiple research studies (over time, over the globe) have shown a direct link between level of work (in terms of complexity and the "time horizon") and what people consider fair pay.
3. Felt Fair Compensation consists of a pay system based upon empirically defined work levels.

Why does this matter? Because we live and work in a world of surplus goods and services. Consumers can buy what they want from multiple sources--and defect to a competitor at the drop of a hat. The only organizational bond that ensures profitability is the one that binds companies to their customers. Employees are that glue. The human interface between a company and its customers is the primary source of profit. Fulfilled, happy employees matter more than anything now because, without them, you can't make customers happy.

Pay your workers enough that they feel they are being paid fairly: doesn't that sound elementary and intuitive? Yet the American Compensation Association, now known as WorldatWork, once blackballed Jacques' theories. It may have been because he affirms the hierarchical structure of organizational life, rather than more au courant models, such as the "learning organization." I'm not so sure you can't have both. We all know if we're being paid fairly. Everyone has a feel for it. Most people don't want to be overpaid: they want a paycheck that reflects what they are worth to the organization. Accepting that fact on the part of management, more often than not, would necessitate a raise for quite a few people. That's the rub.

Yet higher wages now would mean higher profits down the road--regardless of the impact in the next quarter. Reasonably higher wages are good for everyone: the employee, the customer, the economy as a whole. Elliott Jacques, half a century ago, came up with theories to justify them. Maybe the time has come to look again at Jacques theories for another way think in a fresh way about pay scales.

Peter Georgescu is the author of The Constant Choice. He can be found at Good Reads.