Friday, September 2, 2016

New Regulations to Reduce Salary Gap #FB

I fall for clickbait all the time. Slideshows featuring the 50 most exotic hamburgers? A quiz to tell me what brand of cereal I am?, Stories where a dog does something but you won't BELIEVE how it turns out?

NOMNOMNOM - I take all the clicks.

That's particularly true when I see an article run about wage-gaps or salary information in the workplace. Those headlines are boring by comparison but I always read them. I came across an op-ed in the Washington Post that I thought was interesting

Why did I find this interesting?

- I had no idea there were laws under consideration (and apparently passed in MA) that preclude employers from asking job applicants about their previous salary

- I agree with the author's conclusion (this seems like a bad idea), but not her reasoning

The argument for the legislation (I assume) goes something like this: There is a pay gap among women/minorities, and if employers are allowed to ask about previous salary, those previous salaries reflect our current gap-heavy environment and thus will be perpetuated.

The author's argument is that if you prevent employers from asking about applicant's salary history, they'll simply use proxies and get to the same outcome.

I think both of these arguments are not persuasive. The author's reference to proxies uses the example of employers now forbidden from using criminal history and proxies including things like drug tests. OK, I could see how an employer could argue that drug use is an indicator of criminality, there's an explicit link there. But what proxy are they going to use to guess at what your past salary was? Your brand of shoe? Your address? Do they own their own home? The links here are less clear and harder to boil down to an objective question on a job application. But I agree with her that the laws seem wrong, so let's set that aside.

What's more of a driver of wage gaps, to me, is there's not enough transparency in compensation. And it's not as big a problem among new hiring, but among existing employees. These new laws seem to think that less transparency will help the situation, which feels wrong.

The legislator's argument runs into a problem if you consider the employer as a rational actor in the hiring marketplace with a set of many candidates. If they find two candidates of equal talent/ability - one a man and one a woman, only the woman's prior salary is 20% lower - then you'd offer the woman the job for a lower salary and hire her.

This is a great outcome for the company, an employee at a 20% discount. This is not so great for the employee, who is taking a discount. But the key is to move the salary interaction from a one-time anchoring into a more dynamic engagement. How can we get the woman to earn her true worth once she's there? Lack of transparency within the workplace makes wages more sticky than they need to be, so even if whomever you hire demonstrates their value, there are fewer mechanisms/nudges to drive that higher.

The legislator seems more worried about the first part of the equation and a general employment context, that's probably not wrong. Nearly all salary discussions/changes seem to happen within the context of taking a new job (either changing companies or promotions). But why should that be the case, considering those events are few and far between for many people.

I think a better alternative is to make compensation policies more dynamic and more transparent for existing employees.

I'll use two incidents from my own personal experience.

When I was a much younger person, I was looking to change jobs within the finance industry. I also wanted to move back to Philadelphia, and I was pretty motivated to do so. I found a firm and encouraged them to hire me. They didn't really want to - they had just hired someone with more experience and were looking for one more person at more of an entry-level. They ultimately offered me the job (I forget if they knew my historical salary, they probably did), but at less of a base salary than I had made previously. I was fine with that trade-off because I really wanted the job...until I accidentally found out I was making less than a newly hired administrative coordinator.

I didn't leave the job because it was part of a long-term plan to go to B-school, but it certainly ticked me off and stuck with me (apparently). At the time I was a major asset to our firm's primary investment activity, and had I known of the gap, I certainly would have said something and am convinced it would have been a persuasive argument.

Let's contrast that with my post B-school career in consulting.

In that case, I knew what just about everyone else at the firm was making at all times. There were set cohorts with fixed salaries and bonus thresholds tied to employee ratings. I didn't know how everyone got rated, but I knew the scheme and there were relatively clear criteria on how to achieve it. Whenever I got promoted, I already knew what my new compensation would be. I never had a complaint about compensation, and you could argue over ratings and speed of promotions, but the rules of the game were clear. In such an environment, I think a wage gap is significantly less likely (although there's a very valid argument that qualities that get promotions are biased towards men or white people etc., I won't dispute that possibility, but it's a second order question in my mind)

If everyone knew what everyone else earned, I think that would be a huge nudge toward eliminating wage gaps and biases against certain groups. Nudge is probably too soft a word, I think it would be a shove. The less people know about how compensation works within the organization, the less they're able to articulate why they deserve more because like me all those years ago, they might have no idea they deserve more.

The argument against doing this, is that it's going to piss off lots of folks and set off a series of 'how does THAT guy get paid THAT MUCH?' That's why you'd see this much more easily implemented at new companies rather than existing ones, and at smaller ones vs. larger ones.

But if your goal is to reduce bias, a change that makes compensation more public is, in my mind, a much more effective way to go about it.