Episode Transcript
[00:00:00] Good morning. I'd like to take some time this morning to talk about pay and compensation strategies from two perspectives. The perspective of you as an employer or an HR person, and the perspective of the economy and the inflation that we're experiencing. And there's a long article I wrote on this. I've been doing a lot of research on this over the last several weeks, if you want to read more about it. So let me walk you through this story. So if you look at current situation right now, affordability and cost of living is a huge issue. It's been written about, There have been interviews, there's data. The cost of housing is extremely high in the United States, at least the cost of food, the cost of energy, the cost of Apple computers. Everything's going up and up and up. And wages are not going up at nearly this rate, with the exception of a small number of spiky wages and maybe AI engineering. So let's take a look at the history of this computer. Go back maybe 30, 40 years, and you plot a curve of wages versus inflation. And you see there's been a almost shocking disparity in the ability for wages to keep up with inflation. So that means, and I'm talking about over 40 years. So that means since Ronald Reagan in the 1980s, the business community, those of us included, have taken the opportunity to improve profits, revenues, growth and productivity and not return that much of it, in fact, very little of it, to workers. Now, it sounds a little bit odd to say it that way, but that's what the numbers essentially show when you look at the charts. One of the charts you'll see shows that over the last 20 years, productivity in the US has gone up by 14%, which is a very large number over a long period of time. Wages have gone up after inflation by about 2%.
[00:01:53] So we haven't returned this economic benefit to workers. Where did the money go? Well, if you think about it from an economic standpoint, it went essentially three places. First, some of it was reinvested in capital back into companies to improve more productivity. Some of that includes automation. The second is it went to stock market growth, because the stock market has grown extraordinarily over the last 20 years. With the exception of 2008, it's been a very, very steady growth. And the third is it went to CEOs and other executives. In other words, most of the economic productivity that we've captured in our companies. I'm talking about aggregate. No particular company now has gone to owners of the company, stockholders, shareholders and executives of the company. And if you look at the income inequality debate or the, the billionaire debate or whatever you want to call it, the billionaires of the world are owners. Elon Musk doesn't even take much of a salary, nor does Jeff Bezos, and I don't know about Zuckerberg. But because they own high percentages of their businesses, they gain most or much of the benefits of this growth. At the same time this has happened, United States federal policy has been fairly neutral to negative on wage earners. The minimum wage has not really. The federal minimum wage hasn't really been increased since Ronald Reagan. It used to be increased every year. It hasn't gone up much at all. It's $7.50 an hour, which sort of means it's zero because nobody's paying attention. Nobody gets paid that wage. The focus on unions has been negative for the most part, with the exception of Biden in a few situations. So union participation has declined. And the other financial incentives that have been created by the federal government have pushed people away from pensions, towards 401 s other foreign forms of accounts that are self owned, essentially pushing the responsibilities of financial security on individuals. Now, those of you that are sort of business thinkers are probably huge fans of this because these are policies that are very pro business policies. And so running a company or owning a company is getting more profitable over this period of time because of these various decisions that have been made. And the decision of how much to pay a worker or how competitive to make the wage or how well we keep up with the cost of living is really being left up to you or us as leaders, managers, executives, and HR people. So the reasoning, in other words, as to why incomes have not kept up with inflation, have a lot to do with corporate profits. If you think about two big pots of money, the profit pot and the wage pot, the profit pot got very big and the wage pot has not really grown that much. Now there's a lot of debate about this issue and what we should do and the implications.
[00:04:54] But let me go back now to microeconomics and talk about what's going on in HR and in companies. So somewhere around a decade or so ago, when DEI was really a big topic, we had a very big debate for a long period of time on pay equity. And originally it was pay equity for gender, and then it was pay equity for everything else. And we had a lot of interesting intersectionality programs and products and services to show you and help companies eliminate or remove pay inequities. Now a pay inequity is A little bit hard to define, but basically what it means is that if you could balance out two people's work and job, their pay should be equal and not be correlated to their gender, their race or their age. It should be related to their performance.
[00:05:43] And that's a meritocracy kind of idea that I think everybody would agree with. The reality though is it doesn't really work that way. Because when you start your career or your job in a new company, the pay you start at is the biggest determination of where you end up. Because for a whole variety of mostly social reasons, we don't really give people exorbitant raises just because they're performing well. We could give them bonuses or other forms of one time compensation, but it's unusual to give somebody a huge raise unless they get a very big promotion. So there are pay inequities anyway. And some of those pay inequities have to do with the fact that you live in a certain city that has a low cost of living, or you didn't go to a top notch school so you weren't considered to be a highly competitive candidate maybe when you started, or you're not a very good negotiator, or you just happen to be caught in a situation for a year or two in a job where you got stuck and nothing really went well for you personally. So you didn't get a raise or a promotion, or you're in a part of the business that's not growing. I mean, in a big company, the business areas that are growing like crazy have to be competitive with wages or they won't be able to attract people. Whereas the other areas maybe wouldn't get the same kind of treatment. So there's all sorts of reasons why people fall into different categories of pay. And now, you know, here we are in 2026. Feels like 2027 already, but whatever. And we have AI to help us look at this and figure out what's going on. And I was talking with Maria, the CEO of Cindio this week. They have a tool that tries to look at pay systemically across the company. And this is really the issue is if you could look at all of the pay levels and characteristics of work and performance parameters of different people, you would see that some people are quote unquote overpaid relative to what you need or should pay them, and other people are underpaid. So, you know, over the next five years, as more and more AI gets introduced to our companies, we're going to get more data about where these Inequities are. This is what HR 2030 is all about, by the way. This is the reason we keep framing this as HR 2030 is all of these tools don't exist quite yet, but they're coming and we're going to be able to make better decisions. So where does that leave you or us as HR people? Well, a couple of things I want to point out and then I want to give you some personal maybe advice on based on our research. First of all, there's a lot of history to this and lots and lots of studies have been done about the impact of pay on performance, on recruiting, et cetera. I want to give you the ones that are the most important to me. Number one, there's a financial effect of paying people or more money, which is it is captured as an expense. So if you hire a whole bunch more people, your company looks less profitable. And that's actually weird because it's true you have less money, but you also have more capacity. So I personally, and I'm not going to run the accounting board for the world, but I personally believe you have to think about pay as an investment, not expense. Because when you hire somebody, if you hire them well, they're an appreciating asset for your business. They grow, they learn, they become better connected to your internal and external organization and they perform at an increasingly improving level of productivity over time because as they learn more, they can get things done faster and easier. So in some sense we treat it as an expense, but it really is like capital. So what you find is when you look at high performing companies in retail and manufacturing and many industries, the highest performing companies pay quite well relative to their peers. They pay more. They're willing to incur this expense because they see the return on investment is very high. Because when you pay people a higher amount, you get a higher quality candidate, you can be more selective, you can ask more of the people, they will more likely spend more of their discretionary energy in the company and they're just happier and easier to work with and more flexible in their roles. So this idea that cutting pay is a good way to boost profits, even though Wall street sees it that way, is not really true. The reason that it is in a sense true is that we over hire all the time. So rather than thinking about the pay level, what most companies do, and I see this constantly, is they have hiring goals and targets based on revenue projections or expectations and they believe they can hire to grow. The more people we hire, the faster we can grow. As you've heard me talk about on many of the speeches I give. The actual scenario is the opposite. You grow to hire over hiring is one of the biggest problems we've been experiencing during this AI era is companies have just had too many people because they weren't careful or scrutinizing who they were hiring or why they were hiring. So we have all these layoffs. So if you manage the pipeline of growth strategically, you can pay people more money and you'll perform at a higher rate and your profit will still go up. So that's one factor that I think is, you know, maybe not clearly understood in a lot of companies and certainly maybe not at the CFO level. And if you're an hr, you should think about this. And this gets into the issue of talent density and so forth. That's number one. Number two is this idea that pay is a hygiene factor and not a motivator. That is not true anymore. At least now pay is a is number one or number two on most of the surveys of what affects people's satisfaction at work. Didn't used to be, but it is now because of the inflation. And by the way, one of the things about inflation, for those of you that have lived through it before, I've lived through it in the 70s, after a while, when the inflation has been above 2% for a long time, which it's been here in the US Inflation expectations change. And we've reached that point here where most of us are shocked every time we go to the gas station, every time we go to the grocery store, every time we go to buy something. And we're just expecting prices to constantly go up. And therefore we're behaving differently. In an inflationary economy where expectations have changed, people start gambling. Witness Calche and Polymarket. They buy stocks on a whim, they borrow more money. They do what might consider to be risky things to try to keep up. And we're not at a point of hyperinflation here, but we've had inflation for a long time, certainly since the pandemic. And if you look at the data, it goes back before that. And the Fed has done a, you know, I would say a poor job of fixing it because for some reason they're afraid to raise interest rates, which I don't understand. It's because everybody thinks the stock market is the number one indicator of success, which it's not. The indicator of success in an economy is standards of living and well being. So without getting into any politics, that's the issue we face, is that pay really matters to people right now. And if you pay people more or more competitively, they're going to be happier and they're more likely going to come work for you. So throw away those old ideas that it doesn't matter. The third thing I want to mention is some other things about how we run our companies. You know, I've studied compensation now three, four times over the years in big studies. And what you find historically is the traditional way of managing pay is through bands and benchmarks. You have levels of people 1, 2, 3, 4, 5, 6, 7, 8, 9, 10. Some companies have dozens of levels. You have bands within the levels, and you as an individual, move within the bands based on your performance. And those bands are set by survey benchmarks done by survey companies. Well, it doesn't quite work that way anymore because pay is changing so fast and job titles and job roles are changing so fast that it's hard to level anybody. A software engineer who five years ago would have been a $200,000 a year hire might be a $120,000 a year higher now because of Claude code. But an AI engineer who didn't exist five years ago is now a $300,000 a year hire. Although two years from now, that guy is going to be a commodity too, because everybody will know what he knows today and there'll be something else. So things are changing so rapidly that these bans are very hard to keep up with if you use survey data. That's, by the way, the reason Cindia and companies like that exist. And we're getting this data into Galileo, by the way. We're getting near real time pay data into Galileo, so you can go into Galileo and look at a lot of this stuff yourself. So today, given this dynamic change, a lot of the pay decisions that we make, certainly when we hire people, are individual to that person. And I've always felt that every individual is essentially a market for compensation, you know, based on that one individual person, that person's needs, their experiences, their expectations, their ambitions and so forth. So we have to think about this as a much more personalized process, even though we want to be as standard and equitable as possible. The fourth thing about pay I want to mention is that if you want to continue to grow the profit of your company, which you do, of course, not only do you want to pay people more money, but you want to pay them more obviously based on the role and the performance itself. So interestingly enough, a couple of months ago, maybe a year or two ago, there was a story that came out that a Walmart store manager makes almost $300,000 a year in some cases. That used to be a huge amount of money. It's not as much as it used to be, but it still is, especially if you're in a low cost of living city. So why do they pay a store manager so much money? Because they have figured out themselves that that role is. Is a pivotal role. The word pivotal role means that that role affects many, many things. A software engineer that writes code might be pivotal or might not, depending on the role they're playing and the experience they have on other people and et cetera. So we have these jobs in companies now that are spiky in pay for demand reasons or internal reasons, and we have to accommodate that, too. That wasn't in the bands at all.
[00:15:38] I have this funny history story. When I was a young man at IBM and I was only a couple years into my career, and I went in to see my boss and he gave me a performance appraisal. And I think. I think he gave me a three out of five. And I was just crushed. And he showed me my pay relative to the band. He shouldn't have done that, but I never forgot it.
[00:15:59] And he said. He said, here's where you are. You should be happy where you are in the band. And I was. I walked out of the room just feeling crushed. And what he was trying to say to me is, hey, you got a lot of room to grow here. And I was thinking, wow, you know, after going to Cornell and having a master's degree and all this stuff, this is where I land. But, you know, that worked out fine for me. I'm not complaining. I'm just telling you that whole idea, that whole process is kind of going away. And then the fifth or so thing I want to mention is internal mobility. So we know, and we could prove this to you, and we've got the data and you can ask Galileo about it, that when you redeploy people internally and give them the opportunity to take on new responsibilities and help them grow and train them and so forth, great things happen. You don't have to go out into the job market and hire people, which is very costly. You have greater employee engagement, you bring cultural value to the company, you create career opportunities for people and people can grow. And when you do that, because of the productivity benefits, you can afford to pay them more. So if you're a data analyst working in finance, analyzing accounts receivable or some other, you know, part of the supply chain maybe, and you get an opportunity to become a data analyst in marketing or a Data analyst in it, where the pay levels of those jobs are 50% higher than they were for the finance analysts. You should give somebody a raise. You should. I'm not saying they have to be completely caught up, but you need, you need to accommodate that change in demand for that person's pay needs that may not have been in the banding you had for them. They may be a level four and the new one is a level six. And honestly, maybe within a year or two, they should be brought up to that level or you're going to lose them. That's good for you and it's good for them. So all of this added up tells me a couple of things. First of all, historically, the reasoning, the reasons that we have this cost of living crisis in the US have to do with policy and many decisions that have been made over decades. And I think we're at a political point, at least in the US where a lot of those decisions are going to change. There's going to be new tax policies, there's going to be new other things that'll happen that will hopefully take the balance away from CEOs and the stock market towards individuals. By the way, this other narrative that, oh, we'll just go buy stocks and therefore you'll feel more wealthy, that's not true because most Americans, than half of Americans, have no savings whatsoever. So they're not going to go out and buy stocks. So the stock market, for better or worse, is a way of transferring wealth to wealthier people, not improving wealth for everybody. Even though it's a political message to say that. The second conclusion is that you or we as employers do have agency here. And you know, I'm not saying you need to overpay people or let your pay get out of control or quote, unquote, waste money on people that don't need it. But honestly, if you just think altruistically about your job as an HR person, as a manager, if you're willing to pay people well, you're willing to give them good benefits, you're willing to take care of them, and you can do that for social reasons or business reasons or productivity reasons, you're going to be a happier company, you're going to be a more profitable company, you're going to have greater retention. By the way, retention is one of the biggest leakages you have in your company. I mean, losing customers is bad, but losing employees is bad too, because they take intellectual property and customer relationships and experiences with them. So if you're losing people because of pay, you've made the wrong calculation in your wages. Now, I'm not trying to oversimplify the problem. Every job family has its own pay issues. Every city has its own pay issues. And one of the reasons we're putting so much pay data into Galileo is so that when you do hiring or you do placement of locations of roles, you can make very strategic decisions about what is the competitive wage for this job in this city, with this level of experience, with this type of skill, and make these decisions in a more real time basis. In some ways, the pay strategies in your company are almost like real time decisions, which we need new infrastructure to do. And the more you accommodate that and give managers the flexibility to adjust pay more than once a year if necessary, to deal with changes in the economy, changes in the market, changes in demand, the better off you're going to be as a company. Because even if you do consider wages an expense, which it is, and look at the factor of improvement that you could possibly create by reducing wages or cutting staff or whatever, if you don't over hire and you're doing a good job of workforce planning, you're going to find that the benefit of cutting wages is relatively small. The big opportunity you have to grow your stock price is revenue growth, customer growth, customer retention. It's on the customer side, not on the expense side. And if we just mentally start thinking of wages as an investment, which it certainly is, from all the research I've done in learning and development, everything else, you're going to find yourself in a better position to deal with this issue of affordability in the world and maybe make a small dent in it. We're not going to fix it as private businesses by ourselves, but I hope this gives you some motivation and philosophical help in leaning into this problem. And the book that I wrote, Irresistible is all about this. And it's a couple years old, but it's a very good book, I have to say. So if you want to get some background on this, read that book. There's a lot of examples in it. And the new book Superhuman, is coming out in October, so stay tuned for that. It's going to be all about jobs and super jobs and super managers in the world of AI. Okay, if anybody has any questions about this or wants to get into it, please reach out. We'd be happy to talk to you and show you how to use Galileo to help you with all of these decisions. Bye for now.
