One question all managers should ask themselves about pay

What’s the ratio between my pay and that of my highest-paid employee?

When I said that salaries shouldn’t be secret, I talked a bit, in passing, about how it’s managers’ job to support the talented workers on the front lines, and that it’s generally a good sign when the front-line talent gets paid better than the managers. So I decided to put together this simple table:

A word of explanation here: I’m talking not only about your direct reports, but also their direct reports, all the way down. Let’s say that the CEO of a big bank makes $10 million per year, but that the head of her commodity-trading subsidiary makes $40 million per year. And let’s also say that no one else in the commodity-trading subsidiary makes more than $5 million per year.

In that case, the CEO is supporting the talent: the CEO pay is 0.25x the amount that one of his subordinates is earning. On the other hand, the commodities head is well into greedy-and-selfish territory: her pay is a whopping 8 times as much as anybody who works for her.

Now it’s possible that some organizations are set up precisely to encourage greedy and selfish behavior. I can think of some hedge funds, or even commodities-trading shops, which might be run on such a basis, where employees are constantly competing with each other to grab the brass ring at the very top.

But most organizations value teamwork, and consider themselves to be greater than the sum of their parts. And in those organizations, outsized compensation, relative to subordinates, is a real problem.

The problem, in general, is that managers reflexively attempt to pay their employees the minimum necessary to prevent them from leaving, while at the same time making every effort to maximize their own income. Pay for subordinates is seen in an adversarial light: because corporate profits are revenues minus expenses, and labor costs are a massive expense, anything which keeps those labor costs down is good for profits. And of course the greater the profits a manager is responsible for, the more that she feels justified in taking home herself.

The alternative is far better: pay people according to the value their job provides to the company. If they can provide more value to another company, then let them leave: at a stroke you get rid of the syndrome whereby people can only get paid more by looking for a job elsewhere and threatening to leave unless they get a raise.

Recognize, too, that while managers do indeed add value to a company, there’s no particular reason to believe that they add more value to a company than the people who report to them.

There’s no reason to disappear into the weeds of trying to make impossible calculations about how much value one person adds compared to one of her peers. This is one of the many areas where pay transparency comes in handy: just be open about the pay associated with various different roles in the company, hire the best people you can find for each job, and drop all the bureaucratic and political nightmares associated with performance-related pay.

The result: an organization where fairly-compensated people work together as a team, rather than trying to work out the best way to make money for themselves at the expense of their colleagues. If you do away with the slippery pole, and do away with the idea that if you get promoted into a managerial role then you’ll get paid a lot more money, then your organization will be a much happier place to work.

Of course, it’s not always easy to get there from here. But the first step is easy: every manager should be able to divide their own salary by that of their highest-paid employee. The higher the resulting number, the more difficult their task is going to be.