Jennifer Lawrence in The Hunger Games

What Jennifer Lawrence can teach Silicon Valley about wages

In a previous post on startup diversity, I promised to write about why we don’t negotiate salaries for individuals. Little did I know this topic was about to get a major celebrity endorsement. About a week ago, Jennifer Lawrence penned a letter describing how her wages were lower than other male stars in similar roles with Sony Pictures. She attributes her gap in wages to her discomfort with negotiations, already high salary and the expectations that society places on a woman in her position.

I didn’t want to seem “difficult” or “spoiled.” At the time, that seemed like a fine idea, until I saw the payroll on the Internet and realized every man I was working with definitely didn’t worry about being “difficult” or “spoiled.” This could be a young-person thing. It could be a personality thing. I’m sure it’s both. But this is an element of my personality that I’ve been working against for years, and based on the statistics, I don’t think I’m the only woman with this issue.

I certainly hope her experience and justifiable anger at Sony is a wake up call for Hollywood. But I also hope people in the business world see this as the ultimate example of a failed system for setting wages.

Jennifer Lawrence is rich and powerful. She probably has a team of lawyers, agents and other managers to help her negotiate her salary. She has leverage the rest of us can only dream of — billions in box office revenue, global name recognition and the ability to generate massive PR with her every move. She’s in the best possible position to negotiate her salary, but instead of being paid a far wage she’s publicly blasting her employers. And if Jennifer Lawrence and Sony can’t make this system work, you probably can’t either.

The current system of setting wages is both ethically and economically suspect. Typical workers negotiate salaries from a state of massive information asymmetry, which hurts workers, businesses and society as a whole.

The current system:

  • Rewards good negotiators more than good performers
  • Creates friction amongst employees
  • Creates tension between employees and management
  • Has created a persistent gender gap in pay
  • Reinforces class divisions
  • And creates real risks around morale and retention because salary information is inevitably revealed at some point (just ask Sony)

Every employer has to make their own judgements about the cost vs benefit of negotiating new hires and raises individually. It’s almost certainly true that withholding information and negotiating hard will get you some employees cheaper. However, you may also be creating a culture of mistrust within the company and inadvertantly rewarding people for the wrong reasons. For most roles outside of finance, sales or customer success, negotiations aren’t part of the job. If you’re hiring an engineer, a janitor, or the face of your new film franchise, their skills at the negotiating table are basically useless to your business. Don’t reward people for the wrong thing. Your best paid employees should have the sharpest minds, not the sharpest elbows.

Taking the negotiation out of salary negotiations also reduces risks to morale and retention. Unless you work in finance or at an oil company, it’s unlikely that the people you work with are only motivated by dollars and cents (they could be getting paid more to work for Bank of America or Shell, after all). Surveys have shown salaries are usually not the determining factor when people leave their jobs. Certainly in my career, overall satisfaction with the work I’m doing and the people I’m working with is more important than compensation. In fact, nearly everyone who works at Emmerge took a paycut to come work here (my pay was cut more than 75%).

On the other hand, people are extremely de-motivated by unfair treatment and generally view their success compared to their peers rather than on an absolute scale. Most people would be far more upset to hear that the person next to them is getting paid 20% more, than a person at a different company with the same title. Negotiating salaries individually creates winners and losers within a team, which risks alienating your best employees because of perceived slights. Furthermore, employees aren’t stupid, they probably assume someone else has a better deal, which is bad for morale whether they’re right or wrong.

Finally, there are import ethical ramifications to be considered. The wage gap between men and women has been shown in study after study. Apologists for the current system expect women to learn to negotiate ‘more like men.’ But the flaws in the current system lead me to an entirely different conclusion. Shouldn’t we all be paid what we deserve without a fight? After all, it’s not just women vs. men but a host of other factors at play. Most people will turn to friends and family for advice on pay and benefits. If they were the first person in their family to go to college (like my uncle) or the first in their family to work in tech (like me), they may have completely different concepts of fair salaries. We shouldn’t penalize people for dating artists or being the daughter of a nurse, but the current system usually does.

A better approach

When discussing salaries, my co-founder Jeff likes to say “We should pay people what they’re worth.” This is a simple, yet radical approach to setting wages that very few companies apply to their workforce: pay people what they’re worth (even if you might be able to get away with paying a little less).

At Emmerge we don’t negotiate salaries. Today, we pay all of our employees and founders in two bands, based on experience, tomorrow we’ll probably need many bands of salaries as we hire a bigger workforce. We do this for both practical and ethical reasons and I’d highly recommend this approach to any founders out there. Instead of trying to split hairs between the performance of each member of the team, we tie the whole team’s pay to our business goals. Day to day though, we’re really focusing on the “rising tide lifting all ships” instead of internal competition between employees.

Everyone gets a raise when we get our next round of funding. No one gets a raise if we fail to deliver customer traction. It’s good for team unity and it’s also easy for planning purposes. (It’s also difficult to separate the work of two “senior engineers” over the short term, so this approach makes sense for engineering-lead companies) This is much easier for a startup, where the employees are all very smart and they all work together closely on one line of business, but hopefully some of these principles could be of interest to larger firms.

Of course, we’ll also promote people over time, so there is an opportunity for people to advance faster than the company as a whole. Unfortunately, an approach like this also requires a willingness to let people go if they’re not working out, so we’re very selective in who we hire. By controlling quality during hiring, and focusing on team unity, we’re trying to save ourselves from the drama and lost productivity of employee churn.

Variable Compensation

For some roles, the company needs to provide variable compensation to keep financial incentives aligned with personal performance. I would always advocate paying sales and customer success teams with variable compensation (usually commission based). In roles like these that measurably impact the bottom line, it’s ideal to allow hard working individuals to be directly compensated for their talents, connections and charisma. Once again, I would urge my fellow startup CEOs to set a single compensation scheme per role or department rather than allowing each individual employee to have a say in how they’re paid. In sales, the more senior people should be able to bring in larger deals more consistently, so even if their base salary is similar to your junior staff, their total compensation can end up being a lot higher.

At startups we also have the opportunity to reward our employees with stock grants or options. At Emmerge, we’re more generous than most in terms of stock. We do this partially to make up for lower salaries, but also to encourage an ownership culture. Stock does a great job of aligning employees’ hard work to potentially life changing outcomes, and unlike salary, we have vesting schedules that naturally advantage the earlier hires over the later ones. (This seems more than fair since they took greater risk when being hired.)

To sum up:

  • The typical system of individually negotiated salaries penalizes a wide range of people who aren’t great negotiators
  • Paying people based on their value to the company, rather than their willingness to play hardball, does a better job of aligning incentives and rewarding people for the right skills
  • Sparing your employees from awkward negotiations can pay dividends down the road in terms of morale, team unity and retention
  • Giving the entire team a raise based on a company-wide achievement is a good fit for startups, optimizing individually on a small team is not
  • The system of negotiation that failed Jennifer Lawrence is failing the rest of the world too, so let’s change it.

If you’re interested, here a few examples of other tech companies who have tried similar approaches: