Why You’re Paid What You’re Paid (It’s Not What You Think)
We think we know what determines our wages. We’re good at our jobs, or at least we think so. Professionals asked to rate themselves compared to their peers in one study put themselves, on average, in the 77th percentile. Only two of the approximately 100 respondents rated themselves below average.
And so of course we make good money because we’re good, right? In a recent study by Washington University Sociology Professor Jake Rosenfeld, 85% of full-time workers said “individual performance” was an important basis for their pay.
But, Rosenfeld writes, we’re wrong. The vast majority of professionals cannot be better than average; it’s a mathematical impossibility. And individual performance is not, he concludes, the major determinant of our pay. Instead, where we work, what we do, and who we work for make bigger differences — in ways that will likely surprise us.
The many factors going into wage determination could fill a book, and indeed they have. Rosenfeld discussed his eye-opening new tome, “You’re Paid What You’re Worth And Other Myths of the Modern Economy,” on Thursday’s St. Louis on the Air.
As he explained, performance is almost impossible to measure for most jobs, and when people design metrics to capture it, they inevitably offer perverse incentives (think of Wells Fargo workers opening new accounts without their customers’ consent or teachers helping students cheat when they’re judged by test scores).
Even CEO performance can be hard to assess. “The relationship between CEO performance and pay has just exploded in recent decades,” he said. “Going back a half-century, CEOs outearned average workers by a ratio of something like 20 to one. And now we’re in the multiple 100s to one. I’m sure, if surveyed, I’m sure CEOs would say, ‘My performance has just gotten that much better than my predecessor.’ There’s not very good evidence that’s actually true. There’s good evidence that CEO compensation dynamics are subject to a range of very human factors that have helped boost their pay, relative to everyone else.
“One of it is that the people who determine CEO pay are oftentimes fellow executive class members, and they want to make sure that everyone’s pay is rising so they’ll be rewarded next time their compensation comes up for discussion.”
Instead, he said, pay comes down to four factors: power, inertia, mimicry and demands for equity. How those intersect and play out in real-world scenarios is the focus of his book. But the author also includes a number of recommendations and case studies that demonstrate how workers can reclaim some power in the face of rising income inequality and the disappearance of what were once considered good, middle-class jobs.
One thing that can help restrain income inequality, Rosenfeld noted, is pay transparency. Studies have shown that when salaries are public, wage disparities within a given workplace tend to be much smaller — and women are generally paid more in line with their male counterparts. To reduce unfairness, he argues, we should all be more willing to share what we’re making.
In some cases, that may mean changing the law. Some states, including Illinois, have passed pay transparency laws that prevent employers from punishing workers who discuss their pay or inquire about the pay of coworkers.
“There’s been a lot of legislative movement in recent years to crack down on employers who institute a pay secrecy rule of some sort,” he said. “These rules, we’ve found, haven’t proven that effective. Still, today, about half of all workers, and the majority of private-sector workers, are subject to a pay secrecy rule of some sort. … One reason, we think, is this enduring social norm against discussing wages and salaries.
“In general, we are very reluctant to discuss pay and get pretty anxious when the subject comes up,” he continued. “I’m no exception. I study this stuff for a living, and it still makes me nervous talking about it. But not talking about it does have consequences — namely, the ability to discover whether you’re paid less than your peers.”
Thursday’s show also included an update from St. Louis Public Radio business reporter Corinne Ruff. Some Republicans in the Missouri legislature hope to decrease, or delay increasing, the state’s minimum wage, despite a constitutional amendment approved by voters in 2018 to bring it up to $12 per hour by 2023. Ruff explained where the proposal stands and offered analysis of what economists say about the impact of the increases.
“St. Louis on the Air” brings you the stories of St. Louis and the people who live, work and create in our region. The show is hosted by Sarah Fenske and produced by Alex Heuer, Emily Woodbury, Evie Hemphill and Lara Hamdan. The audio engineer is Aaron Doerr.