What HR pros need to know about pay equity and loss aversion - Technical.ly

Company Culture

Feb. 15, 2021 12:14 pm

What HR pros need to know about pay equity and loss aversion

People ops professionals set compensation according to org performance, workplace equity and happiness. Technical.ly’s new Culture Builder newsletter examines why.
Talking compensation.

Talking compensation.

(Photo by mentatdgt from Pexels)

Written by Technically Media CEO Chris Wink, Technical.ly’s new Culture Builder newsletter features tips on growing powerful teams and dynamic workplaces. Below is the latest edition we published. Sign up here to get the next one this Friday.


Humans are much more motivated to avoid losses than they are to pursue gains.

Loss aversion is a well-researched cognitive bias, and it will be familiar to anyone involved in setting compensation rates for an organization. Who among us hasn’t been perfectly happy with what we were being paid until we found out someone else was making more? In one sense, that’s irrational: If we were happy before, why did someone else’s comp change that?

The simple answer is that after gaining more information, we feel we’ve lost something (that compensation we feel we could have been paid, perhaps if we looked different or acted differently). That triggers something old in our tribal brains. The feeling is only stronger because of a modern societal concept of equal pay for equal work, enshrined in federal law. For HR professionals, this is thornier still because of interwoven complexities resulting in lagging pay equity issues — in particular, Black employees on average lag behind white counterparts at every level. Comp equity then becomes not just about cognitive bias but also racial inequality.

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Consider the journey professional comp has taken in the last 50 years. Since the 1960s or so, the U.S. economy has transitioned largely from “financing the exploitation of natural resources to making the most of talent,” as Roger Martin put it in 2014 in the Harvard Business Review.

This is the foundation of what an influential McKinsey report in 1998 called the “War for Talent” — and which recruiters continue to speak about today. Along the way a skills gap and a flood of private equity into software has contributed to skyrocketing compensation for those best positioned to negotiate for it. As early as 2010, Malcolm Gladwell was arguing this talent grab was contributing to income inequality.

Professionals once had a mindset of “How much money do I need?” We transitioned to an era in which professionals now think “How much money can I get?”

This makes some sense. Why ought wealth remain concentrated with capital when labor plays an increasingly important role? The independent negotiating of coveted professionals gives them a kind of influence that lower-wage workers sought in the 20th century through unions. But, of course, it ignores a pretty foundational question: Does any of this make us (and our employees) any happier?

The classic professional quandary of “does money buy happiness” was given a rigorous evaluation by Daniel Kahneman and Angus Deaton in a landmark 2010 paper that formed the basis of what we today might call the “happiness threshold.” Though geographic cost of living differences and personal circumstances complicate easy numbers, researchers recently updated that “happiness threshold”: “The ideal income point for individuals is $95,000 for life satisfaction and $60,000 to $75,000 for emotional well-being. When people earned more than $105,000, their happiness levels decreased.”

What does it mean for the ops professional? In setting comp, you’re operating on at least three axes: org performance and workplace equity, yes, but don’t forget happiness. Employee happiness comes from being heard, holding influence and having control. More money won’t make your team happier if there’s a feeling of that money being distributed indiscriminately, opaquely or unfairly.

Do report and establish transparent pay levels. Welcome employees discussing their salaries with others. Help professionals see a pathway for them to reach those happiness thresholds if they aren’t already. Always consider how your policies can be introduced to your team to avoid a feeling of loss. It’s the most common cause of dissatisfaction.

Programming note: In 2020, I piloted the “TWIJ Show,” a weekly interview series on building better workplaces that went off quite well. It included topics like recruiting, retention and culture building. We’re going to rebrand and invest in the show but I need to learn a few things. Specifically, I am looking to schedule a few quick 15-minute LinkedIn Live conversations on topics about “building better workplaces.” Got an idea? Email me and tell me what we’d talk about for 15 minutes that others could learn from (specific case studies appreciated!).

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Weekly tip and what else we’re reading

  • Why the best leaders love being wrongUniversity of Pennsylvania organizational psychologist Adam Grant has a new book out and it’s focused on how uncomfortable leaders are with “being wrong.” We dig our heels in and avoid any chance of being seen as incorrect. It’s a mistake.
  • “There’s a lot more to compensation than just salary” — Your more junior teammates may be very fixated on headline salary numbers. You have a role to help articulate the range of ways your team is compensated (retirement accounts, health and other perks).
  • How Tech Companies Are Revamping the Remote-Work Experience — This video from the Wall Street Journal gives a nice overview of the complex factors we’re all considering in how a rise in remote work will impact the entire professional labor force.
  • Work from home productivity stats collection — We’re all tracking both organizational and broad trends in WFH trends during this lockdown. The narrative appears to be consistently that we can be more productive from home when doing deep work, but this lockdown has taken a massive toll on us. You’re no fool to believe in the positives in a physical office for your team to return to. It isn’t a must but it is an effective tool when built for collaboration and experience, not employer oversight.
  • How to Write Recruiting Emails People Will Actually Open — There are a few good basics to try here from ERE, including using yes/no questions in the subject line.
  • 4 steps to ensure DEI is a movement, not just a moment — Much of this will be familiar to you but there’s nuance in this overview from HRDive.

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