"Employees with more experience deserve more compensation." Chances are that you work at a company where this is an axiom of salary planning. It seems to be an assumed truth in most workplaces, and new workers just entering the labor force have probably been socialized to the idea since they were young. It's the common expectation that senior employees get senior-level compensation, and junior employees get junior-level compensation. My goal in this post is to convince you that this is a terrible, terrible system - both for the employee as well as the employer.
Before I get into the meat of this post, I want to clarify a few things. Firstly, by 'tenure', I do not mean academic tenure. While academic tenure is sort of tangentially related to this post, it's a complex topic and I won't discuss it here.
Secondly, while the title of this post specifically calls out compensation (e.g., salary, bonuses, stock options, etc.,), job role, title, and seniority / leadership positions apply as well. I'll also talk about those items as they relate to tenure.
With these points in mind, let's define a couple of words within the context of this post:
ca·reer ten·ure: The period of time that someone has been in the workforce. Example of career tenure-based compensation: "Jill has been an engineer for 10 years, so we will base her salary and title on what an engineer with 10 years of experience should expect."
com·pa·ny ten·ure: The period of time that someone has been an employee of a specific company or organization. Example of company tenure-based compensation: "Mark has 10 years of experience as an engineer, six of which have been with us. Thus, we will base his salary and title on those six years."
I previously wrote about compensation for high-value employees. Compensation is a really difficult topic, and most people are very self-conscious when it comes to discussing it. There is a certain stigma attached to caring about compensation and communicating such to your employer. Many people feel like it's 'dirty', 'greedy', or even 'disloyal' to admit that compensation is a primary motivating factor for them in their careers. Ultimately, though, as an employee you are trading your time and effort for money. Yes, there are many other aspects to happiness and engagement in the workplace, but the economy runs on the fact that people trade their work for money. Compensation is a fundmental building block. A good manager knows this, and so do good employees.
Most companies, as far as I can tell, use some form tenure-based compensation. It's the natural result of the raise / promotion / career model that most employers use, and it seems to be the default system in the labor market.
Give Me an Example
Thinking about this problem isn't totally intuitive. Also, it hasn't come about because of conscious decisions by managers to compensate less valuable employees more than their most valuable employees - that's an obviously bad move. Here's a made-up example, where the compensation in question is salary, which demonstrates one of the issues:
Bob joins Acme Inc. in the year 2000, with a starting salary of $50,000. Bob does a decent job in his role, and the company is satisfied with his work. Acme Inc. gives automatic 2% raises per year to keep up with inflation, along with an additional performance-based raise. To keep things simple, let's say that Bob's performance raise has been 2.5% every year - so Bob gets a yearly 4.5% raise. After 15 years of good work, Bob's salary will be $96,762 in 2015.
Alice joins Acme Inc. in the year 2010. Alice does the exact same job that Bob does, and she is a star performer. She solves problems more efficiently and with more innovation, and creates more value for the company for each hour spent at work compared to Bob. By 2010, the starting salary for this position has increased to $60,000 (for comparision, Bob is making $77,648 in 2010). Alice is quickly identified as an exceptional employee by her managers, and the company decides to invest extra resources in her, having identified her as a future leader in the company. Based on this, Alice gets the maximum performance-based raise per year that the company offers, 7%, for a total yearly raise of 9%. By the year 2015, Alice's salary will be $74,770.
In the year 2015, Alice will make $21,992 less than Bob, despite the fact that she is a more valuable employee. During salary planning, managers will probably see this and justify it with two main points:
- Alice is being rewarded for being an exceptional employee by getting an exceptional raise - much larger than Bob's as a percentage of salary.
- Bob makes more than Alice because he has 15 years of experience, whereas Alice only has 5. Bob has more tenure, and thus deserves to make more.
Now, generally, more experienced employees will be more valuable than less experienced employees. I'm not trying to flip the tables on experienced labor. The key point is that while experience is necessary for growth of value, it isn't sufficient, and simply having more experience does not imply more value.
And lest you think this is all about precocious inexperienced employees not being properly rewarded for outperforming their older peers, the same situation could exist if Bob and Alice were both senior employees, and had 30 and 15 years of experience, respectively. It is also entirely possible that Bob's career is being limited by the same tenure-based progression ladder, but in a way that is affecting something other than salary.
This system hurts everyone. Let me tell you why.
The Problems with Tenure-Based Systems
The primary assertion of this post is that a tenure-based compensation model is doing damage to your employee engagement, satisfaction, and retention, as well as your company's growth, success, and ultimately its bottom line. Below is a list of my primary arguments against this system.
Issues with Career Tenure Systems:
- Devalues exceptional performance.
- Incentivizes employees to jump ship.
- Disincentivizes employees to grow their value contribution.
- Limits your leadership talent pool.
- Incentivizes termination of most experienced employees.
In addition to these issues, company tenure-based compensation has an additional set of problems. We'll discuss those at the end.
Let's dive into each of these in more detail.
Career Tenure Issues
1) Devalues Exceptional Performance
Any manager with enough years under his/her belt, or with a big enough team, will vouch for the fact that simply having more years of experience does not make you a more valuable employee. It's certainly true that as an employee gains experience they are likely to become more valuable. But, while experience may be an important part of becoming more valuable, it isn't enough on its own. The notion that having more tenure implies you are more valuable than someone else simply isn't true.
Just to emphasise what I said before, the experience levels are relative. This doesn't solely affect young workers. You can't assume that someone with 30 years of experience is more valuable than someone with 20 years, or that someone with 10 years is more valuable than someone with 5.
In most cases, employees have a general sense of how they are compensated relative to their value. Even if they don't know exactly what their coworkers are making, sites like Glassdoor and Dice Salary Surveys have made it easy to work out the average market value of your skillset, and how much people make based on field and experience level. That means Alice can probably look at GlassDoor, find hers and Bob's field, and guestimate what Bob is making given his 15 years of experience.
As compensation is the primary form of valuing an employee, each employee should be compensated based on the value they create for the company. Undercompensating an employee relative to their contribution to the company devalues their talent and effort, and communicates to the high-performing employee that they are less valued than their less effective but more tenured coworkers. This is an excellent way to create job dissatisfaction amongst top performers.
Side Note: This issue actually has something of an interesting side-effect that some people might argue is a good thing in the big picture. Some of the star performers, instead of switching companies, simply start their own. It's true that many of them would do this regardless of compensation, but many now very successful companies were first started because the founder was dissatisfied with their original employer. You could make the argument that by undercompensating all of the top performers in the labor force, they are more incentivized to create new ventures, thus catalyzing the growth of new wealth in the economy. This isn't such a great plan for current employers, though.
2) Incentivizes Employees to Jump Ship
To be clear, there are a few reasons for this, but by far the biggest is salary compression. Compression is a very serious problem. You can find lots of advice on fixing compression, but none of it really addresses the root cause. Companies all over the world lose some of their best talent due to compression-caused dissatisfaction every year.
Compression happens because the rate of pay raises for someone in a certain role doesn't keep up with the job market's valuation of that role. Example: Charlie starts a new job right out of school at Acme Inc., making $50,000 a year. Charlie is a good employee, and he gets decent raises - 5% a year. In his 5th year, he will make $60,777. But, by his fifth year, market demand for his job has increased, and there isn't enough talent in the job market to fill the need. As a result, Acme Inc. has to offer more money to convince people to accept their job offers. So when David, fresh out of school, starts out where Charlie was 5 years ago, he is already making $60,000. Charlie is now heavily compressed. He is a more valuable employee than David, but his compensation doesn't reflect that. If Charlie left Acme at this point and took a job elsewhere, he could probably negotiate a much higher salary given the market's demand for his skills. By starting a new job somewhere else, Charlie is resetting himself on the market's salary scale for his skillset.
The issue is especially acute for top-performing employees who are undervalued by their current employer. In addition to the salary bump they will get by accepting an offer elsewhere, if they are able to demonstrate that they are exceptional performer in their current role they can negotiate for an even larger pay bump. By the time their existing employer realizes what's happening and scrambles to rectify his/her compensation, it might be too late.
If, instead of giving Charlie raises for every year he is at the company, Acme adjusted his pay based on the company's and the market's valuation of Charlie's skills and contributions, Charlie would not be compressed, and he would be far less likely to be looking for jobs elsewhere.
3) Disincentivizes Employees to Grow Their Value Contribution
If your compensation ladder communicates to employees that the path to higher compensation is simply to have more years of experience, it effectively disincentivizes employees to continually grow the value they contribute to the company.
If employees know that workers with 15 years of experience are always better compensated that workers with 5 years of experience, there is a diminished drive for each employee to continually improve their value to the company. After all, as long as you are at least an average performer, the compensation ladder weighs experience more than performance, right? So why devote effort to better performance when the compensation system gives you diminishing returns?
And remember, I'm not just talking about salary when I say 'compensation'. Let's carry this line of thought over to leadership:
4) Limits Leadership Talent Pool
Strong, effective leadership is a critical component to a company's growth and success. So, obviously, companies should try to fill leadership positions with the most effective leadership talent.
Just to be clear, by leadership I don't just mean "people managers". Especially in technical fields (e.g., engineering, science, business), there are a plethora of extremely important technical leadership positions that have nothing to do with managing people. What I'm really talking about is what most people think of as 'seniority' positions; they are the roles entrusted with important positions. The more senior the position, the more important the decisions made at that level (presumably).
In the same way that many companies' salary ladders communicate that experience is valued more than performance, very often the path to leadership positions does the same. Many companies won't even consider employees for certain leadership positions without the employee having some number of years of experience. The obvious assumption is that older employees are wiser and make better decisions.
To be sure, this is very often the case. Experience is (generally) the greatest teacher of wisdom. But that doesn't mean that your best leaders are always the people with more experience, and given how much of a difference a strong leader can make compared to a weak one, it's a dangerous game to exclude candidates based on tenure. Mark Zuckerberg is very young, but he has the 10th highest approval rating of all CEOs on Glassdoor as of 2014.
Going back to Bob and Alice, let's say Bob is actually an exceptional leader of people. Whereas he is an average employee in his current role, maybe he would be an exceptional employee in a senior leadership role. But, Acme Inc. requires at least 20 years of experience to take the senior leadership position Bob wants, which precludes him from even interviewing - despite the fact that Bob filling that role would be best for him and best for Acme.
The obvious counter-argument to this is that if you go too far in one direction, you might end up in a sitution where a very young employee is leading a much older one. Some older, more experienced employees may have a problem with reporting to someone significantly their junior. Would a 50-year old engineer feel uncomfortable having their performance reviewed by a 40-year old manager? Maybe. How about a 30-year old? Someone younger than 30? It obviously depends on the people in question, but you get the point.
I don't think this is a strong argument, though. If the leader in question, let's say Bob, isn't able to effectively lead people older than he is, then he probably isn't actually a great leader. On the other side of the coin, if a very experienced employee isn't willing to be led by someone more junior, regardless of talent, then address it either as an organizational issue (have the senior employee directly report to someone older, for example) or an HR issue.
Regardless of how you solve it, you shouldn't let problems like this rob your organization of great leadership because talent is suppressed due to tenure.
5) Incentivizes Termination of Most Experienced Employees
This is perhaps the most surprising of my arguments against tenure-based compensation. Tenure-based models actually incentivize the employer to terminate its most experienced employees in roles not experiencing growth of market demand.
Many jobs in established industries have a much lower incidence of compression. For these jobs, the primary driver of starting salary increases is inflation and a growing cost of living.
Tenure-based models promise compensation growth with tenure, though. Employees expect it, and companies advertise it. So what happens to the most experienced employees in these jobs? Well, many times they become too expensive for the company to justify keeping.
Here's an example: Spacely Sprockets hires Elaine at a starting salary of $40,000. Ten years later, they hire Fred at a starting salary of $45,000. Five years after Fred, they hire Greg at a starting salary of $47,000. At this point, here is where we stand:
- Elaine - 15 years of experience - $67,000
- Fred - 5 years of experience - $51,000
- Greg - new hire - $47,000
The type of work that Elaine, Fred, and Greg do isn't the sort of thing that you can "get better at" after a certain point. Sure, Elaine and Fred will be better at it than Greg, but Elaine is only marginally better than Fred, if at all.
If the company decides they need to cut costs, Elaine's salary looks like low-hanging fruit. They could terminate Elaine and bring on someone new to do the same job, saving $20,000 a year, with only a small drop in efficiency. So what happened here? This is actually the opposite of salary compression. Elaine's salary grew so far past the labor market's value for her particular role that Spacely Sprockets is incentivized to replace her.
Again, if Spacely Sprockets advertised, and employees expected, to get paid based on the value they create for the company, this situation wouldn't exist. Yes, that means that Elaine, and probably Fred, would make less than they did in the old system. But, it also means that the company doesn't have that incentive to terminate them after they have been on the job for a few years. It's actually a more stable system of compensation.
Company Tenure Issues
The previous five issues were with regard to tenure-based systems in general (or career tenure systems). Taking tenure one step further means compensating employees based not on their years of experience in total, but rather on their years of experience at your specific company. This is even worse than the previous system, and brings a host of other issues to the table.
Let's say that a company called Cyberdyne uses this system.
Hiring Experienced Personnel
The most obvious effect of this system is that it makes it extremely difficult to hire experienced personnel. This is a really serious problem, for a number of reasons. What it means, though, is that Cyberdyne will only be able to reliably hire entry-level employees.
Only hiring entry-level employees, and depending on them to grow into the rest of the organizational structure, puts severe pressure and constraints on Cyberdyne's hiring and retention. If they don't hire or retain enough new people then several years down the road their organization and workforce will be weak. It forces Cyberdyne to push people into positions they may not want or be ready for, or leave the positions unfilled. If they need to open a new location, it creates difficulty in making the new location profitable quickly.
You can probably imagine many other workforce issues that arise from this sort of model. To avoid beating the horse, I'm going to move on.
As a result of not being able to hire outside talent, Cyberdyne's organization will become very insular. Companies like this are commonly accused of "in-breeding" by disgruntled employees. Without the flow of new ideas and different ways of thinking that external hires bring to an organization, improvements and growth will stagnate. The company will generally become dependent on tribal knowledge as its methods and processes become outmoded, which actually ostracizes external hires even further.
So What's a Good System?
If you didn't catch it earlier, I think Value-Based Compensation models are far more effective. Ideally, every year, the employer evaluates each employee's compensation based on the value they create for the company and the market valuation for that skillset and role. Based on this valuation, the employee's compensation is adjusted to reflect his/her contribution and value to the company.
Coming up with a hard number that represents the value of an employee is difficult, but it's quite possible, and it's something good managers should be capable of doing. Any manager that has had a top performer try to quit has probably figured out pretty quickly how much they value good talent if they hadn't already.
Perhaps the biggest problem is in enacting this system. Sure, any new company could start out with it, but for existing companies with tenure-based compensation, that's very hard to move away from. These companies have existing workforces that expect tenure-based promotions and raises, and their organizations are built around this concept. If they suddenly start hiring new people on a value-based model, they would end up with the organization's compensation as a whole being very unbalanced. They would need to reset everyone's salaries all at once. In the process, they would likely discover that a number of employees are over-compensated relative to their peers, and would either need to accept that or risk attrition. It wouldn't be an easy change.
There are, actually, a growing number of companies that use something akin to the value-based model above. These organizations are generally described as meritocracies by their leadership. This is especially popular in tech start-ups and Silicon Valley, in general. There's a reason so much top tech talent flocks to Silicon Valley for work. Culture and job options are certainly part of it, but the opportunity to be compensated based on talent and ability rather than tenure is a significant factor. After all, how ridiculous would it be if in 2004 when Zuckerberg was 19 and founding Facebook he had said that employees would be compensated based on experience level. He would have had to replace himself instantly.
Regardless of how you approach it, this is a complicated and difficult topic. I think many companies don't have their compensation models quite right, though, and as a result they are losing or missing out on the best talent available to them. If you ask any company what their most valuable asset is, you'll likely hear the cliché but accurate response that it is their employees. Most of these companies really do mean that; it's just a matter of fixing their compensation models to properly value their most valuable assets.