Addressing the Wage Gap in Middle Market Companies

Wage gap and income inequality conditions are most commonly associated in big companies with big revenues. But generous executive compensation packages have found their way into many middle market companies as well. I recently reviewed the Equilar 200 Highest Paid CEO Pay Rankings, and noticed a growing number of mid-sized firms on this list.

middle market wage gap

A noticeable gap in a middle market business can pose several challenges to company executives, including low morale and high turnover, two things that are harmful to the company. To avoid these problems, the company must recognize three things:

  1. All employees have something of value to contribute. That may seem obvious on one hand. Why would you hire someone who added no value to the organization? There are additional levels of meaning as well. Regular employees are the people most likely to be working on assembly lines, interacting with customers, managing supply chain relationships, and designing products. Not only do they have direct impact on how well the company operates, but they will likely be the first to notice problems and may well have the best sense of how to deal with them. Also, research suggests that employees have an enormous effect on the success of a company. According to a report from the Association for Psychological Science, "employee work perceptions predict important organizational outcomes — if employees have positive perceptions of their jobs, their organizations benefit via higher employee retention, increased customer loyalty, and improved financial outcomes."
  2. No company can succeed on the commands of upper management alone. Simply ordering better performance or results doesn't mean that a company will obtain them. There can be a gulf between management desires and theories and the response of employees and customers. Look at the simple example of a company that fails to have employee compensation support strategic goals. People will do what their paycheck demands, and without employees taking the necessary actions, the company will not realize the desired strategy. Another example came from the global financial crisis. Management theories did not successfully translate into practice. Despite MBAs using the most modern of theories and tools, the entire system collapsed. Expecting management to magically direct the company without the agency of employees is like sitting in a car and expecting to make the next right turn despite a lack of a steering wheel.
  3. Opacity of strategy, operations, and financials ultimately detrimental to success. Jack Stack's Great Game of Business suggests another way to counter problems: A company teaches employees to understand the business and financials, and then they open the books. People who are closest to operations and who understand the realities of the particular company are heavily involved in planning. Secrets are anathema because they keep people from working rationally toward the company's goal.

And, yes, openness about salaries must become part of the mix. Business journalist Felix Salmon recently wrote about how pay secrecy is bad for organizations. It creates "poisonous internal politics," reinforces historical inequalities of gender and race, and allows managers to "play favorites with their staff," even if they don't realize they are doing so.

Let the secrets be crushed, and let pay be determined by contribution and ability. It's possible that particularly brilliant product or representatives will make more than the CEO because they are the ones that create revenue opportunity. So be it.

Should a company with a large wage gap be transparent about salaries or is there another way to keep employees engaged?

Erik Sherman is an NCMM contributor and author whose work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, Newsweek, the Financial Times, Chief Executive Magazine, Inc., and Fortune. He also blogs for CBS MoneyWatch. Sherman has extensive experience in corporate communications consulting and is the author or co-author of 10 books. Follow him on Twitter and circle him on Google+.

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