Monday Mornings with Madison

When Companies Dare to Radically Change Employee Compensation or Benefits

There has been a lot of discussion lately about employee compensation and benefits in the U.S.  Candidates running for President are spending a lot of time (in debates, interviews and during campaign stops) discussing topics such as income inequality, paid family leave and other bread-and-butter issues that are part and parcel of the business world.  To a small extent, these issues are regulated by legislation, such as federal and state minimum wage laws which dictate the least an employee can be paid hourly.  However, the vast majority of these HR issues are really under the purview of business leaders and owners.  For the most part, individual companies the U.S. decide how they want to compensate their employees.  Because of that, the usual array of wage and benefit packages – albeit a fairly wide range – has developed for employees at every level, from entry level to C-Suite positions.

However, from time to time, some companies step outside the usual selection of employee pay and perks.  Those outlier companies dare to go beyond the typical assortment of compensation items to offer employees something that is unique or bold.  For a time, the audacious actions of those companies capture the attention of the media and lawmakers.  They garner a lot of attention and usually generate a lot of applause (and scrutiny).  But are those actions altruistic?  And do such creative perks have any impact on what the majority of companies pay and offer in the way of employee benefits?  Do those high-profile HR initiatives move the needle of employee benefits nationwide?

Walking the Fine Line

When allocating profits, companies constantly struggle to find the right balance between compensating employees fairly and paying other expenses, delivering a good return to investors and reinvesting in the company.  Each business oscillates between being seen in the marketplace as generous and unstinting with compensation versus being viewed as stingy and miserly about pay and benefits.  Though it should be a wide gray area, it is often a fine line.  That perception can affect the type of talent a company can attract.  Generous companies generally get a higher quantity — and arguably a better quality — of applicants than tightfisted ones.  Logically, top talent will flock to companies that pay most and offer the best benefits, especially when unemployment is low.

While it was understood that, during lean times, companies had to reduce or eliminate raises, slash bonuses and cut back on benefits, employees expected compensation to improve along with the economic recovery.  In some companies, that happened.  According to economists, in many other companies it did not.  Moreover, in some companies, select employees – those in highly competitive jobs or industries — saw their salaries rise significantly while pay raises for those in less technical jobs remain stagnant.  And some companies have moved to make this disparity even more pronounced.

Company Shares… For Some

Case in point.  Recently, Jack Dorsey, returning CEO and co-founder of Twitter, gave a third of his company shares—totaling about $200 million, or 1% of the company — to its employees.  While it sounds like an incredibly generous bonus for all Twitter employees, it’s not.  He actually gave the stock to the company, which will distribute it “from time to time”.  The shares will be used for promotions and to lure top talent. So the average Twitter employee will not get a big bonus.  This investment is meant to ensure Twitter keeps top talent from jumping ship, especially in light of the company’s recent struggle to show growth and its recent lay offs of 8% of the staff.  (Twitter stock is currently trading for less than half of its all-time high of just a year-and-a-half ago.)  Dorsey’s stock incentivizes top talent at other tech firms to consider joining Twitter, despite its financial problems.

Twitter’s move is a shrewd solution to the tech industry’s cut-throat competition for the smartest minds.  But it isn’t a generous, altruistic act by the company.  And it is definitely not a bold move toward income equality.  At Twitter, just highly-talented existing staff and highly-desirable new staff will benefit from this radical strategy.  Of course, the most talented are usually already the most highly compensated.  The only way this exercise might ultimately benefit the rank and file employees by shoring up the company’s health and ultimately improving the company’s long-term profitability, which would at least increase job security.  It is doubtful that this idea will move the needle to improve how companies nationwide compensate their staff.

Unlimited Family Leave… For Some

Another example of radical, but limited, HR benefit was offered by Netflix this year.  In August, 2015, Netflix announced it would expand its paid family leave policy to give employees who are new parents unlimited paid leave during the first year after the birth or adoption of a baby. Unlimited… as in take as much time as you want or need.  At first blush, that appeared to be incredibly generous.  However, it turned out that not all employees were given that benefit. Only salaried employees in the streaming division were slated to get the new coverage while those in the DVD segment or in corporate customer service weren’t.  Again, the Netflix policy favored highly-valued talent, while the less-skilled employees were left out.  It seemed meant to attract female top talent, which is a scarce commodity in the tech world.  What’s more, this policy was tacked on to the already existing unlimited vacation policy Netflix implemented for key staff.

Frustrated by the two-tiered policy, tens of thousands of people (Netflix employees and their supporters) signed a petition on asking the company to extend the paid leave benefit to all employees.  But, their two-tiered system is actually consistent with what many private sector employees offer.  Higher-income, full-time and professional workers are more likely to get paid family leave, paid sick leave and paid vacation while less-skilled workers do not.  According to a Department of Labor survey, only 17.6% of employers offer paid maternity leave to all their employees.  There is no national requirement for paid leave in the U.S.; only 12 weeks of unpaid time off.   Despite public pressure, Netflix has still not extended the policy to all employees.  And it is doubtful that either their unlimited family leave or vacation time policies for some of its employees will move the needle of what companies nationwide offer in the way of family leave and vacation benefits to its rank-and-file employees.  While a radical move, it is definitely not a game-changer.

A Living Wage for All

Many of the unusual benefits that companies like Netflix, Twitter, Best Buy and others offered have drawn a lot of attention.  But clearly those companies were addressing specific issues, such as hiring more women or keeping top talent from defecting.  However, not all eye-popping HR changes by companies are driven by ulterior motives.

For example, in April, 2015, Dan Price, CEO of Gravity Payments, made a radical move to raise the company-wide minimum wage to $70,000 over a three-year period.  Those earning the least were raised immediately to $50,000 a year, with promised raises of $10,000 per year for the next two years.  Those who were already earning between $50,000 and $70,000 would also get $5,000 raises annually.  The whole plan will cost $1.8 million. To help cover the expense, Price cut his own pay from $1.1 million to $70,000 a year. He’s also sold all of his stocks, drained his retirement account, and mortgaged two properties to pour $3 million into the company. He’s vowed not to fire employees, raise prices, or cut executive pay further to make it all work.

The move sparked a firestorm of media attention; more even than anticipated.  It also initiated a lawsuit by Price’s brother and co-founder Lucas, claiming the pay raise violated his rights as a minority shareholder.  The attention threatened to overwhelm the company’s capacity to handle the growth and media that resulted.  In the weeks after the announcement, the company was flooded with 4,500 resumes and new customer inquiries jumped from 30 a month to 2,000 a month.   At the time of the policy change, the company reached $150 million in revenue, $2.2 million in profit, and had a 15% annual growth rate.  Now –six months later — financial results show that revenue is growing at double the rate than before the raises began and profits have also doubled.  Moreover, although Gravity lost a few customers in the initial tussle, the company’s customer retention rate rose from 91% to 95%, and only two employees have quit.

The outcome was not totally unexpected.  Price had reason to believe it would play out this way.  Four years earlier, after an entry-level employee got angry over low pay, Price gave 20% annual raises to all 120 employees. Despite the cost of the raises, profits at that time rose as much as the year before, thanks in part to a 30-40% increase in productivity. He did that again the next year and got the same result.  As the employees did better, so did the company.  Why?  One study by economists found that when major American companies have raised pay, productivity and performance increased, customer service improved, turnover declined, and better job candidates applied.  Other studies have confirmed the same thing.

Regardless of what the media and pundits say, employee compensation and benefits is not a one-size-fits-all.  Each benefit should be weighed carefully against the cost to the company and the return it can generate to the company’s success.  The best employee benefits are those that actually benefit both the company and the employees.

Quote of the Week

“Employees who believe that management is concerned about them as a whole person – not just an employee – are more productive, more satisfied, more fulfilled. Satisfied employees mean satisfied customers, which leads to profitability.”
Anne M. Mulcahy, Former CEO, Xerox


© 2015, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.

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