Do salaries create conflict, too?
Salaries have also been around a while. Our word “salary” comes from a Latin word for salt. Roman soldiers were given “salt money” as pay; we still may say that workers are “worth their salt,” meaning that they earn their pay. Salaries are set monthly, or annually.
Salaries became more common during the industrial revolution. They were used to pay administrators and managers whose work was difficult to measure, but who weren’t partners or partial owners of the firm. When Japan industrialized in the early 20th century, a new Japanese word—salaryman—was coined to describe these office workers. As our service economy has grown, the share of salaried employees has grown as well. Today, in the US, about 40% of all workers earn a salary.
Salaried employees suffer from a principal-agent problem. Shareholders want the most work possible out of the firm’s employees. Salaried employees may just want to “get by,” without taking a personal interest in the performance of the company. To get around this, salaries are now often considered part of a total compensation system, which may also include bonuses, incentives, benefits, and other perks. These are designed to help employers link rewards to an employee’s measured performance.
But the devil is in the details. Poorly structured incentive schemes create more problems than they solve. They can put employees at odds with each other, with their supervisors, and with their customers. A bad incentive compensation system is often worse than no system at all—leading to poor corporate performance and high employee turnover.
The difference between employee and employer can be seen in how they approach payday. For one, it’s a source of hope and expectation; for the other, it’s a matter of anxiety and dread. If we want workers to “earn their salt,” they need to know that what they do matters—for their customers, for their employers, and especially for themselves.
Douglas R. Tengdin, CFA
Chief Investment Officer