What's a Fair Wage?
by Paul Eldrenkamp
In small businesses, compensation policy often just sort of happens rather than results from a clear strategy or conscious process. We’re often working in a near vacuum when we set wage rates in our companies, and we’re often only dimly aware of what the “going rate” is for a particular position, let alone what a fair wage would be—or even whether a fair wage and the going rate are the same thing.
Here are two pathways that, if taken together, can help you come up with a compensation policy that offers fair wages to your team.
The first pathway involves answering these three questions:
What’s fair when compared with other workers who have a similar level of skills and responsibility in my industry and community?
What’s fair when compared with others within my own company when I take into account their respective experience, responsibility, and competence?
What’s fair in the context of what it takes to get by financially in my community–and what it takes to be able eventually to buy a home, send a child to college, or support an aging parent or ill spouse without absorbing crushing debt?
To try to answer the first question—what’s considered fair within your region —some companies tap into wage surveys. Here are three options to gain access to a wage survey:
Check with an industry organization, such as a local chapter of the National Association of Home Builders (NAHB) or the National Association of the Remodeling Industry (NARI).
Reach out to a group of companies in your region whom you trust, and encourage the group to self-organize a survey. Remember, the more participants, the richer the information (although sometimes also the more confusing the information). Also keep in mind that a lot of local competitors may not be as interested in getting this information as you might be.
Hire a consulting firm such as HELM to help you out. (See our 2018 blog post to get an example of past surveys we’ve conducted).
In my experience, wage surveys have a couple of drawbacks:
Even for the same job title (“lead carpenter,” for instance), actual duties and responsibilities are all over the map. At one company a lead carpenter may be responsible for placing all the special orders and generating change orders for a project; at another, those tasks might be done by someone in the office. Different levels of responsibility warrant different compensation, even if the job title is the same.
It can be even harder to make apples-to-apples comparisons with regard to benefits packages. Is access to a company truck worth more or less than using your own vehicle and getting reimbursed for mileage? Is steady overtime pay more valuable than being allowed to work fewer than 40 hours a week? Would you rather receive retirement plan contributions or a generous tool allowance—and does the answer to that depend on whether you’re 20 or 40 years old?
Despite these problems, it’s still more useful to have the results of a wage survey in your region than not. Wage surveys provide a useful context for any decision about what “fair pay” at your company should be.
The second question—what’s fair within your own company—you can only answer by taking a clear-eyed look at what each of your employees gets paid, and why. Do some demographic groups make more than others—native English speakers more than non-native speakers, for instance? Do positions traditionally filled by men (such carpentry positions) pay more than positions traditionally filled by women (such as office management roles)? If so, is there a legitimate business reason for the difference or is it simply an unconscious continuation of historical inequities? Do more assertive people make more than less assertive ones? Do new hires make more than prior hires, even in the same position? Is there a clear career path, with the wage scale for each position being appropriately higher than the prior level and lower than the next level? Are wage scales transparent and made available to employees? If you don’t know the answers to these questions, or if the answers—or even the questions themselves—make you uncomfortable, there’s a good chance your wages are not fair.
The third question—what’s fair in the context of what someone needs to earn to be able to get ahead in life—you can start to answer by tapping into the extensive Living Wage research. Here’s a description from the Living Wage website:
The living wage model is an alternative measure of basic needs. It is a market-based approach that draws upon geographically specific expenditure data related to a family’s likely minimum food, childcare, health insurance, housing, transportation, and other basic necessities (e.g., clothing, personal care items, etc.) costs. The living wage draws on these cost elements and the rough effects of income and payroll taxes to determine the minimum employment earnings necessary to meet a family’s basic needs while also maintaining self-sufficiency.
Keep in mind that a living wage is about being able to stay afloat, not about being able to swim to truly solid ground. A fair wage certainly needs to clear a higher bar than a living wage.
If you want to analyze your team’s compensation based on gender, role, or tenure, check out the Equal Pay Toolkit developed by Change the Story.
The second pathway towards determining whether you offer a fair compensation package is to think in terms of outcomes. If you’ve done the quantitative research outlined above and set your wages based on what you learned, and if the following four characteristics generally describe your company, it’s likely you’ve done a good job of setting and maintaining fair wages at your company:
You don’t have a revolving door: at least some of your employees have been around for several years. Longevity and loyalty can indicate that you hire well, keep people engaged and interested in their work, and pay a fair wage. Be careful, though; this is not always true. For one thing, it’s a major hassle to change jobs—an economist would say that the transaction costs are high. The pain of staying in a position needs to be even greater than the pain of finding a new position for an employee to be motivated to quit. This means you could have some employees who’ve been around for a while who are not fundamentally that happy with their job or pay scale, but are also not so unhappy that they’re inclined to leave. Another possibility is that you may be paying them well above market rates—significantly more than they could earn elsewhere (which is certainly generous, but not necessarily fair). Longevity can thus be a reasonably good indictor of fair compensation, but by no means a sure-fire one.
You’re able to attract competent new employees when needed. Since the transaction costs of changing jobs are high, the rewards for doing so also need to be high. Part of the reward can be just the fact of leaving an unsatisfactory situation; part of the reward is often higher compensation at the new position. If you don’t have problems finding people willing to take a position at your company, it’s a reasonably good indicator that your pay scale is competitive.
You know what the law is—and follow it—with regard to employee versus subcontractor classifications. Small construction companies have a bad habit of cheating employees out of some critical benefits – workers’ compensation coverage, unemployment, and FICA (social security) contributions in particular – by paying them as subcontractors rather than employees. In my opinion, if this is your practice, you’re not offering a fair compensation package.
You’re not afraid that employees at your company might find out what the others make. This, to me, is potentially the most reliable indicator that your compensation is fair. When I have been afraid of employees finding out each others’ compensation packages in the past, it’s been because that compensation has been capricious, is based on longevity rather than value to the company, or has included a form of “hush” money: paying the most to those who squawked loudest about their pay. But as a company moves towards a coherent system of job descriptions and evaluations coupled with a reasonable and realistic range of pay within each job description, it becomes easier not to feel threatened regarding pay scale transparency. It can even make the employee evaluation process more honest and useful: here’s where you are, and why; here’s what you need to work on to move up to the next level of responsibility and pay. Finally, it can help start to correct for historical gender and racial pay bias.
By paying attention to these two complementary ways of approaching fair compensation—doing the research and the analysis up front, and then making sure the outcomes are what they should be based on the research—you will be able to establish a wage scale and policy that serves you, your employees, and your community not only well but also fairly.