I was chatting with my Director recently and he echoed a frustration I think many have but may be unaware of. As we talked about internal frictions and ongoing challenges of his position, he mentioned one thing that really stood out and caused a great deal of consternation on his part. The whole idea of classifying employees (i.e. exempt/non-exempt or hourly v. salary). And I totally get it, it creates a weird equality shift among work groups, especially when they are integrated with salaried employees working directly with hourly employees. One gets paid for their time, the other (supposedly) gets paid for ummm, expertise? As if to discount the expertise of hourly employees and the time of salaried employees.
But according to the definition based on the Fair Labor and Standards Act [FLSA] established in 1938, exempt employees are “professional”, “necessary” (administrative importance), or “highly skilled.” So what of non-exempt employees? Are they not considered these things? And hence the awkward separation of the classes begin.
Hourly v. Salary
So what does that really mean? One is based on number of hours per week (non-exempt employees are paid overtime past 40 hours) the other is paid based on a yearly basis…but for what? Just putting in time? Well, I guess some employees seem to get paid to just be there, but what of the rest of them/us? What are we getting paid for? I would like to believe we are paid based on the contributions we make to the organization, but that is not how it is defined. Both are defined to be paid based on a measure of time, one is by the hours worked, the other is a on a yearly basis…which is still a measure of time. Ultimately, the purpose of the FLSA was to make sure people were being compensated fairly if they were working more than 40 hours per week. And when you think about 1938 and the lingering effects of the Great Depression where people were eager to work, even if it meant getting paid unfairly. A small paycheck was better than none at all. But guess what…its not 1938 anymore. So one has to ask, does the logic still hold up?
1938 v 2010
Now, obviously this analysis could go down many paths but my goal is simply to look at the economic balance of time-based work versus non-time based. In 1938, the American economy was heavily driven by industry. One needs to only look at the rise of the production line, manufacturing plants, and the construction boom of the 1920s to see roots in industry. Industry is classified as something that produces a good or product. So things like textiles, manufacturing, and construction are all a part of the industrial sector. With each of these individual components of industry it would be very easy to determine output of production by a simple formula (time taken for completion divided by time spent on the job). They are at their very core, time based. You can either decrease the time it takes to complete the task or increase the time spent working on that task to increase output. So it makes sense that in 1938, when so much of the U.S. economy was driven by industry, a fairness measure of pay is based on time.
Fast forward to 2010. In 2010, the industrial sector only comprises 21.9% of the Gross Domestic Product (GDP) of the United States. Whereas services comprise a whopping 76.9%. The “service” sector is “where people offer their knowledge to improve productivity, performance, potential, and sustainability.” There is no time measure for knowledge. The idea is what has value, not the time spent perfecting it. No one knows how many hours Edison took to invent the light bulb, and in the end, does it matter? In a “knowledge” economy, the knowledge has value, not time.
I recall a career session back in high school that exemplifies the encouragement of a knowledge economy. A tale was woven to me about a company that hired an engineering consultant (this talk was to promote engineering as a career) to help determine the cause of the manufacturing line breaking down on a regular basis. The engineer came in and took a few measurements, spent about 45 minutes doing a few calculations and then drew two ‘X’s on the floor about a foot from the manufacturing line and said “move your equipment to these Xs.” When the client received a bill for $15,000, they said all he did was spend about an hour putting two Xs on the floor. His response was “you are not paying me for putting the Xs on the floor, you are paying me for knowing where to put them.” Even in the 90s it was not about getting paid for your time, the goal was to get paid for the knowledge you had.
In 1973, Daniel Bell published a work titled “The Coming of the Post-Industrial Society”. It was the first acknowledgment that America was shifting from a “doing” economy to a “knowing” economy. Within his work he noted the drastic movement from “goods to services” and he identified “Knowledge and Technology” as “the class structure of the Post-Industrial Society.” So in 1973, it was postulated that the class structure of the society would be based on knowledge and technology…not time. Yet, no change in the FLSA guidelines based on time.
32 years later, another forward thinking author, Daniel Pink, postulated that we are moving from a “knowledge based” economy to a “concept based” economy. Within his book, “A Whole New Mind”, Dan Pink shows another shift that is occurring in the modern economy, specifically within the U.S. and Europe. As knowledge based occupations can be reduced to formulas, flowcharts, and fish-bone diagrams, they can just as easily be outsourced or automated. He cites the large degree of customer service and technical help centers that were sent overseas in the early 2000s as prime examples. To see examples of the concept-based economy a great example is the October issue of “Fast Company” magazine that highlights the power of Design (one of Dan Pink’s projected “concept” competencies).
For lack of a better idea
I don’t think the world is totally ignorant to the fact that the system is somewhat antiquated, though some may be naively accepting that “another day, another dollar” is why people get paid. I think the difficulty is in quantifiably measuring output when it is based on an abstract principle such as a “concept” or “idea”. I mean, how valuable is an “idea”? Many times, you won’t know until long after you are gone, so how do you define adequate pay?
Wait a second. That logic doesn’t hold up either, after all, how are you determining salaries? Certainly not by time spent? Most full time positions are based on 40 hours, but they are not paid the same. I mean are you trying to tell me that the average CEO is spending 531 times the amount of hours at work than the average worker? After all, the average CEO gets paid 531 times more than the average worker (About.com). We already ascribe intrinsic value to a position in a capitalistic society. Not based on time, but based on skills, knowledge, and contribution. While the current system is far from what people would call fair, I don’t think paying CEOs by the hour is the answer either, salaries are already calculated by worth to the organization.
So what determines worth? This is the touchy subject that no one wants to talk about. After all, is a CEO’s hour “worth” 531 times than of the average worker? I would say not, but does it take considerably different skill, knowledge, ability, and experience to run a company than it does to operate a machine? I would say so. The tricky part is determining what value one set of skills, knowledge, and abilities have versus another. Now, I don’t know the calculation but I would say what a position is “worth” is what the market will bare. After all, if talent is a commodity (as the MBA/CFO equations would have us believe) then is it not bound by the same capitalistic principles of supply/demand and perceived market value? I mean, compensation analysts look at market trends to determine salaries, right? Even when creating a new position they calculate it based on aggregating similar positions and creating an average for salary. Nowhere is someone sitting down and trying to objectively calculate what the position is “worth” in the typical sense of “contribution to the organization in dollars”. The rare exception is full-commission sales.
How can we start to move from hours to results? When you think about it, most roles that would make sense to be hourly are production type roles…which ultimately could be based on output; x-number of widgets = $X. Every other position out there that does not have a tangible product might as well be salary. The results are based on the expectations of the role. If they are expected to answer the phones from 8-5, then you can measure whether or not they are doing that. If they are expected to help customers from 4p-10p, then the achievement of those results would mandate they are at a certain location for a designated period of time. And although the expectations shift is subtle, the focus is on the behavior or result, rather than the presence. Focusing on results does not mean people can go anywhere and do anything, it means they need to get results, not just be there. So rather than focusing on whether they were not there at 9a, instead determine whether they are available to help customers during business hours. Something a number of companies are trying around the US (including the US Government) is establishing Results Only Work Environments (ROWE) that measure performance on results, not face time.
In a technologically plugged in world mobile phones, laptops, teleconferences, and WiFi create opportunities for portability that never existed, especially in 1938. If an administrative assistant can forward calls to their cell phone and there is no perceptible difference the customer, then why do I care that the call was routed from a coffee shop to my desk – the end result is the same. This is the difference between focusing on results versus presence.
And before anyone starts asking me if I think this position is worth more than this position…I will tell you, it does not matter what I think. The market has determined what a position is worth, whether I am in agreement with the market or not has no bearing. Similar to the housing market. It does not matter what I think my house is worth, it is worth what the market will bear. Same goes for talent.
Stop the Insanity! (Thank you Susan Powter)
So here is a call to end an antiquated notion of paying people based on time. Companies arbitrarily ascribe a value to employees time, how is that different than ascribing a value to the position itself and the results it is responsible for. After all, if someone is just there and does nothing…are you still okay with paying them…after all, they put in the hours, right?