I have long thought movie stars and sports heroes were drastically overpaid in comparison to their contributions to society. For example, teachers are teaching future generations of kids, and get paid pennies in comparison. And, even well paid doctors saving lives, are paid a small fraction of what a basketball star gets paid to simply play the game of basketball. In the last decade, these inequalities are starting to be seen in corporate workplace, as well, with rising CEO pay and a mid-level jobs under siege due to outsourcing and technology automation. I think we need to rethink the traditional pyramid shaped organizational structure to “right size” the work completed vs. compensation paid equations. Allow me to explain further.
WHAT IS A PYRAMID SHAPED ORGANIZATION?
In most hierarchical organizations, it could look something like the following. One CEO manages five EVPs who collectively manage 25 SVPs, who collectively manage 125 VPs, who collectively manage 625 directors, who collectively manage 3,125 managers. As you can see, a very wide base and a very narrow top results in a pyramid design as you move up the organization.
And, as you move up the organization, the compensation dramatically grows with each level, where a manager can make $37.5K, a director can make $75K, a VP can make $150K, an SVP can make $300K, an EVP can make $600K and a CEO can make $1.2MM+. And, depending on the size of the company, the Fortune 500 CEOs can make $25MM a year, which have dramatically increased to that level in the last decade or two.
PROBLEMS WITH THE PYRAMID DESIGN
The first problem with the pyramid design is compensation disparity from the top of the organization to the bottom of the organization. In the example above, do we really think the CEO is worth 32x the managers at the bottom layer of the organization? Or, in the case of a Fortune 500 company, what could be 1,000x the entry level workers? Probably not, as often times the people in the trenches are doing the hardest work.
The second problem is the caps it creates in upward mobility. At every level of the organization, there are 5x as many candidates that can be promoted into the tier above them, as illustrated in our example. Presumably, the 125 VPs are all roughly equal in terms of doing a good job, but only 25 of them will have a chance to get promoted to the next level. That is like a 20% chance of winning the lottery from one level to the next. Or, if you go from the bottom level to the top, you have a 32 in 100,000 chance to go from entry level to CEO. Sorry to the 99,968, you are just out of luck—no lottery ticket for you.
The third problem is the impact that has on the U.S. economy. The wealth gets concentrated in the top 1% of people and the 99% in the middle class are getting squeezed right out of existence, as inflation-based raises are not keeping up with the rapidly growing cost of living and rising consumer debt levels. This country was built by the middle class, and with growing levels of outsourcing and disintermediation by technology, the American dream is really becoming a real potential for a very few people that are able to make it all the way to the top. The old adage is, you need to have money to make money; and right now, there are very few that have it, to give them a realistic chance of making it.
HOW TO FIX THE PYRAMID—BUILD A CYLINDER
Firstly, in my example above, there were six levels of workers, from managers all the way up to CEO. But, instead of having 80% of workers in the bottom tier, what if each tier was evenly distributed with 16.7% of the workers in each tier, closer in shape to to a cylinder than a pyramid. But, that creates some interesting management hurdles, along the way. As an example, you can’t have 651 people acting as CEO or managing the company by committee. But, you could empower more people to make more strategic senior decisions, with fewer levels of bureaucracy. Maybe break the business into pieces, in terms of how it is managed by department, by region, by customer, by channel or whatever. This would require a lot more thought on how best to divide up key decision making roles, to empower more people to take leadership positions. But, if we can elect our Presidents by democratic vote, maybe there is a way to run our businesses the same way?
Secondly, in my example above, there was a total payroll of around $194,512,500. If all 3,906 employees we treated the same, the average would be around $50,000 a person, which would be like a 33% raise to the 80% of employees in the bottom tier, and would materially improve their lifestyles. Now, I am not saying there shouldn’t be a step up on compensation with each tier. But, maybe it is a 25% bump instead of a 100% bump in my example, to help make more room for the folks in the lower tiers. And, don’t forget, in the cylinder model, we moved 80% of workers up into higher tiers within the cylinder, so the raises will end up being much higher when combining the salary per tier with the more people in higher tier advantages. For example, taking a quarter of the bottom tier up to $62,500 (up 67%), another quarter to $78,000 (up 108%), and a third quarter up to $94K (up 151%), as examples, as they were reshuffled upward within the organization.
The natural pushback here will be there are not enough quality candidates for each tier. To that point I would say: (i) we simply need to make education or training of those people more affordable and more accessible; and (ii) we have a ton of “underemployed” people on the sidelines waiting to get back into the game in a much more material way. Of course, the current people at the top, won’t like this model, as it means materially scaling back on their compensation, but that is the price of helping to rebuild our middle class. Instead of having one billionaire Jeff Bezos at the top, I sure he will live just fine on multi-millions of dollars a year, as an example.
CONCLUDING THOUGHTS
So, the points here are: (i) why should the vast majority of the corporate compensation spoils go to elite few, when a business is built on the shoulders of many; (ii) how do we get skyrocketing executive salaries in check; and (iii) how do we save our middle class which is under siege. I am just trying to think out of the box on how best to reinvent organizational design for a modern 21st century business. If you have any ideas here, please add them to the comments box on this page. Together, we may just figure out a way for the anonymous John Doe to get paid the same as Tim Cook, Lebron James or Tom Cruise.
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