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Should your best performers get the most pay?

This column is part of Globe Careers' new Leadership Lab series, where executives and leadership experts share their views and advice about the leadership and management issues of today. There will be a new column every weekday. Follow us at @Globe_Careers. Find all Leadership Lab stories at tgam.ca/leadershiplab

Income and wealth inequality is a controversial topic. Recently, Thomas Piketty published a popular economics book, Capital in the 21st Century, with the central premise that income and wealth inequality were immense before Second World War in Western countries (and Japan) but declined after the war. Then, in the late 1970s-early 1980s, a sudden spike in inequality overtook western economies, reaching even higher levels in the United States than it did before Second World War.

According to Mr. Piketty, as income inequality grows, individuals with larger salaries foster greater wealth. If the rate of growth for that wealth exceeds the growth rate of the economy, you get extremely high levels of wealth inequality. This book and its findings have rocked the economics world and have been a topic of heated conversation on TV, in newspapers, bars, churches, and at dinner tables. However, despite its obvious relevance, it has received little attention in management.

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New research by Ernest O'Boyle and Herman Aguinis shows that job performance does not fit the bell curve. In fact, they find there are a few elite performers who drastically outperform everyone else. They propose that roughly 10 to 15 per cent of people are these elite performers, whereas most people are slightly below average and a small proportion are far below average. This is called a power law distribution, which resembles the unequal distribution of income. If this research is correct (there is some skepticism) it means that a few elite performers are responsible for the bulk of productivity in an organization. This research raises important questions for management regarding productivity, compensation, and how the choices made by managers affect social inequality.

1. What causes unequal job performance distributions?

Mr. O'Boyle and Mr. Aguinis propose a human capital perspective. This explanation fits with folk wisdom about hard work and success. Essentially, elite performers have a mix of greater knowledge, skill, and ability (KSAs), which make them more successful than other people. Companies may have select elite employees who outperform others by a wide margin.

2. Are employees responsible for their performance?

If the top performers produce most of the work, shouldn't they also receive most of the pay?

Mr. O'Boyle and Mr. Aguinis say yes, as most would. Income inequality is not as controversial as wealth inequality, because most individuals believe in a meritocracy regarding labour and income. However, two factors work against this interpretation: the interdependence of employee performance and the effect of education, genetics, and family socioeconomic status (SES) on individual employees' KSAs.

In large, complex organizations, employee performance is more interconnected than people believe. Focusing only on individual performance ignores the interdependence the employee has with other employees. Meanwhile, genetics and family SES have a huge impact on educational attainment, which influences job performance, which influences income distribution, which influences wealth distribution.

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People may say, "If you work hard you can overcome family or genetic adversity." However, it's an uphill battle and the odds aren't great. In public debates about this issue, many are quick to say that those who succeed are fully responsible for their success and those who fail are also fully responsible. For both situations, we need to examine the role of genetics, family, environmental factors and even luck. Managers need to pay attention to the multidimensional way in which performance is determined.

3. How should elite performers be compensated?

For individual organizations, it does not matter if elite performers are responsible for their performance output. An organization just wants to select and retain the best talent possible. Therefore, if the top 10 per cent of employees are responsible for 50 per cent of the productivity, large incomes may be justified. However, it is unclear if huge increases in salaries will bring about huge increases in employee productivity. A large disparity in pay for the same jobs could also create strong perceptions of injustice among employees, breeding resentment and a potential decrease in other employees' productivity. Finally, a large disparity in income contributes to greater social and wealth inequality.

4. How does performance disparity tie in with income inequality?

If there is great income disparity, there will be greater wealth inequality. While we highly value merit-based income in Western democracies, we also value social mobility. The best way to move up the social/economic ladder is through education. However, when wealth is heavily concentrated within a small proportion of the population, access to education decreases.

The best piece of news for Canadians is that we are three times more economically mobile than the United States, where education is prohibitively expensive. Managers want educated, motivated and well-performing employees, but both management researchers and practitioners can no longer ignore the role we play in inequality. Managers, citizens, politicians and academics will have to work together on reducing income inequality, especially by increasing access to education. If we can all come together to do that, we can increase economic mobility among all economic classes. Businesses and managers should play an active role in this process because they have so much influence over the process. Having less income inequality will lead to a larger educated and more economically mobile populace, and a more stable economy.

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Justin Weinhardt, PhD, (@OrgPsychologist) is an assistant professor at the University of Calgary's Haskayne School of Business (@haskayneschool). He is an expert in human resources and organizational psychology, and has a particular interest in understanding how motivation and decision-making change over time.

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