Could Paying Top Dollar For Staff Be Worse For The Labor Market?

Source: Fast Company, Lydia Dishman
Photo: Library of Congress, LC-USZ62-119650

Basecamp recently raised its salaries to reflect the top of the San Francisco market. Some economists are skeptical that this could work on a large scale.

The tech company Basecamp has a mostly remote staff of less than 60 people. But even its headquarters aren’t in Silicon Valley; Basecamp is in Chicago. Which is why it was a bold move earlier this month when cofounder and CTO David Heinemeier Hansson announced in a blog post that the company is paying its workers according to San Francisco’s labor market.

Since their employees are scattered all over the globe, it wasn’t clear what the cost of living benchmark should be. According to Heinemeier Hansson, “It started to increasingly seem like an arbitrary choice, and if we were going to make one such, why not go for the best and the top?” So as of January 1, Basecamp employees will receive a salary reflective of the top 10% of what software companies are paying in San Francisco (compared to base pay plus bonus, but not options). They also offer some amazing benefits. (Put your resumes away, though, because Basecamp isn’t looking to hire more people.)

Cofounder Jason Fried tells Fast Company, “We think this method of paying people regardless of location is just the right thing to do, so hopefully we can encourage other companies to do the right thing too by sharing what we do.” For some, that meant a single-digit percentage increase, while others saw as much as a 20% boost to their paychecks. The cost, Fried says, is “hundreds of thousands this year.”

Fried insists that this isn’t a onetime deal. “Salaries will continue to go up every year at the San Francisco rate if SF salaries go up,” he asserts. Could this scale sustainably if Basecamp did add more staff? And, more importantly, can this initiative work at other companies?

Heinemeier Hansson says Basecamp’s rationale was informed by Adam Smith’s classic book Wealth of Nations. In particular: “The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labor.” This, writes Heinemeier Hansson, is “an antagonistic struggle,” and one they deliberately are upending.

Payscale’s chief economist Katie Bardaro says one of the reasons companies have remote workers or set up offices that are not in San Francisco or Seattle is because the cost of labor is cheaper. “If we start to see more companies doing what Basecamp is doing, that benefit will wash away,” she explains. “We’ll be facing a national labor market; regardless of where people are working and living, they will be arguing for the same compensation.”

If every company had to pay employees San Francisco rates, the increase would be significant. According to Payscale data, the average salary in the area is just north of $85,000, but the cost of living is 80% higher than the national average. Glassdoor’s most recent pay report revealed similar findings. Among the 10 metros tracked, San Francisco had the fastest pay growth in December, where median base pay was $68,078 per year as compared to the national average of $51,210.

Bardaro says that traditional compensation models were set based on a local labor market and driven by competing businesses, the cost of living, and other factors specific to that area. Now, with a more global economy and workers who tend to pull up stakes rather than stay put, businesses have had to be savvy in order to create a compensation strategy that attracts and retains the best workers.

She doesn’t think a lot of other companies are going to adjust their pay calculator up, but does see how “transformative businesses that really, truly value their workforce, which are potentially having trouble attracting and retaining talent, will be pulling out all the stops.” These would be other software or data science companies that are really hot right now, says Bardaro. “They have the liquidity to do something like this.”

Bardaro calls Basecamp’s pay structure “gold on top of gold” because it is not only the top tier of compensation in the country, but in the top 10% for that top market. This isn’t a strategy to attract attention, she observes, it is to make sure they keep the people they have who are key to the company’s success.

Fried asserts that Basecamp has very low turnover, but doesn’t have specific stats. “Nearly half the company has been with us for five or more years, which is exceptionally rare in an industry where the average tenure is around 18 months, I believe.” He says every employee’s tenure is publicly available. “I’m not aware of another company that shares that information, but I’d like to see more do that as well.”

A recent Glassdoor survey conducted among 750 hiring decision makers (those in recruitment, HR, and responsible for hiring) in the U.S. and UK also finds that nearly half (45%) report that salary is the top reason for employees changing jobs, followed by career advancement opportunities, benefits, and location.

“Some studies have shown that more workplace transparency and giving workers information about relative pay can boost work effort and lead to long-lasting increases in productivity,” says Glassdoor’s chief economist Andrew Chamberlain, PhD.

Fried says that while not every employee knows what everyone else in the company makes like some others, they know that others who have the same title are earning the same salary.

Chamberlain says that what Basecamp and other companies are doing regarding transparency is part of a larger movement that also shines a light on hard-to-explain pay gaps at work, including gender pay gaps. “While companies may be slow to adopt a similar pay structure, I anticipate we will see an uptick in pay transparency and increased discussion around salary openness in coming months,” says Chamberlain.

With transparency comes the ammunition to negotiate for more money. Fried says Basecamp has eliminated negotiation from the salary process (“Just be good at your job!” he says), but Bardaro sees this as a potential pitfall to broader implementation of paying top market rates.

“If more companies do what Basecamp is doing,” she says, “they might also freeze or reduce hiring and just focus on the workforce they have.” This she observes, could cause further disparity between the haves and have-nots. “A very select group of people with in-demand skills and the necessary connections will be able to get this wage range,” says Bardaro.

Additionally, there are only so many funds to go around. She speculates that companies who pay top dollar may find themselves limiting future hires to one or two people, where they may previously have employed 10 or more. “More people who don’t have the hottest skills will no longer be seen as necessary talent.” That means underrepresented minorities could face more challenges getting those jobs. “They are already underrepresented in those firms,” says Bardaro. “The opportunity for that to change or move in the right direction is quite limited” if more companies decide to push for higher wages for existing staff.

The repercussions on a macroeconomic scale could mean fewer people with jobs that pay a competitive rate, and therefore fewer people have less discretionary income to spend on anything other than what they need to survive. Eventually, Bardaro speculates, even those who are earning top dollar would be affected.

That said, Bardaro contends Basecamp’s initiative is not likely to take off at that level. “I think some companies are going to use it as a power play in a tight labor market, and they’ll find success for themselves.” The real tidal wave, says Bardaro, is the push for transparency. “What matters more is how pay policy is communicated versus what you are actually paid.”

Lydia Dishman is a reporter writing about the intersection of tech, leadership, and innovation. She is a regular contributor to Fast Company and has written for CBS Moneywatch, Fortune, The Guardian, Popular Science, and the New York Times, among others