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June 4, 2007

What about the cost?

Today's NY Times has a horrible idea on the Op-Ed page by Susan E. Reed, that all firms be required "to make salary data as transparent for ordinary workers as for Supreme Court justices.". She goes on to say:

Most business owners don't want salary information released, reasoning that it would give their competitors an advantage. Yet many courts have said that wages are set by the market, but a market isn't free if only the buyers of labor know the wages that are paid.

To ease the tension that posting salaries may create, the E.E.O.C. could issue guidelines to employers about how to determine fair salaries and identify the biases against women that result in lower salaries. The E.E.O.C. could remind employers that it is illegal to base pay and promotions on racial and sexual stereotypes.

Transparency will have some benefits, of that there is no doubt. A few more productive firms and employees operating in a void of information on pay will do better. Some with more information or luck than quality will do worse. But given the massive amount of pay information available through the census and websites like The Vault, not to mention places like Monster and the job section of the news papers, that this information is not hard to come by. Reed wants this disclosure so you can check your own employer for discrimination, but isn't it far more important how you compare to the industry at large? If you are underpaid, it will show up in industry averages, and that information is exactly the sort that is available.

But the weak positive effect is only the smaller flaw of this idea. The far bigger flaw is its enormous expense. Now firms will have to expend enormous resources catagorizing employees, and if they are to do it well, there must be punishments for miss-characterization. Every employee will need a characterization, and those definitions will need to be standardized across the firm lest employers invent categories to make comparison impossible. That is a huge waste of resources. Imagine a new government service devoted to "defining jobs", new HR employees hiring people and stuffing them into pointless categories, and PR nightmares as employers constantly struggle to justify the incentive and COLA differences in compensation.

Congressmen, leave this bill to die, and go do something important, like fix the immigration mess.

Here is a new NBER paper that shows how about 1/4 of the change income in income inequality since the 1970's can be attributed to performance based compensation.

Posted by OneEyedMan at June 4, 2007 9:13 AM

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