“Cut the pay of Joe the Machinist”

Booz and Co., a management consulting firm, published an essay recently inviting companies to consider the problem of Joe the Machinist.

Joe has been a machinist for 25 years at the same company, a steady and reliable worker.  Although Joe is a significant asset to his firm, his wages have gone up steadily while his responsibilities have remained largely unchanged.  The result is that Joe is significantly overpaid as a machinist compared with co-workers who have been doing the same job for just two years.

Struggling to ride out the worst of the recession and credit crisis intact, Joe’s company has fired dozens of workers — and considering Joe’s salary, he would seem to be a likely candidate for the next round of layoffs.  Or maybe not.  Joe’s a stellar employee who knows the ins and outs of the organization, the result of his many years on the job.  If management let him go, not only would the company lose his wealth of institutional knowledge, but a troubling message would be sent to the other workers — namely, loyalty goes unrewarded.  At Joe’s age and tenure, moreover, there could be legal implications to such a move.  In short, the company would rather not fire Joe.  But what’s the alternative?

The alternative is to cut Joe’s pay.   The company could retrain Joe for a job whose job description calls for a higher pay grade, but such a job may not be available.  The company could offer Joe a job buyout or it could terminate his employment, but that would be inhumane.  But in any case, the company doesn’t want to pay Joe more than the “market” rate, which in practice means the lowest pay they can get anybody to accept.

If a company regards its most experienced and loyal employees as liabilities, what kind of employees will it have?  It will have employees who work hard at doing those things that supervisors notice and take into consideration on merit pay evaluations, and never do anything else.  It will have employees who leave as soon as they have an opportunity.  Can you have a profitable, thriving business under those conditions?  A large segment of American business is making that experiment, and we can see the results.

Click on Retooling Labor Costs for the Booz & Co. article.

Click on Outrageous CEO Pay? How About Lowering Salaries on Longtime Workers? for comment in Harvard Business Review.

Click on Joe the Machinist, Better Watch Your Back for comment by Sam Pizzigoti on the Too Much web log.

This hits a tender spot for me because I myself worked 20 years in the same job—business news reporter for the Democrat and Chronicle in Rochester, N.Y.  I knew from experience I was a poor manager of other people, so I didn’t try to become an editor.  I had no interest in moving to a new city every five or 10 years, so I stayed in Rochester.

This was an unusual pattern in newspaper work in the 1980s and 1990s.  Most reporters on small-city newspapers stayed in their jobs only a few years, after which they moved on to newspapers in larger cities, won promotions to editor or left newspaper work altogether for something more lucrative.

I got regular merit pay increases, which were roughly equivalent to a cost-of-living increase or a little more.  In my own estimation, I got better in my job as I went along.  Over the years I learned more about business and economics, I learned more about individual businesses in Rochester and I got to know more people who could give me good information.  I think I earned my pay raises—such as they were.

My impression is that corporate managers today prefer to have a high turnover than to have older and more experienced employees.   Alan Neuharth, the former CEO of Gannett Co. Inc., said he preferred younger journalists when he started USA Today, because older journalists would have their own ideas about what a newspaper should be, while younger ones would comply with whatever he wanted.  Another reason for preferring younger employees is that they have no memory of what working conditions were like in an earlier era.  They think things have always been the way they are now.

I know of two-tier wage contracts, in which younger workers are put on a career path in which their pay will never catch up with workers in their parents’ generation.  The Booz consultants’ article is a solution of a sort.  Under the Booz system, there are no two-tier contracts because everyone is paid at the same low level.

Then there is the problem of the middle-aged employee who is “over-qualified,” because employers want a high turnover of employees who work cheap.  Under the Booz system, this is no longer a problem, because “over-qualified” employees will no longer expect a wage premium for their skills.

There is an alternate system that recognizes and rewards mastery of a craft achieved over a lifetime.  It is a system in which the journeyman is paid more than the apprentice, and the master more than the journeyman, because the journeyman creates more value than the apprentice, and the master more value than the journeyman.

This is an extensive revision of an article I published earlier on Friday, Aug. 12, 2011.

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