Pay Day

Why we’re paid what we’re paid

David Brancaccio Aug 22, 2012
Pay Day

Why we’re paid what we’re paid

David Brancaccio Aug 22, 2012

If you are lucky enough to be employed in this economy take a moment now to picture your own paycheck. It’s one of the most important numbers for any of us: right after the word “Net” on the pay stub.

But where does that number come from?

There is often a hidden system at work shaping your compensation, one that could stand in the way of your next raise if you don’t know how to play it.

When it came to negotiating her first big job after college, Yelena Sher did everything just right. Almost everything. Her only mistake was last Thanksgiving when a relative got her to crack.

“My aunt, she is quite blunt, to say the least,” Sher recalled. Sher was about to graduate from Cornell’s School of Industrial and Labor Relations and already had what she considered a great job lined up in her chosen field of Human Resources. But under-cross examination, Yelena broke the great American taboo.

“She asked me how much I’m making,” Sher said. “It was kind of silent at the table. Meanwhile my mom was kind of shaking her head and telling me not to tell her. When I told my aunt what I make, her reaction was ‘Oh, so little. That’s OK! In a few years, you’ll have a raise.'”


Sher said she won’t make that mistake again. But here’s what she got right. At Cornell she had studied the mysteries of how companies are supposed to set pay.

“There’s a whole bunch of numbering crunching that goes into it, by looking at what other competitors pay and what a certain job is valued within a company,” she said.

Modern organizations try to get systematic about paychecks. So when it came to her own job search, Sher knew how to use this system and came up with a salary goal of $50,000.

When a prominent business consulting firm in Manhattan offered a sweet human resources job, the salary was right on the money. Sher still tried some negotiating, and brought up, maybe, a relocation bonus? The company said “nah” since she was moving a few subway stops from Brooklyn to Manhattan. But it’s clear Sher never did have much room to maneuver. You see, the job for which she was applying was a pretty clear-cut position: Entry-level Human Resources.

“If it’s a very specific skill set and a very specific task that’s being done, it’s more straight-forward to pay the person,” said economist Kevin Hallock, Sher’s professor at Cornell.

The science starts with a little side business you may never have heard of. It’s possible that right now your employer is making extra money selling a database of what you and your colleagues make…no names…but listed by the kind of work you do. Other companies buy that data to reality-check their salaries. Some websites also buy paycheck data and put it online so the rest of us can have what the employer has already.

“Now you can negotiate both of you being educated,” said Zahir Ladhani, the president of says it’s like when the real cost of new cars hit the web some years ago.

“You go and buy your car you go to Kelly blue book or any other of the places you can do,” Ladhani said. “In that same way with could we get people educated on what their salary is being benchmarked at and how you can grow that.”

All this data at play sounds scientific. But here’s a revelation from Hallock. Even in the best-run companies, figuring out what to pay people is not just a formula.

“I think it’s part science and part art,” Hallock said.

If a job in human resources is easy to compare like oh, I dunno, maybe a pork belly trading on a commodities market, then a company will know what to pay. But, America’s workforce is changing and increasingly, job descriptions are no longer standardized or run-of-the-mill.

“In today’s economy in the last couple of decades/years – some occupations are pretty hard to define,” Hallock said. “If it’s not common or used by many others, things are a lot more difficult.”

So many jobs are hybrids like a graphic designer-slash-marking consultant. Or they are limited-edition positions like the one guy who knows how to keep the machinery going at the Hoover Dam. These are jobs that are more artisanal, hand-crafted…less pork belly and more, what should we say, more “gourmet sausage”? And the more gourmet sausage the job, the less scientific the pay calculation gets. In place of science, the art of negotiation comes in.

“It’s an incredibly important point for thinking about how to get paid more,” Hallock said.

And how do you prep for that negotiation? Hallock has a book coming out in a couple of weeks called “Pay: Why People Earn What They Earn.” He says never walk into a big job meeting without doing this crucial piece of homework.

“If an employee can figure out what’s important to the organization and if he or she can make themselves useful to that mission, they can help themselves in a negotiation,” Hallock said.

Tomorrow on our series “Payday,” Wealth and Poverty’s Krissy Clark takes a look at some paychecks at the bottom of the income scale.

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