Are We Paying the Loyalty Tax? Understanding Employee Compensation
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Chapter 1: The Concept of Loyalty Tax
Have you ever considered the idea of a loyalty tax? If you've been with your company for over a year, you might be experiencing it without even realizing it.
A tweet caught my attention: "Data on 20k job titles shows that new hires earn an average of 7% more than existing employees in the same position." It's a well-known fact that many individuals switch jobs primarily to secure better salaries. For example, I know that one of my colleagues earns 19% more than I do, despite us holding the same position, my seniority, and my two additional years with the company.
To clarify, I am content with my salary and harbor no resentment towards my co-worker. On the contrary, I admire her; she fully deserves her salary, and we collaborate closely. She often encourages me to negotiate for a raise, and I genuinely appreciate her openness and negotiation prowess. To be honest, I could use some improvement in that area!
I never viewed this discrepancy in pay as a loyalty tax or a penalty for staying committed. But when you think about it, it does resemble that notion.
Consider subscription services like streaming platforms or phone plans. When companies extend promotions only to new clients, it essentially penalizes loyal customers for their commitment. I've been a Netflix subscriber since 2012—the same year I purchased my first iPad. What have I gained from this loyalty? Other than access to fantastic content, nothing—new subscribers enjoy the same benefits regardless of their tenure.
Does Loyalty Pay? - This video explores the implications of loyalty in various sectors, focusing on how long-term commitment can sometimes lead to financial disadvantages.
Netflix has a commendable approach to ensuring employees are not undervalued. They maintain equal pay for individuals in similar roles. If one employee receives a higher external offer, Netflix will typically adjust the salary of others in the same role and location during the next review cycle.
This system ensures no loyalty tax exists. It's perplexing, though—why would a company choose to penalize loyalty? Netflix stands out by adopting a model that rewards long-term employees, helping to retain talent rather than forcing them to seek alternative opportunities.
This perspective aligns with the broader concepts of flow efficiency versus resource efficiency. While resource efficiency focuses on maximizing resource use to reduce costs, flow efficiency emphasizes providing continual value to users. From an employee salary standpoint, paying the minimum is resource efficient, but offering competitive salaries to retain employees is flow efficient, as it ensures uninterrupted value.
I can’t help but notice parallels to lean-agile principles everywhere; it’s just how my mind works. 🤷♀️
When it comes to fostering loyalty, companies should invest their time and resources into building a strong connection with employees. Unfortunately, few organizations have cracked the code on effective loyalty incentives.
But that’s a discussion for another time.