Pay Distribution: Maybe It's Time To Think Outside The Bell Curve

by David Creelman | Posted | Total Rewards

Pay Distribution: Maybe It\'s Time To Think Outside The Bell Curve

What do you think the pay distribution for a job should be? If you were to guess at what a normal compensation model looked like, what would it be? Perhaps something like Figure 1?

Figure 1: Histogram of pay levels

histogam of pay levels

This is the famous normal distribution or bell-shaped curve. Everyone likes this distribution because it's common and simple. However, pay distributions don't necessarily work out this way.

Case in point: Let's take a look at how professional soccer players are paid.

Figure 2: Histogram of guaranteed pay of Major League Soccer players

histogam guaranteed pay major league soccer players

This 2012 data from the Major League Soccer Players Union shows the guaranteed compensation for each player. We can see the distribution is not anything like a bell-curve. There is a little blip at the far right-hand side because there are 12 players paid above $800,000.

If we were to stretch out the x-axis to show everyone, it would have to reach more than five times as far to accommodate Henry Thierry at $5.6 million (David Beckman earns just a few cents below $4 million).

Should pay distribution mimic Major League Soccer?

What does the average professional soccer player make? That would be $181,000. However, in this kind of distribution the average doesn't really tell us anything. The median pay is $85,000; far less than the average. The mode (the most common pay) is $34,000.

You can't summarize this distribution as neatly as you can with a normal distribution. Let me stress that again, the seemingly reasonable question of "What's the average pay?" doesn't generate a particularly useful answer.

What are the implications of this Major League Soccer approach? First, let's not jump to the conclusion that you should pay like this. The structure of the labor market for professional soccer players may be quite different from a job in your organization.

Furthermore, from society's point of view, this kind of highly unequal outcome is harmful (see The Price of Inequality by Joseph Stiglitz). The real implication is that we shouldn't assume that pay distribution will be a bell curve, or that it should be a bell curve.

In soccer there is a very significant premium for stars. The top star gets paid significantly more from the second best star; the third best significantly less still. It may be that there are some jobs in your organization where being a star matters. Perhaps a university needs some star researchers, a fashion firm a star designer, and an IT firm some star programmers.

If the same pay dynamics exist in some of your jobs as in soccer then you may want to pay them quite differently than your normal pay system.

Is bimodal pay the answer?

Dr. Jerry Harvey, best known for his book The Abilene Paradox, suggests that performance on well-functioning teams is bimodal with most of the people doing a great job, and just a handful doing a poor job.

The obvious conclusion would be to have bimodal pay as well, with most people on the team getting essentially the same, and the low performers getting less. The twist here is that Harvey thinks the low performers are useful for various reasons, such as creating a necessary tension and providing a benchmark that reminds people why they need to be better.

Whatever your take on this particular puzzle, the notion that pay might be bimodal rather than normal is worth considering (see Figure 3).

Figure 3: A bimodal pay distribution

bimodal pay distribution

Even if we return to normal distributions, John Boudreau argues that the range of performance of airline pilots is rather narrow and that of flight attendants is rather broad. We might expect the pay distribution to follow that performance distribution.

Wrapping it all up

There is a lot to be said for the simplicity of the normal distribution. If it works well enough, we might just leave it alone. However, we should be aware that there is nothing in nature that insists a distribution will be normal, or in management that it should be normal.

Pay distributions can be shaped by power laws as seen in professional soccer players, bimodal as Dr. Harvey suggests, or something else altogether. We've been told we need to think outside the box. We also need to be able to think outside the bell.

Your Turn: What do you think about bimodal pay (i.e., most people on the team getting essentially the same, and the low performers getting less)?

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