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How to Set Wages: What is “Fair”?

Marketplace.jpgI have received two contradictory letters about the budget cuts: one from an administrator who said that even the idea of cutting the wages/benefits of Dartmouth’s lowest paid employees left her shaking her head. The second came from a faculty member who was angry that his total compensation had been trimmed by thousands of dollars due to the increased cost of the College’s health insurance plan, the raising of co-pays/deductibles, and the reduction in his pension contribution.

Both correspondents based their concern on some abstract notion of fairness.

Fairness is a slippery concept. Fortunately in the business world, it is not something that comes up often. Can you name the concept that replaces it when an employer fixes wages and benefits for employees? The answer should be obvious, but in my experience in Hanover, it eludes most people: supply and demand in the open market.

Just as I don’t ask whether the price of a bottle of milk at the Hanover Food Co-op is fair — I simply evaluate if the milk is worth its listed price to me; if it is not, I buy something else or shop elsewhere — so, too, do I negotiate wages with my employees.

Per RSA 279:21, the minimum hourly wage in New Hampshire is $7.25, but if you put an ad in the Valley News offering a full-time job for anything less than $9.00, you will not get a response. Believe me, we have tried. My lowest paid full-time employees now make $9.50/hour, with benefits and medical insurance that are well beyond the legal minimums. Of course, most staff members make substantially more.

Supply and demand dictate this pricing of labor. I need to pay enough in order that people are happy to work in my business, and so that they won’t leave to work elsewhere. Fairness has nothing to do with it, dearie. Wages are pragmatically set in order to keep people working with us. That said, the wage rate can shift. We recently lost an employee to a better paying competitor, and as a result we adjusted upwards the salaries of all staff members in that area.

How does this apply to Dartmouth? Well, supply and demand works at the College, too — even if the administration does not acknowledge it. The professor who wrote to me could well leave for another institution which pays more to its faculty. A smart institution pays the going rate to faculty and to staff, and as a result it keeps the people it needs. Dartmouth, par contre, pays support staff based on some abstract notion of fairness, and today, after the budget cuts, it is still grossly over-paying support staff members — who know full well that their friends are working for local companies at wages and benefit levels much below what they are making at Dartmouth. Yet at the same time, the College is now under-paying its best faculty, who know the opposite about their own colleagues at other schools. The end result will be that the College will lose some of its top faculty members, a loss that is not nearly compensated by the good feeling that certain progressive people seem to get from over-paying Dartmouth’s 3,000+ non-faculty support staff members.

Let the market dictate wages and benefits. There are consulting firms that can tell us exactly where our wages need to be. If Dartmouth were to follow their advice, three things would occur: all of our employees would earn the same income as their friends and colleagues in similar positions make outside the Dartmouth Bubble; the College would save many millions of dollars; and we would keep our best faculty members. To not follow this advice will do (and has already done) lasting damage to our great institution.

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