It's Time to Rethink the Corporate Pyramid
I have long thought movie stars and sports heroes were drastically overpaid in comparison to their contributions to society. For example, teachers are teaching future generations of kids, and get paid pennies in comparison. And even well-paid doctors, saving lives, are paid a small fraction of what an NBA star gets paid to simply play the game of basketball.
In the last decade, these inequalities are starting to be seen in corporate workplace, as well, with ever rising CEO pay and mid-level jobs under siege due to outsourcing and technology automation. I think we need to rethink the traditional pyramid-shaped organizational structure to “right size” the work completed vs. compensation paid equation.
What is a pyramid-shaped organization?
In most hierarchical organizations, it could look something like the following. One CEO manages five EVPs who collectively manage 25 SVPs, who collectively manage 125 VPs, who collectively manage 625 directors, who collectively manage 3,125 managers. As you can see, a very wide base and a very narrow top creates a pyramid design when you visualize the whole organizational chart at once.
And, as you move up the organization, the compensation dramatically grows with each level, where a manager can make $37.5K, a director can make $75K, a VP can make $150K, an SVP can make $300K, an EVP can make $600K and a CEO can make $1.2MM+. And, depending on the size of the company, the Fortune 500 CEOs can make as much as $25MM a year, which is what salaries have increased to in the last decade or two.
Problems with the pyramid.
The first problem with the pyramid design is compensation disparity between the top of the organization to the bottom. In the example above, do we really think the CEO is worth 32 times a manager at the bottom layer of the organization? Or, in the case of a Fortune 500 company CEO, could that individual be 1,000 times more valuable than an entry-level worker? Probably not, as oftentimes the people in the trenches are doing the hardest work.
The second problem is the obstacles it creates in upward mobility. At every level of the organization, there are five times as many candidates that can be promoted into the tier above them, as illustrated in our example. Presumably, the 125 VPs are all roughly equal in terms of doing a good job, but only 25 of them will have a chance to get promoted to the next level. That is like a 20 percent chance of winning the lottery from one level to the next. Or, if you go from the bottom level to the top, you have a 32 in 100,000 chance to go from entry level to CEO. Sorry to the 99,968 others, you're out of luck -- no lotto jackpot for you.
A third problem is the impact this all has on the U.S. economy. Wealth gets concentrated in the top 1 percent of people while the 99 percent in the middle class get squeezed mercilessly, right out of existence, as inflation-based raises do not keeping up with a rapidly growing cost of living and rising consumer debt levels. This country's prosperity was built by the middle class. But with growing levels of outsourcing and disintermediation by technology, the American dream is really becoming less real and more elusive. It's a possibility for only the very few people that are able to make it all the way to the top. The old adage is you need to have money to make money. But right now, there are very few that have it, leaving everyone else no realistic chance of making it.
To fix it, build a cylinder.
To see how, we might return to my example above. There were six levels of workers, from managers all the way up to CEO. But, instead of having 80 percent of workers in the bottom tier, what if each tier was evenly distributed with 16.7 percent of the workers in each. This would be closer in shape to a cylinder than a pyramid.
Interestingly, however, that creates some management hurdles along the way. As an example, you can’t have 651 people acting as CEO or managing the company by committee. But you could empower more people to make more strategic senior decisions, with fewer levels of bureaucracy. Maybe break the business into pieces, in terms of how it is managed by department, by region, by customer, by channel or whatever.
This would require a lot more thought on how best to divide up key decision-making roles, to empower more people to take leadership positions. But if we can elect our presidents by democratic vote, maybe there is a way to run our businesses the same way?
Pay scales in the cylinder.
Next, in my example, there was a total payroll of around $194,512,500. If all 3,906 employees were treated the same, the average would be around $50,000 a person, which would be like a 33 percent raise to the 80 percent of employees in the bottom tier, and would materially improve their lifestyles. Now, I am not saying there shouldn’t be a step up on compensation with each tier. But maybe it is a 25 percent bump instead of a 100 percent bump in my example, to help make more room for the folks in the lower tiers.
And, don’t forget, in the cylinder model, we moved 80 percent of workers up into higher tiers within the cylinder, so the raises will end up being much higher when combining the salary per tier with the more people in higher tier advantages. For example, taking a quarter of the bottom tier up to $62,500 (up 67 percent), another quarter to $78,000 (up 108 percent), and a third quarter up to $94K (up 151 percent), as examples, as they were reshuffled upward within the organization.
The natural pushback here will be that there are not enough quality candidates for each tier. To that point I would say: (i) we simply need to make education or training of those people more affordable and more accessible; and (ii) we have a ton of “underemployed” people on the sidelines waiting to get back into the game in a much more material way. Of course, the current people at the top won’t like this model, as it means materially scaling back on their compensation, but that is the price of helping to rebuild our middle class. Instead of having one billionaire, Jeff Bezos, at the top, I sure he will live just fine on multimillions of dollars a year, as an example.
So, the questions we are attempting to answer here include, Why should the vast majority of the corporate compensation spoils go to elite few, when a business is built on the shoulders of many? How do we get skyrocketing executive salaries in check? How do we save our middle class, whose ranks are being attritted daily? I am just trying to think out of the box on how best to reinvent organizational design for a modern 21st-century business. Working together, we may just figure out a way for the anonymous John Doe to get paid the same as Tim Cook, Lebron James or Tom Cruise.