I find it odd that people debate whether the U.S. should institute a federal minimum wage of $15 per hour, while almost no one (as far as I can see) is questioning the underlying premise of paying employees by the hour. I am convinced beyond a doubt that paying by the hour is a fundamentally broken system that has no chance of ever working. Here’s why.
Paying by the hour sets up a conflict of interest by incentivizing people to take longer to complete tasks. More importantly, an hourly wage imposes a productivity penalty on workers who are efficient and find ways to get things done in less time. Workers who are lazy or greedy learn quickly to game the system. Why cram more work into a 40-hour week with no financial incentive to do so? The game of hourly pay rewards those who stretch out the work over a longer block of time.
The problem is easy to see from an employer’s perspective, but the hourly wage does not serve employees either. The hourly wage sets up the conditions for a workplace culture of distrust and bitterness. Those who work hard are penalized for their hard work. Ever heard the old saying about how the best way to get something done is to give it to a busy person? The deal doesn’t work out so well for the busy person. Honest and hard-working employees are “rewarded” with more work at no additional pay. The system of hourly pay makes burnout and tension inevitable. Meanwhile, the lazy employees get exactly what they want: less work. The greedy employees also get what they want: overtime pay for work that could have been completed within a 40-hour week.
In theory, employers strive to reward more productive employees with higher hourly rates, but I don’t buy into the idea of discretionary pay increases. First, if you really have an accurate way to measure how productive every employee is, then what’s to prevent paying someone an automatic performance bonus, triggered when the employee hits a productivity quota? The truth is, many businesses do not have the necessary foundation in place to accurately gauge which workers are productive and which ones are not. But there are much bigger issues at play: favoritism and pride.
The hourly wage provides a band-aid that makes it easy to avoid dealing with the real issues in a business. If leadership doesn’t know who’s pulling their weight…why not? If there isn’t enough productive work to fill someone’s schedule, why employ that person full-time? Why not pay people in direct proportion to the results they deliver instead of the amount of time it took them to get their jobs done? The biggest and nastiest problem with the hourly wage is favoritism, which often takes the form of nepotism, sexism, racism, and other unfair discriminatory practices when deciding how much an hour of someone’s time is worth.
If you have to hide something, you are doing something morally or ethically wrong, or at the very least questionable. Companies threaten employees with termination if they disclose how much they’re being paid, and often have formal written policies stating as much. Everyone knows the real reason. Some people are secretly paid much more than others, and if everyone knew how much everyone else was getting paid, sparks would fly. But people talk. Grapevines are harder to monitor or control as an organization grows in size. It has been my experience that inequality in compensation structures creates more conflict, tension, and overall ugliness in workplaces than any other single factor.
I don’t believe there is a one-size-fits-all solution to the problem of compensating employees in a business, but I also don’t see the issue as terribly complicated. My proposal is simple: pay people by the result, not by the hour. In some cases, it makes more sense to hire a subcontractor on a per-project or per-task basis. In other cases, it may make sense to hire a full-time person with a base salary and a performance bonus. In the latter case, I believe base salaries should be minimal and provide someone enough money to survive with a meager lifestyle only, with an automatic annual cost-of-living increase across the board. I would also abolish all discretionary pay increases.
My idea is by no means innovative, radical, or even new. Salespeople have long since relied on commissions to put food on the table. If they don’t perform, they don’t eat. Consequently, salespeople have little or no patience for time-wasting meetings. They have every incentive to use their time well because they control their own hourly harvest. Factories in earlier times paid “piece rates.”
Charging For Professional Services
Personally, I do not bill by the hour for my services unless I have no choice. In my view, it makes no sense for anyone to charge an hourly rate for any kind of professional service. I don’t sell time; I sell results and deliverables. If you call yourself a professional, doesn’t being a professional include managing your own time? Doesn’t being a professional include having a reasonable idea of how long tasks should take? Doesn’t self-employment mean accepting more of the downside in exchange for more of the upside?
I can understand the underlying problem. You have scope creep, and sometimes you have tasks that are difficult to predict. But I disagree with charging hourly as a solution—because it’s not a solution. Charging by the hour is a band-aid. When we charge flat rates by the deliverable, it forces us to get better about setting expectations, defining the scope of work more clearly, and communicating proactively as soon as requests for additional work extend outside the scope. We have to put in more effort upfront, but in the end, we have a clearer thought process about our own services. Charging an hourly rate is easier because we don’t have to think that hard about scope, but in the long run, I believe hourly rates do more harm than good for both the client and the service provider.
At the end of the day, creating a culture of performance requires accountability and fairness in compensation. When people are paid in such a way that a good month for the company spells a good month for those who contributed to the bottom line, the resulting work culture is vibrant and thriving. Pay structure is not the only factor and by no means am I suggesting that my proposal will provide a one-stroke solution to every business issue. But I believe that hourly rates create a culture of mediocrity and work avoidance.
If you’d like to abolish the hourly wage at your company, or would like to explore the possibility of working with me, grab a time on my calendar and let’s talk.