A better way to pay workers

By Shamus Khan

It starts with recognising that the success of a business depends on the team, rather than individuals

In 2007, after the venerable New York law firm Dewey Ballantine merged with another firm, LeBoeuf, Lamb, Greene & MacRae, commentators heralded the creation of a “global super firm.” As James B. Stewart wrote in the magazine, the combined firm, Dewey & LeBoeuf, recruited and retained top attorneys with big paychecks, and rewarded these rainmakers with extra pay when they brought lucrative business to the firm. Following the financial crisis, Dewey & LeBoeuf’s expensive contracts with individual stars crippled the firm, Stewart wrote, and played a big role in forcing it to file for bankruptcy, in 2012. Today, people look back and nod knowingly at how unwise the firm’s deals were. But they reflect a simple, deeply held view: you have to pay for talent.

This resonates with the notion—especially popular in American culture—that innovation emerges from the minds of individual geniuses. But what if it doesn’t? In the magazine in 2002, Malcolm Gladwell wrote about the sociologist Randall Collins, who, in tracing the global history of philosophy, found only three thinkers whose ideas could reasonably be said to have developed alone: the first-century Taoist metaphysician Wang Ch’ung and, in the fourteenth century, the Zen mystic Bassui Tokusho and the Arab philosopher Ibn Khaldun. Other philosophical ideas—like those of Confucianism, psychoanalysis, German idealism, and postmodernism—developed as a result of dialogue.

Recent research has reinforced Gladwell’s argument. Brian Uzzi and Jarrett Spiro, in the early aughts, studied why some Broadway musicals succeed and others flop. They gathered information on people who had worked on almost five hundred musicals, from 1945 to 1989. The most obvious theory of success was that, if you get the best director, composer, lyricist, librettist, choreographer, and producer, you’ll have a hit. Instead, Uzzi and Spiro showed, in a 2005 paper in the American Journal of Sociology, that individual superstars didn’t do much to explain a musical’s success; the relationships among all the people working on a production mattered much more. Specifically, the researchers found that successful teams combined people who had previously worked together with newcomers. Uzzi and Spiro concluded, “The success of a musical production depends on the team, rather than individuals.”

This study is part of a growing body of research—with important implications for businesses—into what makes members of groups work well together. Anita Woolley and her colleagues, writing in Science in 2010, described research in which they put people in groups and directed them to solve tasks. They found that a group’s performance was related to the intelligence of group members, but not much. What mattered far more was whether group members were sensitive to one another, whether people participated equally in conversations, and whether the group included a high proportion of women.

A corporation is little more than a giant group; social-science research, then, may suggest that corporate success has less to do with attracting the smartest talent than with getting people together in the right arrangements. This means that businesses may well be getting their compensation schemes wrong. Companies generally rely on performance-based pay, compensating workers based on the estimated value that they add to corporate performance. Management experts have long recognized a problem with this approach: the difficulty of estimating how much value a person adds. But there might be another, more basic problem: added value may have more to do with group dynamics than with the achievements of individual employees—which means that employees should perhaps be compensated accordingly.

How else might workers be paid? The Cravath system—pioneered almost a century ago at the firm Cravath, Swaine & Moore—calls for lawyers to be paid in “lockstep,” according to seniority. The aim is to create a culture of coöperation that favors collective well-being over self-interest. This model isn’t confined to élite law firms. With an approach called “gainsharing,” for example, companies quantify the value of their increased productivity over a period of time and share it with workers. A 1996 book, “Inside Teams,” by Richard S. Wellins, William C. Byham, and George R. Dixon, describes how Miller Brewing had used the approach with certain groups at its plants, improving not only workers’ pay but also their productivity.

Attentiveness to team dynamics isn’t the only aspect of the Cravath system that works. Dewey & LeBoeuf had enormous differences in partner pay: the highest-paid partner made twenty-five times as much as the lowest-paid partner, Peter Lattman wrote in the Times. Wage inequalities are common in systems that seek to reward individuals. But, in team-oriented wage systems, those gaps are intentionally tightened. At Cravath, no partner makes more than three times as much as any other partner. The economist Adam Smith theorized that the pursuit of self-interest would augment the collective wealth and the good of communities. But Dewey & LeBoeuf collapsed, and Cravath remains one of the most profitable law firms in the world—and partners at lockstep firms like Cravath are among the happiest in their profession. “What these firms seem to have—and what Dewey & LeBoeuf so manifestly lacked—is a culture that fosters coöperation and mutual respect,” Stewart wrote.

This shouldn’t come as a surprise. Economists have found that workers who discover that they make more than their peers aren’t any happier in their jobs, but those who discover that they make less report considerably less job satisfaction. Big wage gaps among people who work together (assuming similar experience levels, qualifications, and skills) don’t necessarily mean that the highest-paid person is the best one; instead, a gap might mean that he has simply appropriated more of the value created by the whole group. In the long run, that can be bad not only for the workers but for the company itself.

Shamus Khan is a sociology professor at Columbia University and the author of “Privilege: The Making of an Adolescent Élite at St. Paul’s School