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You know, growing up, I think many people liked peanut butter. Obviously, those that are allergic to it, that's
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one thing. But now peanut butter is being used as a term connected with the business world and
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with pay raises. Interesting combination, to say the least. We talk about it more with Peter Capelli,
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who's a professor of management here at the Wharton School. Peter, I loved peanut butter growing up, but
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I think in the case of many people, they're not liking how peanut butter, the term
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is being used right now. Yeah. And just to be clear, we're probably talking about smooth rather than crunchy peanut butter.
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Yes. All right. So take us into this. The term peanut butter raise is kind of in the vernacular of companies right now in
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terms of the type of pay raise that they're giving. Explain this. Yeah. Yeah. Well, I think it's not actually not a
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new term. As I recall, this may be 20 years ago, you heard this term before. And the idea is, if you have merit
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pay money to distribute, so our annual pay increases, the budget is 3% or 2%. It's been like that for a very long
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time. Do we spread it equally around to everybody? So everybody gets a 2% increase or
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do we make it crunchy? So some people get zero and some people get 6%, right? That's the question.
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And the peanut butter spread approach means we're going to basically give it to everybody equally
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or more or less equally. So are these types of pay raises then considered to be fair when you're giving them
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to everybody and maybe somebody who has done more for the company is not getting as
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much or getting anything at all? Yeah, I think it is the right question. And it is complicated by the fact that
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these increases are so modest, right? So they are this year going to be the average below the rate of inflation, right?
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So that means that if everybody got just the merit pay increase, they're all losing slightly
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to inflation. And so the question, one way to think of it is, as you describe it, you
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often hear executives say this, the best performers should get more. But how about those employees who are doing
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just what you're telling them to do? You got an office job, you don't have a lot of discretion over what you do.
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Do you give them a zero? In which case they're taking a 3% real income cut, right?
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Because inflation is at least 3% or so. So one fairness idea is to say, look, people who are doing fine at their job,
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they're doing okay, they're doing what you want them to do. They shouldn't get punished because they don't even
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have the opportunity to do more. But the other side is, as you say, we have some people in some jobs who
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are doing really well. Shouldn't they get more than inflation? But there's the rub.
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We don't have very much money to spend. All right. So let's look at this from the company's
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perspective for a second. Is there some dynamic within the company, whether it be philosophy, whether it be the bottom
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line during a quarter or during a fiscal year, where a company would trend to go
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one way or the other? Well, I think at the moment in the U.S., because we're so concerned about inflation,
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the idea of really squeezing your employees and that is giving some of them 0% increases in the other folks so you can
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have more to distribute elsewhere is likely to really get up the nose of employees.
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And so what you're thinking is, if we differentiate a lot, is it really going to
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motivate our best performers to do a lot more? So we're going to give some people 0%,
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some people 6%. And the answer might be maybe, but these increases are so modest, you know, that it
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probably might not do an awful lot for them. And then on the other hand, you're thinking
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about the people who'd be irritated by taking a pay cut and they haven't done anything
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wrong. So I think the reason that this term has come up a lot now is the inclination, I think, for organizations to try to
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do more peanut butter spreading. But the folks at the top really don't like to do that.
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But the people at the bottom are telling them, hey, you know, you've got a lot of irritated employees if you don't.
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Does the type of labor market that we have right now factor into these decisions being
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made in this direction? Yeah, I mean, if we think the labor market is really soft, and I think it
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probably still is, although new data today came in coming out showing a big jump in
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job openings, so maybe it will change quickly. But, you know, you can squeeze your employees
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more in a down market. They can't quit. More important, they probably feel better about just
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having a job. Right. And, you know, you start to feel worse if you think there are lots more options
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around you. So you probably could squeeze them more if you wanted. But then again, the question is squeezing them
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for what? And if it's to be able to demonstrate to your high performers that we really are
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paying attention to you and looking after you, you know, maybe that is what they want.
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I don't know if there's research about this, but, you know, I guess then the potential
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reaction of having this peanut butter spreading of pay raises is whether or not the people
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at the higher end who have been more successful potentially look to go someplace else over
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the next 6 to 12 months because they feel like they have been undervalued to a degree.
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Yeah, I think that's right. I think on the other hand, if we're thinking about this is the time you could
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squeeze your employees, that's also true for your high potential employees, right?
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They don't have a lot of places to go right now, so you probably could squeeze them.
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But I think the complication is, you know, who are you going to squeeze here, right?
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I mean, the problem is companies are allocating very little money to employees. And maybe a better way to do this
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is to try to rely more on bonuses as a way to increase people's motivation. Yeah.
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Going back to somewhat at the beginning of the conversation, you said this has been around
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for a little while now. Is this realistically a style that has been in play constantly through the last couple of
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decades, or is this kind of hit and miss depending on some of the dynamics in the economy?
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Well, you know, I guess we should say first, I'm not exactly sure what on average
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companies are doing right now. You know, the stories about peanut butter raises were kind of pejorative, right?
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I mean, they weren't saying, oh, this is a great thing, we should all do it. So I think, you know, the debate has
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been around forever. I think you would have seen a decade or two, two decades or so ago, much
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more concerned about trying to treat everybody kind of fairly. And, you know, since in the last generation
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or so, much more concerned about trying to differentiate employment broadly and rewards in particular.
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But then we come back to this issue of, you know, if your jobs aren't allowing you to do very much that's creative, and
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we're just asking you to do regular office work, why shouldn't you get at least the
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average pay? Right. Exactly. You haven't done anything. Yeah. Peter, thanks very much for your time today.
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Wish you all the best. And thanks again for spending a few moments. Peter Capelli, Management Professor here at the Wharton
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School.