Income Inequality, by Chance or by Choice

Economists are increasingly focusing on how income inequality plays out at the company level, but it’s important not to lose sight of how this phenomenon affects individual employees. Working for a “losing” firm can have profound implications for earnings and upward mobility. Understanding this dynamic can be difficult, because people are reluctant to share details about their earnings.

But one group of people has unique insight into how it shapes workers’ lives: financial planners.

Before moving into that line of work, Lavina Nagar, president of Maya Advisors, in Palo Alto, California, was an IT professional, and today many of her clients work for Silicon Valley tech companies. She spoke with HBR about how inequality shows up in her clients’ lives. Edited excerpts follow:

HBR: Do you see evidence of “firm inequality” when you examine clients’ finances?

Nagar: I do, but I think the situation is a little different in Silicon Valley. In the tech industry, the workforce is extremely mobile. If you’re smart and young and mobile, firms will take you; it’s not hard to move. But I can see how in slower-moving industries, workers who end up in poorly paying jobs would find it very difficult to move to a different company.

Can you think of two clients whose fortunes diverged because they went to different companies?

I have two clients who are in their mid to late thirties. Both immigrated to the United States about eight years ago. Both are highly trained technical employees whose skills are in high demand. One of them joined a start-up. It’s been successful and profitable, but because of market conditions, it hasn’t been able to go public. This client started at a lower salary, with no benefits. He has a good level of stock options—but they’re sitting there, illiquid. When the other client arrived in the U.S., he joined Amazon. He stayed there five years and then went to Facebook. He’s well-paid. There’s a very large gap between the two clients’ finances, despite similar skills. That gap could close overnight if the first client’s company gets acquired or goes public, and in that case he might be in the stronger financial position. But that’s uncertain, and that’s the risk he’s taking.

If the client at the start-up wanted to jump to Facebook, could he?

Maybe, but he’s been at a start-up for so long that Facebook would definitely question his capacity to fit in at a larger company. In a way, he’s now constrained by the choice he made. When I see a gap between people’s skills and what they might be earning at another employer, I ask: Is it by chance, or is it by choice? Silicon Valley is filled with highly qualified people who agree to lower pay at start-ups. They are betting on the future success of their firms. Other people stay at lower-paying employers because they have flexible work schedules or they like the environment. These are situations where there’s a pay disparity because someone made a conscious choice.

When do you see it happening “by chance”?

Say two people join different start-ups and put in a lot of hard work, and one company gets acquired or goes public while the other doesn’t. One person feels like he or she got nothing out of it—that the other person was in the right place at the right time. At larger companies, pay gaps can happen to people who are a little older. In technology, you get obsolete every year unless you keep up your skills. By your early forties, if you start losing that technical edge—and you’ve not risen high enough in the company—you get stuck. At that age, people don’t want to take a risk by changing jobs, because they’re worried about losing what they have. That’s a situation that feels more like chance, and over time it can have a big impact on their finances.

Do benefits play an important role in firm inequality?

A retirement plan allows you to save $18,000 a year, and at many large companies, the employer matches your contributions. That definitely adds up. Many start-ups don’t offer retirement plans. And many have less-generous health insurance options, so their employees often pay higher premiums and out-of-pocket costs. Those also add up.

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Can you guess someone’s earnings or financial situation from where they work?

If someone works in HR, accounting, or finance, it doesn’t matter as much which company they work for. Pay in those functions is much more stable; there are fewer differences between employees. Also, those workers tend to stay at the same company for longer. For engineers or product managers, it can be harder to guess how much they make. People in those functions move around more, and companies are willing to pay more for those skills, so there’s more variation in pay.

How much does equity drive firm inequality?

In Silicon Valley, it’s the biggest driver. There’s not as big a discrepancy in salaries, and if there is, it’s possible to negotiate a raise. But equity is much harder to control. An employee might get the same 100 stock options at Google, Facebook, or Yahoo. How well those companies do, and how the market perceives them—that’s up to chance, or at least it’s out of most employees’ control.

What can people do to cope with this situation of haves and have-nots?

I come from the same background as my clients—I used to work in tech. I tell them that the biggest assets you have are your education and your technical skills. You have to invest in those as you go along. Just as you make a savings goal, you need to keep your technical skills up-to-date. This is how the Valley operates. Employers will undervalue you unless you do something to make yourself valuable.The Big Idea