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WORKSPAN
WORKSPAN DAILY |

Increasing Employees’ Disposable Income Pays Dividends at PayPal


kupicoo/iStock


PayPal has more than held its own throughout the coronavirus pandemic.

 

In the second quarter of 2020, for example, the San Jose, California-based online payment company reported record revenue and earnings.

 

Of course, the arrival of COVID-19 and the forced isolation that followed has created a surge in online shopping and digital payments; a boom that clearly benefitted PayPal and other companies of its kind.  

 

But PayPal was doing pretty well before the pandemic. In 2019, for instance, the company achieved then-records for revenue, net income and operating margin performance. PayPal added more than 37 million net new active accounts in 2019, bringing total active accounts at that time up to 305 million; an increase of 14% year over year, according to PayPal’s fourth quarter and 2019 full year results.

 

2019 also saw PayPal and CEO Dan Schulman launch an initiative that he cites as a key factor in the company’s continued growth.

 

That year, Schulman decided to do a research study on compensation within PayPal, “because I thought I was going to get back this great information that I was going to talk about at an employee meeting about how well we pay,” he said in a 2020 TED Talk interview.

 

“And what I found, unfortunately, like the rest of the world, even though we paid at market or above market, 60% of our operations personnel — our entry-level employees, our hourly workers — faced the same thing. They struggled to make ends meet. And that was simply unacceptable for me.”

 

Net disposable income — what’s left after paying for basics such as food, shelter and health care — sat at around 4% to 6% for these employees. Schulman’s goal was to bring that number closer to 20%. He set out to do so by increasing the company’s contribution to health care costs by more than 50%, increasing pay by an average of 7% and giving all employees restricted stock units.

 

By the end of 2020, the average net disposable income among PayPal employees had risen to 16%, and the company is also offering financial education designed to help workers manage their money and increase their savings.

 

The organization’s recent financial performance suggests that Schulman’s move has paid off, and he sees PayPal’s approach to compensation as a competitive advantage going forward.

 

“ … You take care of your employees and other things naturally flow from that. They love being a part of that company. They take care of customers better. And all of those things inevitably accrue to the benefit of a company in terms of how it’s trying to serve its ultimate end market.”

 

Given the results that PayPal has seen since implementing this novel compensation strategy, will other organizations rethink their compensation approach as a way to help improve their employees’ financial well-being?

 

The answer “depends on the industry and the organization’s profitability,” said Vlad Gogish, a principal in Mercer’s career business. “When a company struggles or has very thin margins, it is difficult to argue that increased spending will lead to stronger business results.”

 

Periodic reviews of the organization’s total rewards — not just compensation and benefits in isolation — is a best practice, he said.

 

“However, where we see divergence is in the response to those reviews, especially if the findings result in a proposal to increase compensation or benefits.”

 

Ultimately, whether or not to increase compensation and/or benefits, and what variables to use in making that choice is “a philosophical decision to some extent,” said Gogish, “driven by the company’s financial model.”

 

Companies and compensation leaders considering a compensation model like the one PayPal has adopted must weigh the broader implications to employee compensation that such a move could have, he said.

 

“Most organizations today pay based on the cost of labor. Shifting to a disposable income target means that cost of living becomes more of a consideration. Larger, national organizations in particular should think about how employee decisions on where to live should or should not be factored into this approach,” said Gogish.

 

“For example, if a company’s employees have the option to work from a state without an income tax, should they be paid less — all else being equal — since the same amount of salary would yield a higher disposable income? Those are the types of issues that are likely to surface.”

 

About the Author 

 Mark McGraw is the managing editor of Workspan. 


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