On Wages
measuringmeasures.blogspot.com
measuringmeasures.blogspot.com
"The plans and projects of the employers of stock regulate and direct all the most important operations of labor, and profit is the end proposed by all those plans and projects. But the rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension, of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin."
Seems like Henry Ford was on the same page.
Part of his book is a sustained critique of the mercantilist view of national wealth, which thought that increasing the stock of money (in this case, gold & silver bullion) was the measure of increasing national wealth. Wealthy nations had a positive balance of trade and increasing stores of wealth, according to mercantilists.
Smith wants to get away from the idea that money = wealth. In his view, increasing production and increasing wages are the signs of national wealth. So, state intervention into production and trade with the object of increasing the stock of bullion controlled by the state is actually counterproductive in terms of increasing national wealth, according to Smith.
In Smith's view, the state should have a mostly laissez-faire role. Setting high tariffs on imports and intervening in the market actually decrease national productivity and hurt wage levels. By decreasing competition they also allow for profit levels to rise. For both Smith (and David Ricardo later) the key effect of competition was to kill profit margins, whereas competition to increase production would raise wage levels by making the labor market competitive.
I think the linked article and Smith's ideas are both taken from a macro perspective, viewing the economy as a whole. From the national point of view, low profits and high wages and low prices are a good thing. For the individual firm, the opposite is the best: low wages, high profits, high price points.
Smith notes this contradiction between the individual capitalist businessman and the overall capitalist economy later in the same section I quoted above:
"Their superiority over the country gentleman is, not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his. It is by this superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction, that their interest, and not his, was the interest of the public. The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always in the interest of the dealers...
"The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order or men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it."
1) Paying workers as little as possible isn't the best way to maxmize business profits.
2) Paying workers way above market rates doesn't attract the best talent.
3) You should pay the fabled 10X productive engineer 10 times the salary.
So... I don't know, I think the author was trying to say to pay in the middle somewhere, but got lost on the way to the point?
Paying people very high wages (he says) retains the best talent, which turns out to be a really good investment.
The businesses he mentions that overpay mediocre engineers presumably aren't good at finding the best talent, nor at firing talent that turns out not to be good.
At least, that's how I read it.
You should create a tight-knit team of highly competent people in an environment that favors productivity. This will attract the best people. Then share the profits with them (i.e. pay them well) to make sure they stay.
Of course, this may be easier said than done, and ignores the fact that not all work is interesting.
The problem for most hackers as I see it is that you can't know someone's value until you've worked with them for awhile. Since your value isn't "public information", your salary won't get driven up through a bidding war.
If I earn $2 MM a year in salary, then in a short period of time, I could quit, retire, and work on whatever (open source, nonprofit) technical projects interest me. Companies vest stock for this reason, and I think Google does an admirable job of creating a college atmosphere full of world-class talent to retain passionate employees.
But not every company can employ Vint Cerf and Guido van Rossum and prepare gourmet meals.
Should a company try to keep their star employees under such an "independently wealthy" threshold? I imagine that Henry Ford, even paying twice the prevailing wages, didn't need to worry about this issue. 2x the average wage probably wasn't enough to quickly retire back then.
a) Pay an employee $2 MM a year in salary and have them spend it along the way.
Rather than:
b) Give them stock that vests in 4 years - worth $5 MM - and have them feel abruptly wealthy and quit.
I understand that startups usually give out equity because they don't have the cash to pay high salaries up front. But if a company does have the choice, it seems that a vesting period on equity is the common method for keeping an employee on the hook.
Most things have a straight supply curve: if you pay more for a bushel of apples, more people are going to sell apples to you and you will get more apples. So price and quantity supplied are positively related--higher price, more quantity supplied.
Labor, however, has a backwards-bending supply curve. If you offer more and more money, you'll get more and more labor up to a point. At that point, however, increasing the price of labor further will actually reduce the quantity supplied due to laborers having diminishing returns on making more money. Normally, it's couched in terms of an hourly wage: you'll get more people willing to work more hours for $60/hr compared to $40/hr, but at $6000/hr, people will just put in half a day and then go shopping to add to their BMW collection or something.
A similar concept could, as you point out, be applied to salaries. Offering $200,000 a year over $100,000 a year will sure get you more salaried employee-years, but offering $20,000,000 will start you on the backwards-bending supply curve since people will start to retire early. At least in theory--in practice, a surprising number of people who earn millions of dollars a year keep working while they can. You never hear about a star athlete earning like 50 million in a year from salary and endorsements for two years and just saying, "I got all the money I need, to hell with football". Not even Fortune 500 CEO's seem to retire after a year or two, and god knows they can afford to. Maybe it's just that fun to have a job like that, maybe people want to work, maybe people who have those kinds of jobs can't exactly do the same thing for free and they don't know what else to do with their time, and maybe people just get used to living on that kind of salary so they have to keep working to keep up their lifestyle. But the concept does seem to apply to hourly wages, even if it doesn't apply as well to salaries.
I think you do.
The problem with these sorts of "jobs" is that the athlete would probably still do it if they were working in a factory for a living. Playing football is a fun pastime.
Is that really so bad? Probably one of the first things you would do is blog about how great it is to retire. Other star programmers will see this and all line up to work at this company.
Plus, if star programmers could break out of the rat race they probably wouldn't stop programming. They would just (as you say) work on things that interest them. Think of the best free software projects and imagine if those guys didn't have to work for a living. What else could they (and others like them that haven't had the time to build things yet) build? If they build something that helps the industry then it helps the business they were working for (e.g. lowering the costs to do whatever the new software does).
Could be that my experience is not representative, but after asking what my salary expectations were, every company I ever worked for wanted to pay me a bit less than that.
I am also sure they would have done so regardless of how much I asked for, it's standard haggling practice as far as I can tell.
So think I'd rather work at a company that gave a top of the line machine to develop on, used a good development stack, had a good working environment with plenty of space, had talented coworkers and interesting projects to work on.
I'd certainly take a pay cut for that instead of working in a cramped space on an old workstation at a megacorp pushing out some small part of a massive product.
Do you have a theory why employers don't take you up on your offer? (I understand there must not be too many, given your "I'd take...")
Seriously, I've never heard of a company paying a single engineer (that is working as an individual contributor, and not in a leadership role) 10 times the salary of a "typical" engineer. If we take the salary of a typical engineer as merely $60,000 (probably an underestimate in most regions) that would imply a $600,000 salary for a "rock star" programmer.
And some will be working. </cheap jab>
He does claim that some employees are 10x more productive, but later on says there is anecdotal evidence that some are 10x more productive. Maybe the reason firms aren't paying 10x more is not because they're unable to measure the difference, or because they're mean, but what if the 10x productivity is only possible in certain sets of circumstances which don't manifest in typical large business work?
e.g. when the employee has some kind of cross-department authority to make decisions and affect large chunks of a product which they would have in a startup but which would be proxied via some other people in a larger business?
Upper management has these authority in larger businesses. They also get paid magnitudes more.
Is he paid that because he's a Senior VP, or because he's worth that? If he is worth that, how much is he worth it full stop, and how much is he worth it but only when he can amplify his efforts, direct chunks of the company, refuse compromise, etc. using the power and respect of the SVP position? How far can the two be separated?
Sort of like the average NBA shooting guard makes a few million a year, but Michael Jordan was making $30 million a year at the end.
http://www.amazon.com/Peopleware-Productive-Projects-Teams-S...
I would paste some quotes but I lost my copy.
An interesting data point he cites is the comparision between Lotus 123 version 3 and Excel 3.0: "Excel took 50 staff years to produce 649,000 lines of code. Lotus 123 took 260 staff years to produce 400,000 lines of code. [...] The difference in productivity between the two teams was more than a factor of 8." But then it will probably not be too difficult to find people who will tell you that 123 was still the better product.
[Edit: Another important point is that the these factors are between the best and the worst. The difference between the best and the median can be considerably smaller, so it is not that surprising not to see any programmers paid ten times the average.]
It's just taken me 30 days to add some new CLI functionality to a piece of code (my first ever time working with this bit of the code stack - I'm not familiar with the underlying code, the debug tools, the various ways the build can fail). I know that the standard time for an experienced CLI developer to implement the equivalent extension of functionality on this section of the code is 3 days.
My second piece of CLI functionality is on track for 15 days... so by the time that's finished I will only be 5 times worse. :)
Ego and morale. For instance, I overpaid a contractor once to take on a role at my company that was killing me. I overpaid by like 50-70%, but I got him to drop everything he was doing and turn out amazing results for me. If one of my long term staff knew what I was paying, it would've destroyed morale. "You pay him what? I'm here all the time, and you pay him for 10 hours of work half what I make all month?"
So yeah, people with me always got pretty good compensation and a hell of an enjoyable work environment, but I didn't make a habit of posting everyone's salary and expenses publicly. Also, people tend to be uncomfortable with that. I think sometimes people who have never managed people have an idea that could be easily tested or talked about with someone, but they advance their idea before doing so. There's a reason most companies don't talk pay with people - if somebody else makes more, it's going to bruise feelings and ruffle feathers and screw up morale.
I don't think thats quite right... The reason most companies don't talk pay with people is because most companies fall into the "pay as little as we can get away with" category. In that category, some people are bound to be getting paid unfairly when compared to others, so its not surprising that feelings would be hurt and feathers would be ruffled if the truth came out. If everyone is paid fairly to begin with (regardless of whether or not pay is usually public), then by definition no-one should get upset if they do find out the pay of others since it would be fair.
The real difficulty is getting everyone to agree with the same idea of "fair." For example, software engineers should be able to fairly evaluate their relative pay against other software engineers doing similar work, but they may have a difficult time fairly evaluating their pay relative to sales people.
The only thing I've ever seen that makes people not feel this way is an objective ranking system and pay scale, such as the military. You pass text X and have Y years in service you get Z dollars, with the test generally meaning more than years in service so as not to prevent stars from rising but still allowing lesser talent to earn rank with time in service. Such an atmosphere ends up divorcing pay from the job in such a way that people tend to do work for pride rather than money.
You're right to some extent, but it's not that cut and dry. Lots of companies want to pay their stars, to retain them and set a good example, it's just a little harder to evaluate talent and consistency of talent than you could imagine. Even if a guy is stellar, if you give him a huge raise, is he going to keep up his production?
For instance, an acquaintance of mine had an estimator who was absolutely brilliant, but an alcoholic. Whenever he got too much money, he'd get into hard drinking and flame out and disappear for a while, then come back later and apologize. His boss was careful not to give him too much overtime or the guy would get extra cash and flame out. (It was quite a blue collar business) So there's considerations like that. This was one of their best estimators though, when he was sober. Lots of talent.
> If everyone is paid fairly to begin with (regardless of whether or not pay is usually public), then by definition no-one should get upset if they do find out the pay of others since it would be fair.
You think a 10 year veteran is going to feel happy that some brilliant young college dropout is making the same money as him, because they're objectively producing the same amount? This is just simply not the case.
> The real difficulty is getting everyone to agree with the same idea of "fair." For example, software engineers should be able to fairly evaluate their relative pay against other software engineers doing similar work
A truism from project management - when a project is worked on by multiple people, if you ask a person what percent of the project they completed, the total is always greater than 100%. Everyone thinks they're more important than they are. Unfortunately, less talented people actually think they're better than they are. And on top of it, lots of elite brilliant people have huge ego and chips on their shoulder, so you'd see lots of jockeying to be "the highest paid" and so on.
It's not at all that simple. "More transparency" sounds good in theory, but if it really did work better, companies would switch to it. And yes, everyone wants to pay what they can, but truly, remotely smart managers want to pay and reward and take care of their stars and reward production and pay people. You keep your best people by paying them. Figuring out exactly what they're contributing is by no means easy, though, and people are never objective about the quality of their own work. Hence, ego and morale concerns.
"You pay him what? I'm here all the time, and you pay him for 10 hours of work half what I make all month?"
What strikes me is, "I'm here all the time." Why is someone who puts such a high value on merely showing up even still employed?
OTOH, this touches the original article's point, that paying well above market is an excellent away to retain employees. (Whether they're worth retaining is another matter).
Because employers put such a high value on just showing up.