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Comment by 6gvONxR4sf7o | Hacker News Reader

> Finally, we (or basically I) have not done a good enough job of high rewards for high performance.

15 years later, this is still a widespread problem everywhere. People don't capture the full value of their labor (which makes a sort of sense, given imperfect information and how risk is allocated), which leads to people not being incentivized to increase the value of their labor.

We've all heard stories about people being extra efficient and getting rewarded with raised expectations and maybe a paltry raise. If people were really incentivized to do their best work, I imagine we'd get a better world.

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> which makes a sort of sense, given imperfect information and how risk is allocated

This doesn't just make a sort of sense to me, it makes perfect sense.

People trade their labor at a lower rate for higher stability (less risk). The people who start companies, find capital, and distribute that capital in ways that increase the value of the company have taken on more risk (how significant varies case-by-case and usually is a natural market cap ceiling to the total value the owners can extract ahead of employees).

If the company I work at gives me shares in that company, I want the company to pay less for my labor (and everyone's) if my belief is that collectively all employees output will accelerate my own wealth creation when I sell my shares in the company. The share becomes a transitive store of value I believe my own labor alone will never be able to keep up with, and I want to make sure the value it's accumulating is not diminished because the company is paying out the full capital value of everyone's labor. Then there would be very little incentive for me to take the shares in the first place, and, honestly, very little incentive for anyone to start a company (why take on that risk if there's no payout in excess of just joining another company?).

Feels like many are stuck in this dichotomy between choosing stable rates or venturing out on your own where more middle ground should probably exist. Employee incentives should probably align more

Isn't RSU the middle ground already? You can part of your compensation in salary, part in ownership of the company. If you work and the company does well, you do better.

The % of comp in RSU raises as you get promoted to higher levels, where you (theoretically at least) actually have more impact on the success of the company.

If my contributions increase the value of a $100M company by 10%, there's no way my RSUs' value is going to increase by $10M (unless I own 100% of the company). In a realistic scenario of $100k/yr of RSUs, even this near-impossible mythical single-person contribution of 10% would only net me $10k/yr.

RSUs go a long way, but don't totally align the incentives.

The value proposition is that RSUs goes up more than your 10% contribution, so using MSFT's stock price, $100k at the start of 2021 is worth some $150k by the end of it. Still not $10mm but better than $10k. The change in value is +$70k if you were at TSLA. This only works while the stock is going up though. If you were at FB, you'd be underwater so that $100k of RSUs is now only worth $80k, but at least RSUs mean you can still get $80k out of them if you had to liquidate (unlike options which have a strike price and can even be worth negative dollars, depending on your tax situation).

At a company of, say, 100,000 employees, how much my individual contribution will makes the stock price go up is debatable, but getting more of those RSUs will materially boost my TC, where at upper levels the majority of TC is stock-based.

It makes sense qualitatively, but the numbers no longer add up: https://cdn.statcdn.com/Infographic/images/normal/23410.jpeg

Even considering the risk-neutral compensation, this is not how much employment ought to be discounted. Especially not in the U.S. where many states have at-will laws.

All states are at-will states except for Montana in limited circumstances.

That is not a graph for software devs.

What do you think it looks like for software developers?

What about fairness?

Bezos' risk of spending other people's money rewarded him with billions.

Warehouse workers risk of personal injury are rewarded with starvation wages.

> People don't capture the full value of their labor

Why would you expect people to capture the full value of their labor?

Imagine you operate a business. You do the math and determine that hiring a new employee will cost you $100K/year, but it will bring in $100K/year of revenue. In other words, the employee would capture the full value that they create (assuming nothing goes wrong).

Do you hire that employee? Of course not. It doesn't make any business sense. It's more work for you, more risk for the company, and most importantly it provide $0 financial value to the company. It's an easy no.

Now if you can hire someone for $100K and their addition will bring in $150K, that's a different story.

You can't expect to capture the full value of your labor as an employee. However, you're also free from capturing the full value of the losses you might create. If you fail to ship your objectives or you accidentally drop the main DB and cost the company $100K, you don't receive a bill for the negative value you created. You get to keep your paychecks.

> which leads to people not being incentivized to increase the value of their labor.

This doesn't make sense at all. People increase the value of their labor all the time because it leads to more and better opportunities and gives more leverage in future negotiations.

You don't have to capture the "full value" of your labor to have an incentive to improve.

>Do you hire that employee? Of course not. It doesn't make any business sense. It's more work for you, more risk for the company, and most importantly it provide $0 financial value to the company. It's an easy no.

That's what the model predicts, but it's unfortunately not how companies beyond a certain size work in practice. Hiring decisions are not made by the business owner to increase profit, but middle-ranking members of the hierarchy who have their own parallel goals.

Businesses can, and do, regularly hire employees that bring in zero or negative value. Often, these people will make up more than 50% of the company by headcount, and the only reason the company still turns a profit is because their existence is subsidised by a small minority of hyper-productive people.

There is usually no way to quantify how much value each developer is contributing. I mean, if your job for 6 months is to go through your company’s software and update to a new API since an old one is getting deprecated, how much business value did you produce? Yet you did something that needed to be done.

There are people who take on big, flashy projects that generate a lot of measurable value, and there are people who do the boring stuff that needs to be done too. Without one, you don’t get the other.

> Businesses can, and do, regularly hire employees that bring in zero or negative value. Often, these people will make up more than 50% of the company by headcount, and the only reason the company still turns a profit is because their existence is subsidised by a small minority of hyper-productive people.

Or the company has a near monopoly over certain lucrative markets.

I think at this point it's unfair if we were to say the specific people are the issue. A big business has a lot of required components in order to keep running, and some of them are not directly revenue generating, but you still need most of them. That's a value of small companies, being so lean you can be hyper-focused and efficient. Bigger companies can perform at scales smaller ones can't, but that comes at the cost of inefficiencies of orchestrating the bigger operation. Just getting all the people aligned to do the things the business needs them to do is a huge and messy cost that smaller companies don't have, but it's required else your conglomerate would fall apart.

Honestly, after working at my previous employer (Blackmagic Design in Port Melbourne, 500+ employees across many products), I just can't believe that.

There was no HR, no management class, no purchasing agents or head of IT, maybe one hour of meetings a month and everything worked ridiculously, buttery smoothly.

We built the products that needed building, everyone pitched in and morale was generally high.

I could name one person who I'd consider had a "bullshit job", and another who's job was semi-bullshit. This is out of maybe 100 people I met across multiple departments.

I don't think we disagree, I think your example fits with what I was saying but I didn't really explain what I meant by required components. It's going to be different for every company too. Like at Blackmagic Design, there is probably a team handling the accounting, and that doesn't directly generate profit by putting products in the hands of consumers but it's a required component to operate with 500+ employees. I really just meant that bigger companies can have more cost center requirements.

I agree that a lot of businesses can cut down on bullshit process and bullshit jobs and keep running fine, but there's a lot of "cost centre" style jobs that are non-negotiable, especially when it comes to compliance and government reporting. Compliance and reporting is a business requirement that the software industry very rarely has but I'm expecting to see that change over the next decade. Accounting kind of falls in that category actually.

An aside, Blackmagic sounds great to work at. I avoid big companies specifically to avoid the bullshit process and people, so that sounds like a dream.

Yeah, of course!

There was an accounting team, of course, as well as support and the most competent IT department on planet Earth (consisting of two guys for the whole company), but they were nimble and didn't overreach in terms of their authority.

Legal was outsourced, AFAIK.

>An aside, Blackmagic sounds great to work at.

It really was. The culture was amazing.

> There was no HR

In a company with no HR, whose role is it to deal with employment contracts, ensure the company's compliance with labour laws and deal with personnel issues (which, at 500+ employees, probably arise more frequently than either of us would think)?

I'm assuming the contracts were all written up by a competent lawyer, once, and then just had the titles and salaries slightly changed from person-to-person.

Interviews were handled by the team that the new hire would be joining, and most personnel issues were handled locally too. Very rarely they'd be kicked up the chain to the department head, but honestly these issues were very rare.

Seriously, without an "HR police" to complain to, most people would just deal with interpersonal issues like adults and move on.

Who handles the sexual harassment complaints and the illegal hiring discrimination?

Who handles health insurance and 401k match?

>Who handles health insurance and 401k match?

The Federal Government.

>Who handles the sexual harassment complaints and the illegal hiring discrimination?

Team leads, or lawyers if it gets far enough. You don't need a team of people on full-time for an event that happens twice a year.

I think the GP is from Australia, where a lot of that stuff is handled by government departments and labour laws. We have lots of labour protection laws that as an employee you can action through the Ombudsman, a federal department. The "401k" is called super anuation and is handled as a standardized legal requirement by the federal government, which simplifies it a lot. Because the ombudsman has teeth, they are pretty good at compelling businesses to comply with labour laws. Health care and so on are also all handled by the government or privately by the individual, rather than being tied to your company.

There's a theoretical response and a practical response.

In theory, if you had a competitive and fungible marketplace where a specific employee would boost profits by $100k, and you offered her a salary of $80k, someone else would outbid you with $90k, and someone else would outbid them at $95k etc. Even if the "margins" are low, no one is going to pass up on free money.

In practice, the labor marketplace isn't nearly competitive or fungible enough to expect the above. However, there is still a very different problem. Even if the average salary is "fair", people get rewarded a tiny fraction of the value they generate. Imagine if I'm working at Google and I find a way to save Google $10M/year via improved hardware efficiency. Despite the fact that this isn't part of my job description. How much of that $10M would I get in the form of a salary increase or bonus? A pretty darn tiny amount. 1% if I'm lucky. Is it worth it? Probably not. I might as well just do what my manager asks me to do, and spend my extra time learning Haskell and going to happy hours. This is pretty much what GP was alluding to. If companies started giving people a significant fraction of the value they generate, corporate life would change dramatically.

> where a specific employee would boost profits by $100k

This isn't a good model. Boosting your company's profit by 100k doesn't mean they can boost any company's profit by 100k. If they could, they'd capture a lot more of the 100k.

> Imagine if I'm working at Google and I find a way to save Google $10M/year via improved hardware efficiency.

The sole reason while your research generates millions of dollars of year of saving is because it would be applied at Google scale. So your work times google scale = $10M/year.

As stated above, you deserve to be compensated for a part of your work. But pretending that your compensation should also include the "Google scale" factor - which you did not contribute to in any meaningful way - is not right.

If you want your compensation to be based on the outcome of your work on the company as a whole, you need to work for equity and not for salary, and accept the associated risks - which might include getting nothing for a lot of efforts. Of course, your compensation will then also include the work made by others, which you might like or dislike.

If you want to be able to precisely measure your own contribution, exclude any other factors, and capture almost all of it, you probably are better of creating your own solo-founder type of company and stay solo. When 1+1=3, it's hard to precisely pinpoint which "1" generated the extra value.

> But pretending that your compensation should also include the "Google scale" factor - which you did not contribute to in any meaningful way - is not right.

If I can make $1 on my own, and you can make $1 on your own, but together we can make $4, we each deserve $2. I don't deserve $3, even though I turned your lone $1 into $4. But I also don't deserve just $1, because I did contribute to the scale factor. In todays world, it seems like we'd each get $1.

More accurately: If me and me friends lemonade stands makes $1 million on it's own and your lemonade stands makes $1 on it's own. We bring them together and make $1.1 million because we had an amazing product and you are an amazing sales guy (yay!).

How do we divide the extra $100k. Are you pretending that you should get $50k (50 thousands times what you were doing alone) and we should get $50k (1.005 times what we were doing without you) as well ? That does not seem very fair to me at all.

Some of that extra $100k should probably go to the company, but sales is maybe not the best example because salespeople are quite often paid on a base+commission basis and would easily get a fixed percentage of all of their sales for the year. It seems high for sr engineers to make $500k/yr but it should be noted that senior sales people can also make $500k/yr if they're doing well!

Not necessarily. If you add a 3rd person, C, that also can make $1 alone, but $5 with person A, then person A's worth is somewhere between $2 and $3 if my intuition is right (i.e. B would need to agree to uneven split to convince A to work with them). This falls under computational social choice field (coalition formation), and is not a straightforward thing to compute.

The analogy doesn't apply. In this case, there are thousands of other employees and you together making $4. Not just two people.

> The sole reason while your research generates millions of dollars of year of saving is because it would be applied at Google scale. So your work times google scale = $10M/year.

"Google scale" wouldn't exist without the workers that make it possible. Seems to me like they can get more of that value they enable than they currently do.

What a silly argument, decoupling the company's status from the contributions of its high-performing employees as if they're independent events.

Google probably runs at 25% profit margin, so $10M/y savings equate to $40M/y additional revenue. A Google cloud sales rep probably makes at least 5% sales commission, so they'd net at least $2M for equivalent sales (which they would only able to achieve because of Google scale, but if you make that argument with them, good luck keeping them employed). Conversely, a SWE delivering $10M/y savings would probably only see a small bump on their refreshers and bonus.

> People don't capture the full value of their labor (which makes a sort of sense, given imperfect information and how risk is allocated),

I think it is primarily due to de-risking. You agree with your employer that the biggest percentage of your income will be fixed and independent of how much value the company produced (be it profits or share appreciation or whatever). This makes sense because your life has high fixed costs, and your cash-flow cannot allow for years when you make zero (or even a negative amount), even if in the next one you would make 5 times your current salary.

> which leads to people not being incentivized to increase the value of their labor.

Don't think this is necessarily true. I would love to walk into an apple orchard now and spend an hour picking if I could keep 25% of the apples.

> If people were really incentivized to do their best work, I imagine we'd get a better world.

Assuming wages are a function of the free market. And the less mobile people are, the less job-applicants exist, and the higher wages need to be to poach. Incentivizing for good work might have diminishing returns after a certain point.

I love it, we need everyone to have poverty wages and be insecure in case the poor multinational corporations might have difficulty underpaying people

Is it actually a problem everywhere? I wouldn’t be surprised if it’s not written about much on HN, but my guess is that at least some of the big tech companies will sometimes do large off-cycle performance bonuses. It may depend a lot on the work though, e.g. doing the thing the company actually cares about vs what they say they want or needing to fight one’s case a lot, or needing to have product focused improvements rather than some equivalent savings from efficiency.

This is the entire foundation of capitalism. The idea is that people who own capital only reward other people for their time who help add to their capital. If companies distributed all of the gains in terms of stock awards to employees, you will see very different asset distribution in our society.

'Capitalism' is neither theoretically, nor in practice, limited to "only reward people for their time". Some industries where the labor is low-skilled trend that way.

The basic concept of capitalism is that there are capital owners, and they hire workers who use that capital to generate value. The capital owners receive all of that value and then pay the workers for their time.

This is not a comprehensive description of capitalism but it is the low level idea. Obviously there is a distribution of real world behaviors.

Capitalism is about trade and industry being done by private owners, instead of by the state. It's a decentralized economic system that acknowledges a state's inability to fully plan the economy due to imperfect information.

It's not anchored in labor exploitation.

> Capitalism is about trade and industry being done by private owners, instead of by the state. It's a decentralized economic system that acknowledges a state's inability to fully plan the economy due to imperfect information.

> The basic concept of capitalism is that there are capital owners, and they hire workers who use that capital to generate value. The capital owners receive all of that value and then pay the workers for their time.

These are both true.

capitalism cannot differentiate between efficiency and exploitation

State capitalism exists.

This is incorrect. You can have state capitalism as well as non-state non-capitalism (worker-owned cooperatives are a common example of private non-capitalism).

As the person you're responding to said, capitalism is the philosophy that concentration of capital should be rewarded. It's that simple.

Whether the state or private magnates concentrate the capital and get rewarded for it is irrelevant.

That's only the 'basic concept of capitalism' at a reductionist Fischer-Price level-of-understanding by its detractors. That's just as impoverished a model of the real world, in its own way, as simple microeconomics analyses of 'perfect competition'.

I disagree. The description I used is helpful in distinguishing capitalism from previous modes of production like feudalism or alternatives like communism. I explicitly said the description is not comprehensive, but it is one aspect of capitalism.

> a reductionist Fischer-Price level-of-understanding

By the way I got this from Richard Wolff. Here is his education history:

B.A. History magna cum laude Harvard 1963

M.A. Economics Stanford 1964

M.A. Economics Yale 1966

M.A. History Yale 1967

Ph.D. Economics Yale 1969

Ideology can make even the highly-credentialed pretty dumb.

But did Mr. Wolff really say – "The basic concept of capitalism is that there are capital owners, and they hire workers who use that capital to generate value. The capital owners receive all of that value and then pay the workers for their time." – ? Where?

You would also see much fewer companies to begin with. Maybe there's a better way to reward highly skilled people than beating this extremely dead horse?

Capitalism has nothing to do with fewer or more companies. A founder can currently be rewarded as much as 1000000X than an average employee simply because the arrangement is that employee gets paid for time (a highly limited quantity) while founder gets paid for capital (virtually unlimited quantity). Assume that you forced founders not to capture all of the capital gains generated by employees such that the founder was rewarded "only" 1000X more than average employee. I don't think this is so badly under-rewaeded that founders will just stop being founders.

A founder that's rewarded 1000000X is cashing in on a lottery ticket. That's all there is to it. Just as in most lotteries, even most founders are losers.

>If companies distributed all of the gains in terms of stock awards to employees

Then there would be no incentive for investment.

Exactly. And investment includes buying the tools that lets the worker be productive enough to create a surplus.

There's three people (or entities) in this: the one who makes the tool, the one who buys the tool, and the one who uses the tool. All of them need some of the rewards from the increased productivity that the tool empowers, otherwise we stop getting tools that let us be more productive, and we're all worse off. So you have to pay both the capitalists and the workers.

Now, you can argue that the pendulum has swung too far in the direction of the capitalists. That's a defensible position. But the answer is not to move to "the workers get 100% of the gains". That's going to leave everyone worse off, including the workers.

There would be if employees themselves were worker-owners.

That would be fair if companies can also distribute losses if any and are able to get money back from employees

Maybe so, but stockholders aren't responsible for company losses either.

They are. They lose their money / investment if companies go bankrupt or don't do well.

Not in the past 5-10 years...

Huh? A gentle look at WSB will tell you a lot about stockholders who lost money.

> They lose their money / investment if companies go bankrupt or don't do well.

The CEOs of such companies get multi million dollar packages for leaving.

Would it? As I understand it, most companies don't distribute losses to owners either. I believe that's the core of "limited liability" corporations. Except for capital losses for shareholders, but employees are already paid in RSUs too, so I think that's relatively moot.

Problem is the employees aren't willing to bear the risk that early investors were willing to.

If the entire society had a similar level of appetite for risk, we'd see a different asset distribution in society.

Since most people are terribly averse to losing anything, they also shut down the perspective of winning big.

It’s not about being willing, it’s about being able too.

Imagine there is a lottery where for every 10 million tickets you buy you get one that is giving you 20 millions back.

No brainer, right? Except if you don’t have the 10 million to spare, buying lottery tickets instead of food doesn’t make sense.

Labor/job is your single lottery ticket.

Investors can afford to buy all tickets to make sure they win.

Make a lot of friends, buy up the tickets together, and split the winnings.

Applied another way, everyone in a given class of YC should share a bit of ownership with everyone else in their YC class, and then everyone of them is likely to end up a millionare.

This is where the analogy fails, I think, because it assumes a static market price, or a lack of competition for the tickets. Where the price changes or competition changes availability, we run into the same issues where those who already have power/money are more able to exploit the system than those who have to collude just to have a shot.

FYI this is an analysis of your average returns at YC: https://80000hours.org/2014/05/how-much-do-y-combinator-foun...

I still wish that YC would provide some more concrete figures, and ideally include separate figures for first employees as well as founders.

From link: “Most of the returns have gone to a tiny minority of super-successes. The founders of AirBnB, Dropbox and Stripe are worth about US$7 billion, about 80% of all founders’ equity, although they account for 0.5% of the companies. Outside of the most successful companies, it was still possible to earn significant returns. 12% of companies from the first five years of Y Combinator are now worth US$40 million or more, and a further 10% have sold for US$5-40 million. The remainder probably earned little more than their (low) salaries.”.

Respectfully, if you think entrepreneurship has anything to do with lottery or has an "already-rich" requirement to start with, I'd suggest you double-check whether you have an accurate mental model to succeed in this area (assuming you have an interest in succeeding in this area, which, if not, it's totally fine).

Respectfully if this reply is the best quality of posts you can produce I suggest you find another forum. Maybe 4chan is more appropriate for you.

> Problem is the employees aren't willing to bear the risk that early investors were willing to.

Employees take on considerable risk by joining early startups, and they take on opportunity risk when working for other companies, as well.

An early employee risks their ability to house and feed themselves and their family, along with their ability to afford medical care or retirement, by working at a company that could fold or fire them at any moment. An investor might experience some capital loss they can write off at tax time.

That's just how life and the universe works. The level of risk employees bear is one of the lowest possible. Reality won't let you go much below that.

I'd bet in most early stage startups nowadays developers are paid way more than the founders themselves. And they work way less hours, with way less stressful problems than the founders.

The difference in pay, hours dedicated and stress (along with damages to health and life in general) represents the founders' risk appetite for future earnings.

Employees are not at all open to bear this level of risk and they should not be compensated for not bearing this risk. Founders and investors deliver value to society by bearing higher risks. We have better and cheaper services as a result. They should be compensated accordingly, so we keep them motivated to continue servicing us in increasingly better ways.

It’s suppose to be the value you added. The investors get payment for the risk they take by investing in or loaning money to the company. If a company has monopoly power and/or gets bailed out by the government consistently there is no risk to investors. What ends up happening is rent seeking a behavior by theses companies and they will also take unnecessary risks since they are incentivized to.

> People don't capture the full value of their labor

If it does it's no longer capitalism.

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