
On Wages - fogus
http://measuringmeasures.blogspot.com/2010/01/on-wages.html
======
Perceval
Adam Smith wrote, in _The Wealth of Nations_ , Chap. XI, Part III, "Rent of
Land: Conclusion":

"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.

~~~
dunstad
Does the above idea bear similarity to internet sales in that they both try to
sell to more people for a lower price? I'm not sure I completely understood
the excerpt.

~~~
Perceval
Smith is looking at the socio-economic health of the nation in aggregate. His
overall project with _The Wealth of Nations_ is to try and redefine what
people thought of as 'wealth.'

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."

~~~
dunstad
The conflict between what's good for individual businesses and the national
economy sounds like the prisoner's dilemma.

~~~
rw
cf. tragedy of the commons.

------
pmichaud
This is a little strange. The essay says:

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?

~~~
mcantor
It's okay. Sometimes the stuff you find when you're lost is more interesting
than where you were trying to end up anyway.

~~~
dunstad
Agreed; however, that's what editing is for: to make it look like you never
_got_ lost.

------
nathanmarz
Michael Lewis talks about the mismatch between salary and value for offensive
lineman in his book "The Blind Side", which is similar to how great hackers
are underpaid according to their value. Once the NFL shifted to a free market,
the salaries of offensive lineman sky-rocketed 10x in some cases.

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.

------
hallmark
How does the possibility of employees becoming independently wealthy factor in
to determining compensation for star performers? Let's say that I have
personally determined that $3-5 MM of assets properly invested would earn me
enough to live off of for the rest of my life.

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.

~~~
philwelch
This is actually similar to a well-known concept in economics, called the
backwards bending supply curve.

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.

~~~
pbhjpbhj
> _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"._

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.

------
ido
I have yet to encounter a company that doesn't follow the "pay as little as we
can get away with" policy.

~~~
byrneseyeview
Do you mean that they chronically underpay people (and thus that you could
predict success by looking at companies that pay their employees a lot)? Or
are you just observing that all else being equal, companies want to pay less,
and workers want to make more, and they either meet at a mutually acceptable
value or refuse to do business with one another.

~~~
ido
The second.

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.

~~~
byrneseyeview
Well, yeah. Unless your negotiating tactic is to name the lowest price you
would ever accept, they have to assume that they can offer you less than you
originally said.

------
icey
So.. I guess we should watch and see if the Flightcaster devs start driving to
work in Porsches and Aston Martins, right? (In other words, this is something
that's easy to say and people have been saying it for some time; but nobody
seems to have implemented it.)

------
Raphael
The advice is to hire the best workers. But by definition, not everyone can be
the best. So, say all the firms are bidding up the best talent to their true
10-20x values (and giving them interesting projects), as the author suggests.
The market adjusts, and it becomes economical again to higher a massive team
of average workers with management and space. You might have to set your goals
lower, if you can no longer expect leaping innovation that only a genius could
make. But it's way easier to find and replace average talent. If they can
actually do the job, and your business is expanding, then you can raise
compensation to at least maintain morale.

------
robryan
The pay isn't exactly the most important thing though, in software development
I think you can get away with paying market rates and pitching at incentives.

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.

~~~
JoachimSchipper
The interesting thing is that nothing you name is expensive (relative to your
salary).

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...")

~~~
robryan
More in a general way, being a uni student I've just noticed that the only
real workplace I've worked at in development is kind of lacking in quality
development systems, comparing it to freelance developing on a decent system
at home you realize how much more productive you can be on a decent system.

------
storborg
Spoken like an engineer who thinks engineers are undervalued, not like a
project manager who understands that the 10x productive engineer is
incredibly, incredibly rare, and that all businesses must ultimately seek to
maximize their profits.

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.

------
potatolicious
So, anyone know any companies that subscribe to the above article? :P

------
goodgoblin
How much should a new engineer hired on at an investment bank with 10 years of
experience expect to receive in salary and bonus?

~~~
daniel-cussen
Seeing as they get payed in base salary plus bonus, with the bonus being as
big as the firm wants it to be, it varies. If, for instance, he turns
everyone's excel macros into lisp macros and makes half the firm redundant,
all in the space of one year, and the boss miraculously not only forgives but
praises him for it, he can get...yeah, a few million, really. But I'm making
no guarantees.

------
jodrellblank
"Naturally, some members of the enterprise are better at leadership and
strategic thinking than others. It is natural for these members of the
enterprise to spend their time thinking more strategically. Others will be
executing more tactically. Some will be involved both strategically and
tactically."

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?

~~~
kurtosis
I've heard the story where there was a 10x difference in the time it took CS
students to complete a series of system programming assignments, but are there
other anecdotes out there? I'm very suspicious of this story, and think that a
lot of this fabled 10x multiple can be explained by extrinsic circumstances or
luck. At least that's what I've observed in science where easy experiments in
a field that is new and fashionable can yield lots of interesting papers,
where taking on more difficult projects in established fields can require much
more work to achieve incremental results.

~~~
fhars
That page gives an overview over the (dead tree) literature on the topic:
[http://forums.construx.com/blogs/stevemcc/archive/2008/03/27...](http://forums.construx.com/blogs/stevemcc/archive/2008/03/27/productivity-
variations-among-software-developers-and-teams-the-origin-of-
quot-10x-quot.aspx)

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.]

~~~
ytinas
The Lotus vs. Excel thing is more likely showing the fact that smaller teams
can outproduce larger teams, since with smaller teams there is less
coordination needed.

------
lionhearted
> If employers and employees trade vale-for-value, then what is there to hide?
> Doesn't it make sense to compensate people relative to the relative value of
> their productive achievements and capabilities? If it does make sense, then
> why distort the relative scale through secretive compensation practices
> cloaked behind a veil of low integrity?

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.

~~~
leertaylor
> 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.

~~~
gnaritas
You won't even get developers agreeing, most people think they're worth more
than they are and better than they are. Pay could be perfectly fair and people
will still be insulted because they don't believe developer X is really better
than they are even if everyone else believes so.

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.

