underwaterventriloquist

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Bubbles p. 2

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WHY ARE PEOPLE PAID THE WAY THEY ARE PAID AND WHY ARE PEOPLE PAID DIFFERENTLY?

1.      How companies decide your salary.

Most companies, large or small, have a compensation professional. Their job is to look at how much everyone else in the company is being paid – their salaries, bonuses, retirement packages, etc. They compare these internal numbers to other companies based on size, location, and industry. They get these reference numbers from surveys that a 3rd party company performs (like Towers Watson). Towers will ask companies for how much they pay their people then compile all the data into one reference sheet. There are national surveys, industry specific surveys, and company size specific surveys.

Let’s say I’m a comp professional for a tech company called Banana based in Silicon Valley. I’ll want to compare how much we pay our people to our competitors in the tech industry. So, I’ll grab a tech specific survey and look at how much we pay in comparison to the average. But maybe Banana wants the “best” employees. So, their strategy is to pay at the 90th percentile, not the average. They’ll look at the 90th number and make sure their offers are around that number. Different companies have different strategies. If I’m a startup with not a lot of cash, I’m gonna pay around the 25th percentile because I’ll be paying with perks like “wear whatever you want to work”. Other companies might be very location specific and look at a Silicon Valley survey.

Tl;dr companies decide how much you’re paid based on other companies (based on size, location, industry).

2.      Why are salaries different / How that salary changes

THIS IS THE IMPORTANT STUFF

Does your company measure the additional profit you might bring to them?

There are two different types of companies: 1) innovation or accountability and 2) Cost effective

The first type of company is profitable because of individual actions that can be measured. They pay individuals or teams based on innovation or outcomes. If Banana measures the creativity/efficacy/degree of excellence of their workers by the new innovations they come up with and holds them accountable to constantly striving to do better, then they will seek to pay at the higher end of the range to make sure they retain the best talent. You’re not innovating if you don’t have the most innovative people. Paying at the average range gives you no innovation and only maintains the status quo. (according to compensation professional bibles). If your profit margins require you to be the most innovative, you hold your people accountable to their creations and compensate as such. As a result there is a race to the top for salaries – people eventually have a max salary where if you pay them even more than that it doesn’t impact their work. If you were paid 10 million a year or 11 million, does that extra 1 million impact your performance that much? (Examples of companies: Tech, finance, pharmaceutical, law)

The second type of company is cost-effective. Success in innovation does not impact profits or cannot be easily traced back to an individual. Compensation professionals will seek to pay at the average or lower end because success does not impact profit. There is a race to the bottom. If your output is measured by what you don’t do (preventative) – factory workers that do not make x amount of mistakes – teachers that ensure a bare minimum level of test score/ retention – then compensation professionals are not competing for the highest quality worker for better profit margins; instead they are cost saving and trying to find the LOWEST PAY for the LOWEST QUALITY they can provide while receiving the SAME INCOME.

Tl;dr : Innovation/accountability companies pay more and more for talent because their profits and stock require new “high quality” ideas. Cost-effective companies do not adequately reward innovation because success does not impact profits.

Problems:

Every company requires talent. However, only the first type measures and pays for it.

If your measurements for the first company are flawed, you are over-compensating people.

There are near-constant issues of under-compensation of a type-2 company.

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My paper on housing affordability was published in the Columbia Economics Review:

“Chen’s paper examines the impact of various demographic factors, including percentage of college student comprising a community and residents’ usage of public transit, on housing affordability for renters. Her focus on renters, a group typically underrepresented in the literature on housing markets, has key implications for policymakers in better determining how their decisions impact all constituents of a community. She ultimately finds that college students decrease housing affordability for renters, an important result for urban planners to take into account when designing community partnerships with universities.”

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Lucky Fish

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Chopped

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You came so far to see me

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Bubbles, as inspired by David Akiba

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Kaneda’s bike from the landmark film Akira