On Wages

http://measuringmeasures.blogspot.com/2010/01/on-wages.html

by fogus • 17 years ago

58 50 17 years ago

measuringmeasures.blogspot.com

pmichaud• 17 years ago

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• 17 years ago

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

dunstad3• 17 years ago

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

angelbob2• 17 years ago

A point he merely skimmed was that Ford did seek out the best talent (and presumably fired people if they turned out not to be the best).

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.

JoachimSchipper2• 17 years ago

There is a (somewhat hidden) point 2a) in there: interesting people don't work on dull problems.

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.

Perceval2• 17 years ago

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.

dunstad3• 17 years ago

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.

Perceval2• 17 years ago

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."

icey• 17 years ago

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.)

jodrellblank2• 17 years ago

"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?

eru• 17 years ago

> 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.

jodrellblank2• 17 years ago

Indeed; the person who sprang to mind was Jonathan Ive - known as a good designer, wikipedia puts a million pound salary on him, he is an Apple higher up.

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?

kurtosis• 17 years ago

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.

earl• 17 years ago

There is some empirical evidence in a book called Peopleware.

http://www.amazon.com/Peopleware-Productive-Projects-Teams-S...

I would paste some quotes but I lost my copy.

fhars• 17 years ago

That page gives an overview over the (dead tree) literature on the topic: http://forums.construx.com/blogs/stevemcc/archive/2008/03/27...

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.]

rw140• 17 years ago

Some of it might be a matter of experience.

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. :)

argv_empty• 17 years ago

I don't think I've ever heard of top employees being 10x as productive as the average employee. I usually hear 10x quoted as the difference between top and bottom. I think the part you're missing here is how low the bottom is, not how high the top is.

goodgoblin• 17 years ago

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• 17 years ago

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.

notaddicted• 17 years ago

This one went for $1 million, or was going to until he was arrested: http://en.wikipedia.org/wiki/Sergey_Aleynikov

ido2• 17 years ago

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

byrneseyeview2• 17 years ago

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.

ido2• 17 years ago

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.

angelbob2• 17 years ago

NVidia's engineering department doesn't seem to, to give one example where I've worked. They expect long hours, and they expect to pay a premium over market price for them.

nopinsight• 17 years ago

My small startup-like company doesn't. We pay 20-30% more than the prevailing market rate and did attract top software engineers in the city. (This is also because the work involves game development and a new interesting platform.)

joeyo• 17 years ago

Costco seems to pay more than other retailers in their sector, especially when you factor in benefits.

potatolicious• 17 years ago

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

robryan2• 17 years ago

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.

JoachimSchipper2• 17 years ago

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...")

robryan2• 17 years ago

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.

lionhearted2• 17 years ago

> 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• 17 years ago

> 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• 17 years ago

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.

lionhearted2• 17 years ago

> 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.

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.

mmt• 17 years ago

I agree with leertaylor's comment, and I think it further generalizes to other aspects of transparency in the workplace.

"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).

pbhjpbhj2• 17 years ago

>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?

Because employers put such a high value on just showing up.

Raphael• 17 years ago

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.

hallmark2• 17 years ago

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.

TheSOB88• 17 years ago

Most people don't even consider that. I think most people are spending most of the money they make.

hallmark2• 17 years ago

To continue with this line of thought, then, it would be better for retention to:

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.

philwelch• 17 years ago

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.

pbhjpbhj2• 17 years ago

>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.

ytinas2• 17 years ago

>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.

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).

nathanmarz• 17 years ago

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.

storborg• 17 years ago

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.

On Wages

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