Pay in scalable industries is unjust
July 16th, 2009 | Published in Economics idea | 3 Comments
This post is partly in response to comments Eric left on my July 10th post “How to Avoid Strikes.”
In one of Eric’s comments, he asked if Michael Jordan deserved his multi-million dollar salary because he added enormous value to his basketball club and provided fans with the type of action they wanted to see. While I think Eric has argued successfully that Michael Jordan does provide enormous value, there is a huge problem with fairness.
Since everyone wants to watch the very best basketball players and television and large arenas make this possible, the very top players can meet the needs of the entire market. This is because an enormous number of people can benefit from watching a basketball game at the same time. While we are focusing on basketball, the issue of extraordinarily high salaries applies to other professions where a small group of people can meet the needs of a very large customer base. Movie actors, writers, and investment advisors are also scalable professions where the very best people capture the whole market and earn huge salaries.
With big salaries at stake, lots of people aspire to be professional basketball players. Many people play basketball through highschool and the good ones devote a lot of time to it. Most people discover at some point that they don’t have the talent needed to succeed and they drop out. Many people haven’t developed other work opportunities and end up in low paying jobs. While it might be tempting to have little pitty for those who fail, they are actually an integral part of the system.
The problem is that it is difficult to tell ahead of time who is going to be a super-star basketball player. The only way to find the next Michael Jordan is to have a whole army of kids work really hard at the sport developing their potential. It is only after years of work that the truly talented players can be identified. When people watch professional basketball, they want to see the amazing players. They want to see the one-in-ten-thousand outlier who is really over the top amazing.
So, while Michael Jordan ends up being the super-star, the effort of all the kids who drop out is actually essential. We can’t have amazing basketball games without all the work of the kids who don’t make it. Wouldn’t it make more sense to spread the revenue the game earns over everyone who works towards making the games possible?
Michael Jordan may have worked a little harder than others. He didn’t, however, work tens of thousands of times harder. He’s earning big bucks because he is lucky. He happened to have what it takes to be one of the very best basketball players. It was dumb luck.
The ultimate question is what do we pay people for? Are we paying for effort or results? If we pay for results, then in scalable professions there are going to be big winners and losers.
July 17th, 2009 at 12:39 am (#)
Re: do we pay people for effort or results
I think the starting point has to be that we pay people for results. The reason is that at some point along the line there have to be results in order for there to be value to distribute. If you are a subsidence farmer, a “good effort” does not feed you.
However, as economies become more sophisticated and specialized, maybe there is room for paying for effort in some cases. The yardstick I would measure it by is whether it increases overall value by some measure, although I don’t know how to measure it.
Let’s say the NBA distributes some of its revenue to support developmental players as Stephen suggests. Would this result in a better basketball product? Would the NBA or the NBA team owners increase their revenue?
I don’t think I would implement these kinds of changes for fairness’ sake if it didn’t add value.
Eric
July 17th, 2009 at 1:26 am (#)
Follow up thought:
In a flexible, competitive market, individual companies are free to try different strategies. If more equal pay resulted in a better product or better overall revenue/profitability, companies have the opportunity to do so now. The flip side would be that if paying CEOs or star athletes millions of dollars was a detriment to a company, their competitors could out-perform them by paying more reasonable salaries.
If no one is willing to establish a company with “fair” salaries and have to be forced into it through regulation, I would think that there must be inefficiency introduced.
I’m sure that there are situations in which this is not true, but, again, my starting point would be to allow freedom. I think the burden of proof is on the argument to put controls on the system.
Eric
July 17th, 2009 at 8:17 am (#)
Eric.
We had a discussion back on my May 29th post “Should fairness be measured in terms of effort or results?” about effort versus results. An example of napkin folding was used where on folder could fold twice as fast as the others. The question in that post was how to divide up the work. I don’t think we came to any conclusion about what is fair.
The pay question is equivalent to the dividing the napkin folding task. Should the quick folder be paid more per hour to fold napkins? If it’s output that counts, yes. If it’s effort, no.
I don’t agree with your assumption that paying for effort must have hidden obsticles because otherwise someone would set up a company that pays based on effort. The beliefs and rules that govern the marketplace have a big effect. For example, if people are free to negotiate salaries and jump from job to job, the high performers will all go to companies that pay based on performance. The pay for effort folks get left with unproductive people. If we want to pay based on effort, we all have to pay based on effort.