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Why people make what they make

Article posted on 6/19/2008

This is an excerpt from something I wrote for our internal business plan. I've had a number of people comment that they think I should publish this so here it is:

 

Why do people make what they make? If you ask someone, they will answer that it’s based on how good of a job they do or their level of training or perhaps because that’s the “going rate”. But none of those answers get to the root of why people make what they make.

How much people are paid is derived from how much wealth they produce. The typical amount of wealth produced by a particular job title helps set the base salary – i.e. the market forces that set the “going rate”.

But the reason why an engineer makes X and a secretary makes Y has to do with the wealth they produce. To make more money, you have to find ways to produce more wealth.
People are not compensated simply because they are good at their job. They are compensated for what they produce either directly or indirectly through their labor via others. It’s not about fairness or skill or personality. Those things may be elements that lead to opportunities to generate more wealth but they are, in themselves, not the root sources of their salary.

The greatest worker will still not be as well paid as a mediocre worker if the product of the great worker’s labor doesn’t make as much wealth as the mediocre worker’s efforts.
For example, the reason the CEO of Stardock works so many hours, brings his laptop on vacation and is available on it all the time isn’t out of a sense of duty or guilt. It is because the CEO of Stardock wants to make more money and does this by producing more wealth through his efforts.

No one forces or suggests that a particular employee should work every weekend or be available on his laptop while away on vacation. But at the same time, he should realize he is making a choice. Most people are unaware that they’ve made a choice. Most companies are too rigid to even allow for such a choice. But in the right company, the management team will make sure employees have as many choices as possible in order to harness their native abilities to generate more wealth.

Compensation isn’t about fairness or hard work. Compensation is the result of the wealth the individual has produced. That Wealth can be measured as the difference in wealth that would have been generated by an organization if that person wasn’t there versus how much was produced by his contribution.

The individual who believes they are entitled to wealth simply because they are surrounded by it is always doomed to disappointment because they do not understand that those who obtained the wealth are the ones who are entitled to it.

Compensation is not given as a prize or gift. It is not a fief given by the benevolent corporation. Compensation is simply the portion of the wealth that the individual already controlled. The individual already controlled that wealth because they were the ones who produced it and the corporation is reliant on the individual to continue to produce that wealth.

The money people earn was always their money even before it was paid to them. The employee always had control over that compensation because they generated it. Compensation is not dispensed as a bribe or as tribute. Compensation is merely the affirmation of the wealth that the individual already produced. It was already their money. Companies that do not turn over this money are stealing is just as much as a thief who breaks into someone’s home.

Companies do not give compensation because they are generous or fair. Companies provide compensation because they want those individuals to continue to generate the wealth that allows them to mutually benefit.
The greedy company that attempts to withhold the share of the wealth that rightfully belongs to the individual destroys itself because by withholding the earned wealth, the individual can take their productivity elsewhere.

However, if an organization can successfully argue that a given amount of wealth would have been generated whether a particular person was there or not, then that particular person has no sovereign claim to any of that wealth and to think otherwise will only lead to baseless resentment. A person only “deserves” the compensation that they control. And they only control it if they produced it through their labor or investment.