The philosophical side of me woke up a bit disgruntled this morning. It had processed that last blog post during my 6 hours of rest, and it concluded that what I had written ultimately spelled the unraveling of capitalism as we know it. “For you see,” says philosophical side, “if a company’s profit represents only the gap between the contributions of its workers and their actual pay, then any company that isn’t losing money is operating unjustly. And any company that is losing money won’t be operating for long.” Ah, guilty as charged. So how’s about I speak more precisely?
The root of that equation remains true. A company’s profit still represents the difference between the contributions of its workers and their pay. The crucial detail here is that in this definition, a company’s “workers” also includes its top brass — the people making the deals (the other crucial detail is that some of that profit is mitigated by taxes, risk, etc. boring!). In a perfectly just company, the gap between workers’ contributions and compensation represents the value that the company’s principal shareholders bring, because they are ultimately the ones that will reap that profit.
What had induced me to carelessly paint profit as an illustration that high performers were not fairly compensated was that it’s usually true. But only of high performers. This axiom can be witnessed at most any company, but it is perhaps easiest to illustrate at technology companies, if only because that’s where I’ve witnessed it. The gap in productivity between a company’s most productive programmer and least productive programmer is usually around 10x (This is not an exaggeration; if anything, it is an understatement. Unless they are damn good at hiring, a gap of 10x is usually observable by the time a company reaches 20 or so programmers. See Paul Graham’s earlier linked articles for some exlanation of how this is possible).
The gap in salary between a company’s most productive programmer and least productive programmer? Perhaps 2x, at most 3x. Blame methods of evaluation, blame economies of scale, blame the rain, but the reality is that a programmer who is 10x better than another programmer who makes $40,000 is not getting paid $400,000. They’re probably getting paid $70,000, and hopefully, working with a boss who lavishly praises their contributions on a regular basis.
But the bottom line is that $330,000 of that programmer’s productivity is being manifest as profit for the company (or $330,000 of that programmer’s productivity is paying for the 8 overcompensated crappy programmers, if you prefer). This is not a “good deal” for the highly talented individual. But I admittedly mispoke in attributing all profit to inequity. In actuality, some profit is absorbed by future investment, some by past and future risk, and some by the shareholders who will take that profit. The rest? That is inequity.