Simple Math

 

So the mantra goes: “Why does a CEO make 700 times what his average worker makes?” The ostensible killer punch line then goes: “Does he work 700 times as hard? This reasoning, far from a profound expose on the unfairness of the capitalist system really just shows abysmal lack of understanding of the relationship of value to compensation. Now when Worker Joe hears this is he is generally quite indignant. He believes that value is weighed as human worth.  In business, and economics it is not. He rightly believes that connecting “part A” to “Widget B” on an assembly line is as important to a company as “The Suits” doing zillion dollar deals at corporate luncheons. They are equally important, but they do not both bring equal value to the company.

An employee’s worth to a company is in the aggregate amount of revenue and monetary value the individual brings to a company. If we reverse the question and ask: "can an assembly line worker bring several million dollars to a company?" how many widgets would Joe worker need to assemble to bring enough raw dollars to cover a multi-million dollar salary? Joe could not produce enough widgets working twenty four hours a day with eight arms on a diet of nothing but Red Bull to produce enough revenue to cover such a salary.

Now back to the Executive lunch. Yes it looks absurdly easy to laugh over a lobster lunch and then hand off the paperwork to the lawyers and accountants but the executive has an entirely different skill-set. And just as engineers have a different skill-set than line-workers, and line-workers a different skill-set than delivery drivers, with each being compensated upon the value they bring to the company executives salaries cannot be based upon hours worked, or upon some arbitrary sense of “fairness” but upon raw dollars they bring to the table. The simple economics is that it is economically feasible to pay Joe worker say, $50,000 for the $300,000 dollars he brings to the company just as it is economically feasible and equitable to compensate a CEO $19 million for the [b]illion dollars of revenue he brought to the table. No, he could not do it if there weren’t a lot of worker Joes producing widgets, but on the other hand Worker Joe would not have customers to make those widgets for without  the Fat Cats  making those massive business deals over lunch before 9 holes of golf that afternoon.  

Economics is not susceptible to our arbitrary sense of fairness.  Economics is absolute. Economics does not care who feels bad about some arbitrary sense of inequity. Economics simply provides that compensation levels must be commensurate with objective value provided. That value, as measured by pure economics is in increase – not effort. We all barter our compensation based upon our ability to bring a certain amount of value ($$) to a company. Worker Joe says: I can bring you about $400,000 dollars, and for that I will require $65,000 (16.25%). Executive Al likewise says: “I can bring you about $800 million, and for that I will require $19 million (2.38%). When examined in the light of pure economic principles and simple math Joe Worker often receives a much higher ratio of compensation to value accrued.  The beauty of pure economics is that it, unlike the whims of man, never substitutes one arbitrary sense of fairness for another.  No company that ignores economics will remain in business for very long. Compensations packages that mirror the economics involved pay homage to unchanging and unalterable universal laws of economics. Companies that ignore these dynamics in attempting to appease the ignorant protestations of those who do not (or will not) understand economic dynamics can only take such company down a happy Yellow-Brick- Road to ruin.