Tuesday, June 28, 2011

Personal Value in Economic Terms

One of the things that I constantly come back to when I hear dissension concerning compensations is “What was fair to you when you made the decision to take the job?” There is so much discussion concerning wealth redistribution and income parity. There have been numerous editorials and op-ed articles on CEO compensation. The NFL players union is in negotiations with the NFL owners concerning the distribution of revenue. There seems to be a lot of focus on the other guy. There seems to be a prevailing opinion that income is fixed and therefore compensation must be rationed between parties.

I was raised in the Midwest in a farm community. My thinking is somewhat molded by this experience. The concept of retirement is just not a real concept to a farmer. The farm never retires, there is always work to be done. It doesn’t provide medical benefits, 401K, or promotions. You can’t negotiate with Mother Nature to get a pay raise, try going on strike and see how that works. You make a commitment to a life style and you live up to that commitment or you change professions. Many children are leaving the farm because of that very issue. They expect medical benefits, they expect a retirement plan, they don’t want to work past 62, and they want their income to rise with the cost of living. These are all foreign concepts to farming.

I can’t tell you how many discussions I have had with employees who think their compensation is somehow relational to someone else’s. X-genres are the worst. “I’m doing all the work and fat old man in the corner office gets the big bucks.” And yet they agreed to do the work for the compensation offered. At the time they made the decision is seemed like a fair deal, or at least fair enough. Shouldn’t my concern be more along the lines of “I hope he makes a fortune because some day I’ll have his job…” Then figure out what it takes to get a job like his, build the prerequisite skills, knowledge and experience and apply. In economics, value is not derived by labor and materials. Value is created by demand in the marketplace. If I can find someone else who can perform your duties as well as you can for the same or less, then as a business stakeholder I have an obligation to consider them for employment. That job candidate should consider all possible avenues they can take to earn a living and take the most productive. What anybody else is doing only affects you as it relates to your decision to continue doing what you are doing.

I do think that many CEO, entertainers and sports figures are grossly overpaid, but that is because they don’t have a high level of value to me. I would never pay them at their current level. (Don’t misinterpret my statement as meaning they don’t have considerable value, just not as much in my view) The people who are paying them see their value or they wouldn’t pay them. If someone with higher value comes along then they will displace the current employee. That is how it works. The fact that I make less than them does not enter into the equation. My value and their value are independent.

An interesting read for those who want to understand economic value is “I, Pencil” by Leonard Read. He chronicles all of the independent people who help create the pencil. Everything from the tree growers, saw mills workers, and truckers, and graphite miners, and wax producers, and lacquer makers to Paper producers…. Everyone from all over the world…. Most of these people do not know they are involved. They all have a part. No one understands the entire process completely. This is how we fit in our perspective organizations. We all have a part. Each of us chooses to contribute or not. Each of us chooses if our compensation is enough or not. None of us, as individuals, depends on the value of others to create our own unique value. For a healthy economy we should all look for ways to increase our value independent of the value of others. If each of us increases our own value the economic ship will rise on the tide. If our goal is to drag others down to make ourselves feel better, no one will prosper.

It is not bad to want what others have. It is bad to want to take it from them as a form of compensation. Create value; create value in yourselves and others. Do not spend time trying to minimize the value of others. It will only bring everyone down.