The ANALyst

Leverage, optimise, synergise

Is compensation defined by physical effort?

Just came across this letter today in the New York Times. This is a public resignation letter from a Vice President at AIG who decided to quit because he felt betrayed by the firm’s leadership. What got me thinking, more than the letter itself, were some of the comments that were posted in response. People seem to imply that individuals involved in physical labour intensive professions such as coal mining or plumbing should be compensated as much as a Vice President at a multinational financial institution just “because they work as hard”. Clearly this is the most ridiculous statement one can make because we all know (I hope) that compensation is not necessarily a function of effort.

What, then, is it a function off? What defines how much one gets paid. One way of looking at it is that one’s salary is directly proportional to the wealth generated by the individual. Let’s take the example of the now proverbial ‘Joe the plumber’. Let’s assume he is self-employed and earns around $60,000 a year. If he is only able to sell $60k of work, that’s what he earns irrespective of the number of hours he puts in to his job. A consultant gets compensated approximately a third of the fees he or she generates for the firm. Similarly our friend at AIG made around $100m profit in a year and thus felt he was entitled to a few million in bonues – fair enough.

In some professions wealth generated or revenue earnt has no bearing on the compensation. For example, the public sector. Traffic police incomes have no relation to revenue earned through fines. (Atleast one would hope not). Similarly, government tax officers are usually not compensated based on the revenue they bring in by chasing unpaid taxes. Yet a tax accountant does get a cut of the tax dollars he saves for his clients. Weird!

How do you judge the compensation for teachers. Directly they create no wealth. Yet indirectly, the wealth created by their students as a result of the education received could run into trillions. We do not hear of them getting a cut.

It does certainly pose some interesting questions. So what should an ideal compensation model for such professions be?  Are we paying them enough or do they deserve more? Should they be completely outsourced, just because they are seen as a cost and not a creator of wealth or should we be looking at other methods to boos their compensation? Any thoughts?

April 7, 2009 Posted by | General Rambling | 2 Comments