It’s good to be reminded of this from a standpoint of empathy, but at the same time I think it’s missing the fact of the matter: we don’t get paid more money because we work harder. That’s just a remnant of the Puritan work ethic. The economic fact is that we get paid more money because there are fewer people available to do what we do. Generally speaking, anyone can be a line cook, a bricklayer, or a janitor. When (more or less) anyone can do a job, it doesn’t pay as well because the available workforce is ample. If a software developer got paid as much money as a line cook, then software developers would be deployed at tasks that don’t warrant their more valuable time given their (relative) scarcity in the workforce. Deploying scarce resources in a suboptimal fashion is bad for everyone in an economic sense. It’s like using copper during the war effort to make brass bathroom fixtures instead of wiring for airplanes—it’s a poor (and potentially disastrous) use of the resource.
You can see this at work in NYC right now: the relative ease at acquiring financing means there are a lot of really dumb startups here right now with stupid ideas and no real market that are tying up valuable engineering talent which makes recruiting harder for legitimate startups that are genuinely creating value. Imagine if all the engineers who worked at Google during the early days were instead tied up working for Pets.com and Webvan such that Google was never really able to get off the ground and folded. That would have been bad for everyone, because Google ended up creating a lot of real value and Pets.com did not.
This same reasoning, I think, applies to the question of why CEOs get paid such astronomical salaries. The answer is that the kind of people with the skills to run a large company are extremely few and far between. Sure, a lot of them do fail at their jobs despite getting paid so much money; but that's not a reason for a hew and cry about how much they’re paid—it’s (usually) simply a testament to how hard the job actually is to pull of successfully. (Incidentally, it’s a common lament that the people at the top get paid disproportionately more than everyone else. But that’s just because the scale doesn't increase linearly—it grows exponentially. I'm not sure what the outrage against such a fact is—if you’ve taken differential equations you’ll remember that myriad complex mechanical, electronic, chemical, astronomical, biological, economic, etc. systems have nonlinear characteristics.)
So the idea is that salaries for scarcer resources are generally higher such that only enterprises creating sufficient value (i.e., profits, or at least a general confidence in future profits) to pay for them are the ones who get them. It’s certainly arguable whether this is what occurs in practice; and—while there are always exceptions, transients, and outliers—I think by and large it’s a good approximation.
This is kind of tangential to @jacquesm’s point, I know, because he’s simply pointing out that we should be cognizant that we get paid more for arguably easier work—but all the same I think it’s important to keep in mind that making things more ostensibly ‘fair’ may not always be in everyone’s best interests in a larger sense.
> This same reasoning, I think, applies to the question of why CEOs get paid such astronomical salaries.
That I'm much more skeptical of, especially seeing how things have transformed recently. I think a lot of it boils down towards a principal/agent problem, where top executive ranks have been captured by an in-group that hires each other. This is true even in universities; when a university is looking for a President, the search committee, made up of high-up university execs, looks at other university execs. This leads to an artificially restricted supply pool as execs hire each other (often, literally, since the execs are on each others' boards). Sometimes the pay is even formalized; they want to pay "competitive market rate", often defined as something like 10% above average, which leads inevitably to an upward wage spiral, since by definition everyone can't pay 10% above average. When political backlash results, they just quote the policy.
I don't think it's necessarily conscious nefariousness, either, but more of a cultural thing: they really do think that their social peers are the only people who could possibly do the job, regardless of whether they have evidence for that, and they really do think that they and their peers are worth the money that they're voting themselves.
At the very least, the opposite hypothesis---that they earn their pay by providing shareholder value---has been extremely hard to show empirically. There is, if anything, a slight negative correlation between CEO pay and shareholder returns. Tellingly, at closely held companies where a family or relatively few people personally control the company rather than diffuse set of shareholders, CEO pay tends to be much lower, after adjusting for the company's size. The hypothesis of what to make of that correlation is that when owners are vigilant, as in closely held firms, they don't pay CEOs as much, because they don't believe that the CEOs aren't worth that much. When owners are asleep at the wheel, though, you get the HP case--- pissing away tens of millions on ineffective CEOs' golden parachutes.
Sometimes the pay is even formalized; they want to pay "competitive market rate", often defined as something like 10% above average, which leads inevitably to an upward wage spiral, since by definition everyone can't pay 10% above average.
What you are describing is a bidding war for a scarce resource. This happens for all sorts of people, not just CEO's. See, for example, programmers.
...they really do think that their social peers are the only people who could possibly do the job...
What's the "social peer" of a CEO? Other CEO's and upper management?
I certainly think that only my "social peers" (read: other programmers) can do the job of programming.
At the very least, the opposite hypothesis---that they earn their pay by providing shareholder value---has been extremely hard to show empirically.
This is hard to show for most fields. When a job consists of building organizational capital (e.g., CEO, programmer, manager) rather than directly producing outputs (e.g., cook, assembly line worker, doctor), it's very difficult to empirically measure the contribution of any individual.
This is doubly true if you are trying to generate macro-level statistics (e.g., compare CEO performance across companies, or programmer performance across projects).
Listen to this podcast interview of Kaplan, he describes his new paper where he disputes the idea that CEOs are "gaming" the system by hiring each-other. The data is pretty convincing that CEO pay rates are increasing at the same rate as other skilled labor (lawyers, doctors, bankers, software engineers, etc).
Maybe anyone can be a line cook, but not everyone can be a chef. Chef school is brutal. And not everyone can plan and run a large meal plan for a large group of people with sporadic hours and special meals, either.
And, as somebody else pointed out, the chef's existence -- and the supreme quality of his work -- was one of the big draws for tech talent to come to Google.
And, furthermore, by freeing the tech talent from having to worry about food or leave work to get it, he contributed to the value they created.
Your argument is basically a straw man. You set up "line cook" or "brick layer" -- jobs everyone can agree are not special or meritorious. Then you shoot it down. Very impressive.
Sure, not everyone can be a chef—I completely agree. I spent my summers working in restaurants growing up, so I’ve seen firsthand just how brutal the work is and how much skill it takes. But certainly there is no doubt in my mind that more people can be good chefs than can be good software engineers.
And, as somebody else pointed out, the chef's existence -- and the supreme quality of his work -- was one of the big draws for tech talent to come to Google. And, furthermore, by freeing the tech talent from having to worry about food or leave work to get it, he contributed to the value they created.
I didn’t set up a straw man, but I did draw some hyperbolic distinctions for the sake of exposition. (In fact, I worked as a line cook one summer and I wasn’t very good at it—so not everyone can even be a line cook.) There is obviously a spectrum, and if we’re going to point out fallacies then you’ve set up a false dichotomy: that there’s either things everyone can be or things few people can be. This isn’t true, and I’m simply saying that software engineers are a scarcer resource than chefs. I don’t disagree that the chef at Google legitimately contributed to the value the company created, but I think there are plenty more chefs that could have done so than there were software engineers who could have built the core technology the company was built on. My point is that the salaries are, broadly speaking, a reflection of supply and demand and not difficulty of work.
I'll wager there are fewer trained chefs than software engineers. And you can't outsource it to India. Google could've hired a decent fry cook instead of a chef and given him fewer options. They didn't, so clearly they believed he added value.
Even if we postulate that it's more difficult to become a chef, or that fewer people are capable of becoming chefs, the economics of software - the borderline-nonexistent inventory and marginal cost of goods sold - conspire to make software engineers generally better paid than chefs. It's difficult to draw conclusions about how important the skill of this particular chef was to the success of Google, because we don't have a lot of data about "successful startups with chefs as early employees", but we do have a lot of data about "successful startups with talented engineers as early employees".
You can see this at work in NYC right now: the relative ease at acquiring financing means there are a lot of really dumb startups here right now with stupid ideas and no real market that are tying up valuable engineering talent which makes recruiting harder for legitimate startups that are genuinely creating value. Imagine if all the engineers who worked at Google during the early days were instead tied up working for Pets.com and Webvan such that Google was never really able to get off the ground and folded. That would have been bad for everyone, because Google ended up creating a lot of real value and Pets.com did not.
This same reasoning, I think, applies to the question of why CEOs get paid such astronomical salaries. The answer is that the kind of people with the skills to run a large company are extremely few and far between. Sure, a lot of them do fail at their jobs despite getting paid so much money; but that's not a reason for a hew and cry about how much they’re paid—it’s (usually) simply a testament to how hard the job actually is to pull of successfully. (Incidentally, it’s a common lament that the people at the top get paid disproportionately more than everyone else. But that’s just because the scale doesn't increase linearly—it grows exponentially. I'm not sure what the outrage against such a fact is—if you’ve taken differential equations you’ll remember that myriad complex mechanical, electronic, chemical, astronomical, biological, economic, etc. systems have nonlinear characteristics.)
So the idea is that salaries for scarcer resources are generally higher such that only enterprises creating sufficient value (i.e., profits, or at least a general confidence in future profits) to pay for them are the ones who get them. It’s certainly arguable whether this is what occurs in practice; and—while there are always exceptions, transients, and outliers—I think by and large it’s a good approximation.
This is kind of tangential to @jacquesm’s point, I know, because he’s simply pointing out that we should be cognizant that we get paid more for arguably easier work—but all the same I think it’s important to keep in mind that making things more ostensibly ‘fair’ may not always be in everyone’s best interests in a larger sense.