Salaries and merit

People like to say that salaries should be based on merit. Employees should be rewarded by their ability and performance, and not by connections, or family, or race, or class, or luck.  

In a previous post, I argued that it's something we say, but don't really mean.  We don't really act as if we believe that "merit" is what counts.  In fact, outside of sports and school, we don't seem to want to measure merit at all.

-----

The classic example is teachers.  We love to talk about how valuable teachers are and how important education is, and almost everyone has a story about a great teacher and what a difference he or she made to their life.  But, even so ... we don't make much effort to separate the better teachers from the worse ones.  

Sure, that's not necessarily easy to do.  Ratings are arbitrary, and subject to all kinds of manipulation and favoritism.  We can't let the students vote on merit, because they'll just reward the teachers who give the highest grades and the least homework.  How do you judge "good" and "bad", anyway?  Isn't it mostly subjective?

All of those issues are legitimate, but not insurmountable. The students themselves know who the best and worst teachers are, independent of the grades they give, right?  In my high school, we all pretty much agreed on who were the best.  A good analogy is MLB broadcasters.  Here's one poll of the best and worst.  You probably agree with it, for the most part, right?  (Except that Vin Scully should really be #1.)

There is a movement to pay teachers based on merit, but mostly from policy wonks.  It's not something that parents seem to care about, or students.  And even when it is, it's almost all about improving education. That's important, sure. But, what about from an ethical standpoint?  If we really believe in paying for merit, shouldn't the argument be that better teachers should be paid more on the principle of simple fairness?  Tellingly, the Wikipedia article on teacher merit pay doesn't mention that argument at all.

----

There are some situations where we *do* want to recognize merit.  It's obvious that someone who works 40 hours deserves --  "merits" -- twice as much pay as someone who works the same job for only 20 hours.  They do twice the work, so they deserve twice the pay.

But, what about when one employee can do twice the work in the same amount of time?  

In my field, software development, there's an adage that the difference between the best and worst programmer is 100 times the productivity: 10 times between best and average, and 10 times between average and worst.  Let's say it's really only 5 times instead of 10, and let's say we fire all the bad programmers.  That still leaves a 5x difference between best and worst.

Should a fast programmer make 500 percent of the salary of an average one?  If you believe in merit, then, you have to say yes.  Don’t you?  

You could even argue that the difference should be *more* than five times.  If you had to hire five slow employees to replace the one fast one, you'd need five times the desks, the heating bill, the parking lot, and lots of other fixed costs. Furthermore, critical situations often arise when something needs to be done very fast.  The single employee provides you that capability, but the five slow ones will just run into each other.  (Brooks's Law: "Adding manpower to a late software project makes it later.")

But no company could get away with that kind of salary differential.  There'd be a riot.  

Some of the average guys would feel underappreciated and quit.  Others would instead spend their time coming up with rationalizations that the fast programmers are producing lower-quality work, and perhaps even sabotaging them.  The managers would enviously rebel against their underling programmer making three times their salary (even though they'd have to grudgingly admit he's worth it).  The suits in head office would say, why is that geek with no social skills making more than me, when I have an MBA and a thousand dollar suit?  And, when the superstar programmer got older and slowed down, you'd have to find a way to cut his salary in half, without humiliating him.  

I’d argue that merit pay doesn't fail because merit is too difficult to measure.  It fails because merit CAN be measured, and we don't like the results.  

-------

You're a teacher.  You've been doing it for a few years, and you're proud of your career choice.  The parents like you, and people show a lot of respect when they find out you're a teacher.  You have a satisfyingly high level of status in the community.

But, now, someone figures out a way to accurately evaluate all the teachers.  When they’re done, it turns out that you’re only 30th percentile.  Seven out of ten of your colleagues are better than you.  

Now, you look and feel like a bit of a failure.  Even if you kind of knew, before, that you weren't as wonderful a teacher as some of your colleagues, you didn't really have to face it. You could think, hey, I’m good in my own way.  I may not be able to hit home-run explanations like Barry Bonds, but I use time-tested approaches, so I don’t strike out much either!  

But now that "Teacher WAR" shows you’re barely above replacement, your rationalizations don't work any more.  Also, your pay gets cut.

Even the *good* teachers don’t necessarily benefit from evaluations.  When the world gets a reminder that some teachers are worse than others, everyone’s status takes a hit.  Then the mediocre teachers quit, better ones replace them, there's more competition, and suddenly you’re middle of the pack.  And what happens when you have a bad year? Whatever it is you’re doing right, you have to keep it up in order to keep your place in the pecking order.  In fact, you probably have to get substantially better.  It's lose/lose for almost everyone.  

Except: if they only rate the best.  Then, nobody else really gets hurt.  Sure, you didn't win, and that shows that you're not the very, very best, but that’s no real shame.  And, for all the world knows, you might still be the second best, or in the top 1%.  

I think that’s why, in many professions, you'll see awards given to the best in the field, while nobody else gets rated or mentioned.  (Google any job description followed by "awards," and, usually, you'll find something.)  The awards aren't just to benefit the winners ... they’re also there to raise the status of the profession in general.  When a local employee wins a national award for best mechanic, all mechanics gain a little bit of additional respect.  ("Geez, I thought that mechanics were just people too dumb to graduate high school, but this guy seems really smart!  Now that I think about it, my guy might be pretty good too.")

In the everyday world, the equivalent to an award is a promotion.  Instead of saying, "Bob, you fix cars only half as fast as Joe, so we're going to pay you only half as much," we say, "Bob, as you know, Joe is the very best mechanic here, so we're promoting him to senior technician."  You get to recognize the best without having to formally call out the worst.

Another benefit is we tend to compare ourselves to our peers, rather than people at different positions in the hierarchy.  So, after the promotion, Bob is less likely to become resentful, because he's less likely to compare himself to Joe.  Also, if Joe is doing a different job, Bob doesn't get reminded every day that Joe is twice as good.

But ... it's a promotion to a different job.  You're taking the best performers out of the environment where they've excelled, and moving them to something unproven.  In software in the government, they take the best programmers, and move them to something that’s very different -- like “project leader,” which is a middle-management job.  Sure, you need strong technical expertise to do that job, but almost any decent programmer can do it competently.  When you have a programmer who’s five times as good as average, why put him in a job that’s he’s less suited for?  It’s like telling Mike Trout, "You’re so good at baseball that we’re promoting you to bench coach."

And there are only so many promotions to go around.  We've all seen lots of low-paid workers who are excellent at what they do, and lots of their colleagues who aren't that good.  I’m pretty sure the range of their salaries is much narrower than the quality and quantity of their output -- Walmart cashiers, for instance, seem to all be within a 25% range. 

So if you're good, and you want to be rewarded on merit, you have to count on promotions.  But how many of the best can be promoted?  Walmart has 2.2 million associates, and promotes 170,000 of them annually.  That’s less than 8 percent.  That means you're going to have a lot excellent cashiers making only slightly more money than average cashiers.  

If we really cared about merit, we'd be outraged by that.

------

In Canada, we have "pay equity" legislation, designed to close the gap between men’s and women’s earnings, by reclassifying male-dominated and female-dominated jobs in such a way that their pay scales become more equal.  

The rationale is "equal pay for work of equal value."  As in, "a secretary is just as valuable as a carpenter and should be paid no less."

But ... we only seem to care that the pay in question becomes literally equal.  We demand that equals be paid equally, but we don’t really care that non-equals are paid non-equally.

If you really believe in equal pay for work of equal value, the faster programmer should be earning much more than the slower programmer, and the better teacher should be earning much more than the worse teacher, and the industrious janitor should be earning much more than the average janitor. But we don’t take to the street to say, "Jan is working twice as hard at the ice cream parlor as Marsha, but being paid the same!  Stop the exploitation!"

When we do accept pay differences, we don’t seem to care much about whether they're proportional to ability.  We may agree that doctors are more "meritorious" than, say, welders. But, how much more?  Should a doctor be paid twice what a welder makes?  Ten times?  Twenty times?  Nobody cares, really, do they?  

The rare times that we do care, it’s almost always on the side of making everyone more equal.  Much is made of the ratio between CEO and worker pay, how it's too high.  Why do we think CEOs make too much?  For egalitarian reasons that have nothing to do with merit.  I have no idea, honestly, what the ratio should be, how much more valuable a fast-food CEO is worth than the guy who flips the burgers.  Is it 100 times? 1000 times?  10,000 times?  If we did care about equal pay for equal value, it would matter, wouldn't it?

It certainly matters in sports.  We know Mike Trout is a bargain at 600 times the US minimum wage, but overpaid at 6000 times the minimum wage.  Why don’t we have the same argument for CEOs?  I think it's because we don’t care about merit for corporate bigwigs; we're just uncomfortable that they make millions. Maybe I'm wrong -- maybe we really do believe CEOs make more than they deserve on merit.  But, if that's the case, why does hardly anyone argue numbers about how much they're actually worth?

I stumbled onto this article that profiles Marie Sanders, a single mother who works for McDonald's.  After more than two years of full-time work at Mickey D's, she still earns only $7.75 an hour and has trouble making ends meet.  

There's nothing in the article about merit.  The article never asks: "Is Ms. Sanders worth more than $7.75?  Is she worth the $15 she implies she deserves?  How were her job evaluations?"  If the writer *did* ask that, there would be outrage.  "How dare you imply that she's not competent enough to deserve a living wage!  Don't big corporations owe their workers a decent enough paycheck to allow them the dignity of feeding their family?"

Actually, Ms. Sanders sounds intelligent and competent.  I bet she’s well above average among her peers.  If that's true, does that bolster her case for $15 an hour?  I think it does, and I think most everyone would agree.

But if her excellence is an argument for paying her more, that's the same thing as saying her co-workers' averageness (or even mediocrity) is an argument for paying them less.  If Marie should earn more than Andy, the reasonably competent fry cook, that means Andy should earn less than Marie. 

How much less?  Maybe even ... $7.75?  If not that low, then, what?  $10?  OK, say $10.  But, now, what if there's someone even worse than Andy, someone who's just marginally competent?  

I think we don't want to bite the "merit" bullet and face that some workers are worth a lot less than others.  We're uncomfortable if Marie earns the $15 she's worth, and Andy earns the $7 he's worth.  Instead, we're happier if Marie and Andy both make $11 -- even if Marie is a lot better at her job.  

We say we want salaries to be merit-based, but what we really seem to want is for salaries to be equal.  

Luck, careers, and income inequality

According to this (anonymous) blog post from "The Economist," increased income inequality is partly due to random chance becoming more important in picking winners and losers.  

The post (and accompanying article) cites a recent paper on "herd effects," where a song or book becomes popular kind of randomly, because people tend to flock to whatever other people have already flocked to.  So, you can have two songs of equal merit, but one is a smash hit just because, for random reasons, its early adopters had better social networks.

Furthermore, there's experimental evidence.  In a recent academic study, researchers sent job applications to two different employers.  The resumes were identical except that, in one of them, the applicant said he had been unemployed for several years, while in the other, the applicant said he had a current job.  

Overall, the "out of work" applicants got around half the callbacks of the currently employed applicants.  Presumably, the employers believed that those who were out of work were less likely to be suitable candidates than those who weren't.  

The author writes,

" ... the implication is troubling: someone who ends up unemployed through bad luck, and for some idiosyncratic reason doesn't quickly land a job, finds his chances of reemployment diminish until he’s part of the long-term unemployed. ... 

"... this research opens a new and troubling dimension on  inequality. Unlike deficiencies of skill, it’s hard to tell society's  losers they should go back to school to become luckier. "

------

Certainly, there a huge, huge amount of luck involved in career success. There has to be: there's already luck in hockey, golf, and chess, and real life is infinitely more random and complicated than those.

For starters, there's when and where you were born, what kind of schools you went to, what books you happened to read, what kind of influences you had from your friends and parents, how good your teachers were in various subjects, chance remarks from strangers about what careers are likely to be lucrative, and many more.

Even in the more concrete sense, there are many, many small random things that can make a big difference.  What company you choose to join for your first job, what your first manager thinks of you, how your bosses think of your performance amidst the noise of team accomplishments, whether your co-workers give you credit or blame behind your back ... and you can probably think of hundreds more.

Basically, where you wind up in your life, in your career or any other sense, is overwhelmingly the result of so many random events that it's basically ... well, it's kind of a miracle that we are where we are now instead of somewhere else.  If we had to live our lives over again, from any given point, we'd probably be in different jobs, doing different work, with a different spouse, maybe living in a different city, earning a different income.  

In that light, I find it a bit perplexing that the authors chose these two specific examples as evidence of how luck factors into it.  They seem pretty minor, don't they?  I mean, the unemployed applicants still got half as many calls as the employed ones ... that seems like a pretty small career stopper as opposed to, say, if their first manager didn't like them and put them into a dead-end position and never promoted them, among hundreds of other possible events.

As for the "herding" argument ... wouldn't it be the case that there's LESS herding luck now, with the internet?  It used to be that you only knew songs you heard on the radio.  Now, you can find whatever you want on YouTube, on demand. There's more opportunity to find a niche.  Isn't that established wisdom?  Isn't that what "The Long Tail" is about, that, these days, there are many different markets that never existed before?

In terms of "herding," I'd bet that luck is much LESS a factor than it used to be.  

-------

Also: as much as luck is a huge, huge part of where any individual winds up, I don't think it's a big factor in the overall distribution.

In baseball, luck is, what, around 30 percent of the variation in team W-L percentage?  

Now, suppose you expanded the major leagues to include 30 little league teams.   Now, luck is a much smaller factor, isn't it?  The "real" teams always beat the kids, so, now, whether or not you're over .500 is completely a matter of talent.  Luck is still important within your group, but, overall, I'd bet the r-squared drops from 30 percent to ... I dunno, maybe 5 percent. 

Something similar happens with careers.  Two accountants, Andy and Beth, graduate from the same school with the same talent.  Andy winds up in a job where the culture matches his talents, while Beth does not.  Just by that random happening, Andy eventually winds up a CFO making $1 million a year, and Beth winds up in some middle-manager type position, making $70,000.  

Yes, Andy outearns Beth because of a lucky break.  But, the difference is contained within the accountants' income distribution, in the same way luck in our expanded MLB is contained within the teams in a single age level.

Luck matters more, obviously, when the differences in talent are small.  Within the subgroup of accountants, luck is going to matter a lot.  Within the subgroup of burger-flippers, luck is going to matter a lot.  But within the COMBINED group of accountants and burger-flippers, luck isn't that big a deal. You're not going to have many burger flippers, with average talent, getting lucky and outearning a typical accountant.

You can probably see this for yourself with a little introspection.  For my own part, I can see my career, and life, turning out radically differently based on a few key random events and decisions.  But ... I don't think I'd be poor.  I don't think I'd be making minimum wage.  I like programming, and I'd find a programming job somewhere, and even with the worst luck, I'd be making a decent living.  

Also, I don't think I'd be ultra-rich.  Even with extreme good luck -- say, 3 or 4 SDs above average -- I doubt I'd be a charismatic, celebrated CEO of a big company.  That requires skills and personality traits that I just don't have.

There's a lot of luck in individual baseball batting performance, but that doesn't mean you'll see Ozzie Smith hitting 60 home runs.  And there's a lot of luck in career outcomes too, but that doesn't mean you'll see lots of Bill Gateses working minimum wage.

At least, not because of the kind of luck the authors are talking about here.  

------

But, fundamentally ...  I wonder about the entire premise of the argument, that the prevalence of luck causes inequality to increase.  I wonder if it's the other way around.

A "system that rewards ability", as the author puts it, is an important and desirable goal.  A job, or promotion, or salary, or other reward, should go to the person who does the job best, not the one with the right resume, or the right skin color, or the right DNA.

Nor, by extension, to the one who happened to obtain the best roll of the dice.  

But, why does it follow that a system that rewards ability must also be more equal?  I think that's the wrong conclusion. It's understandable ... we see that some people get rewarded for being lucky, and we think, well, if only those people didn't get to be so rich, randomly, we'd all be more equal!  

But, I think that's backwards, at least in the hiring context. The more merit matters, the *bigger* the differences in salary.  Because, an employer is only going to pay you the expected value of your production.  

Let's use a simplified sports analogy.  

A team is trying to sign players, who are $100 on average ... but, some are worth more, perhaps much more, and some less.  

Suppose you have no scouts.  So, you have no idea of the players' relative talent (assume, also, that neither do the other teams, or the players themselves).  

That means you have to hire randomly.  What are you going to pay?  Obviously, $100 per player.  You have complete income equality among your players, even though the guys on the team got there by 100% luck.

Later, you hire some mediocre scouts.  You're able to tell the better players from the worse ones, to a certain extent, based on "whether they look like ballplayers".  So, you hire some at $130, and some at $70.   Less equality.

Finally, you hire some sabermetricians and some expert scouts, and now you can estimate each player's value within $10.  You hire the superstar at $400, and a mediocre mop-up man at $5.  Even less equality.

Isn't that a better description of how real life works?  You can't be a well-paid employee unless you can prove to an employer that you're worth it.  The more merit-based the system, the better chance you have of getting full value for what you're worth.

If you don't like that analogy ... try this.  There are a hundred brand new Honda Civics on the lot, and they all cost the same.  But, now, suppose you have more information about their merit -- somehow, it becomes possible to predict reliability.  That blue Civic over there will run trouble-free for 20 years. But that red one ... the transmission is going to blow at 80,000 miles.  

Now, the top 1% of Civics will sell for a lot more than the bottom 1%.  Right?

-------

In general: the closer you look for merit, the more differences you find.  The more differences you find, the wider the distribution of the sum of those differences.   So, the more you hire by merit, the more spread you get in salaries.

Is that a problem?  Not for me.  I'm strongly in favor of hiring by merit ... and I don't think income inequality is necessarily always a bad thing.  So, to me, there's no serious trade-off. But, if, you like both merit and equality, I think you have to choose which is the lesser evil, in this context.

As a society, I think we've made our consensus trade-off ... because, there are many, many unspoken ways in which we deliberately ignore merit.  For instance, we pay our teachers by seniority and experience, rather than by how good teachers they are.  We try to avoid situations where long-term employees get demoted or has their pay cut, even when their performance drops.  We discourage comparisons of which employees are better workers than their colleagues in the same position.

We give lip service to the idea that we should be paid and rewarded by merit, but we don't actually believe it as much as we say we do.  We claim we can't have nepotism because then we're being unfair to candidates with more talent, but then we believe we CAN favor older, worse teachers, without being unfair to younger teachers with more merit.  

Like a lot of other things in our society, we start with the outcome we want and work backwards to rationalize it.  We hate nepotism, and we hate firing mediocre teachers.  Merit is just an incidental consideration.