How to reward people fairly? 1

Does anyone think economies should not be more efficient? Does anyone think they should not be fair? In the future, resources and opportunities are going to be scarcer, so how do we realize the two goals of efficiency and fairness? This is one of the topics I have included in my futuristic novels, and since I do not have the answers (every answer I postulate, I then show how someone gets around the rules, which then leads to undesirable outcomes) here is the chance for you, the reader, to show me the light.

One obvious current problem is how to reward people fairly? Obviously, what is considered “fair” will vary between people, and it is unlikely that there will ever be detailed agreement, and an example I gave in Red Gold was, on Mars, who gets paid the most: the carrot grower or the pumpkin grower? The carrot grower might claim carrots are more valuable, but the pumpkin grower might claim to produce more oxygen, which everyone breathes, but is inconvenient to charge for its use. There is another problem. Markets appear to be fair, but the general assumption is that the addition or removal of one player makes little or no difference. Where you have only one or two providers for a product, that assumption fails and monopoly behaviour is seldom fair.

What about salaries, particularly for unique positions? Consider Apple Computers. Now it is possible to justify whatever they paid Steve Jobs, because he rescued what was almost a basket case and turned it into what it is now. However, his predecessor took over the leading personal computer company and turned it into a basket case, and at the same time, took home tens of millions of dollars for the privilege of his doing that. That is neither fair nor efficient.

Closer to home (New Zealand) we have a state-owned company called Solid Energy, which, recently, was worth several billion dollars, and is now deep in the minus column. The management, who brought about this disaster, take home what are, for here, enormous salaries. Three examples of their “brilliant management”:

1. They spent something like 70 million dollars on a study to convert lignite to liquid fuels. I could have reached the correct conclusion for a few per cent of that, and got fat on it! There were several reasons why the idea was a lost cause, e.g. they did not own the land, the lignite was very wet, there were major environmental protests promised, the technology is well-known but nobody wants to use it because it is economically wrong right now, and there were more. It was always a dog!

2.  They spent a similar amount of money on a project to grow canola and make biodiesel. The problem was, apart from the fact this is a bad idea in its own right, they planted a huge area in a region where nobody else tried to grow it. The overall yield was negligible, most of the plants well dead before seed formation. They overlooked a golden rule of new ventures: unless you are sure, start with a small experiment. Small costs less when it fails.

3.  Over the last couple of years coal prices were extremely high, so they bullishly expanded. So far, so good. However, they were unprepared for the prices to fall again. Now, you do not have to be extremely bright to work out that the reason prices were high was because supply was short, and the reason for that was that the huge mines in Queensland were shut down due to flooding. Equally, you do not have to be extremely bright to realize that such highly efficient mines would eventually reopen, supply would be full to overfull, and prices would drop. Good management would keep an eye on Queensland, and close down the least efficient in time.

My question is, why did such stupidity justify excessive pay? For that matter, why are so-called investment bankers paid huge bonuses for bubble trading, with the taxpayer picking up the pieces when the bubble bursts? Why do not people who made fortunes generating shonky derivatives and dressing them up all nice go to jail for fraud? That is where I would go if I generated such rubbish and sold it, but it appears that when an “approved bank” does it, it is OK.

None of which answers the initial question, so feel free to offer your suggestions.

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3 thoughts on “How to reward people fairly? 1

  1. A mix of socalist-capatlism might work. My theory goes that each position has a capped salary package with a trailing commission component. If you leave a company in good hands then a CEO gets there $25 salary + $2M per year trailer until they receive their $6M bonus over 3 years. If they leave a dog of a company or the next guy screws up then the bonus is cut to zero. The max bonus cap should also have a limit, say $2M, which forces bigger bonus over a longer time frame. Eg. $10M bonus takes 5 years to claim

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