How to reward people fairly? 2

In my previous post I raised the question of people being overpaid for what they do. This raises the questions: What is a reasonable reward? Who decides? On what basis do they decide? How much does someone really need to accept the job? Who pays?

The last question is the most straightforward for a company; it is the owners, or the shareholders, who pay. They pay for the salaries, they reap the rewards of success, and they pay the price of failure. Now, you may say, they can afford it, and sometimes they can, but also stop and think about how much of this investment came from pension funds. The managers of the investment funds do not lose, but rather it is ultimately the pensioners, who can least afford it.

Looking at who decides, we now see what I believe is a real problem: the people who set the boss’s salary are often either directly or indirectly setting their own rewards. If the investors vote, it is the managers of the investment funds who actually do the voting, and their salaries and rewards are usually set according “to what is general in the market”, but they in turn are creating the market price by setting CEO salaries/rewards in the companies on which they sit on the Boards. Anyone see a hint of a conflict of interest here?

However, it is the question of what is reasonable wherein the problem lies. A comment on my first post seemed to think that $25 million per annum was reasonable, obviously for a CEO of a really major company. The question now is, why? As I noted in the previous post, someone like Steve Jobs is almost unique, and deserves whatever he can get. There are also some that run small companies, and I have heard of one or two in the finance industry that have made extraordinary returns for their investors, and while they end up billionaires, I see that what they get as quite fair. They made the money in circumstances where just about everyone else was losing it, so they deserve to keep a good fraction of it. A really stellar performance at least justifies stellar returns. The trouble is, only too many get into such positions and turn in quite disastrous performances when the going gets tough. Worse than that, in some cases they can turn in near fraudulent performances, and fraud is probably the least punished crime.

Does fairness matter? I think it will if there is a real resource shortage, as is almost inevitable in the future? If supply cannot meet possible demand, those with large amounts of money have an extremely unfair advantage. To get around this, in my future history ebooks, I have introduced in A Face on Cydonia, a somewhat different system of payment. In this, you can negotiate whatever payment you can get, but there is rationing of all resource-constrained goods, and everyone gets personalized coupons that must be used to acquire them. That means that while higher salaries lead to the ability to purchase more fashionable things, and some other objects such as art that are not couponed, money itself becomes less of a goal. There are no coupons for private jets and so on. Of course, this creates some additional problems that will be part of the plots of future ebooks, however if anyone wants to suggest some, and if they are useful enough to incorporate in some of the follow-up novels, I promise your suggestions will be acknowledged.

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.