This doesn't just make a sort of sense to me, it makes perfect sense.
People trade their labor at a lower rate for higher stability (less risk). The people who start companies, find capital, and distribute that capital in ways that increase the value of the company have taken on more risk (how significant varies case-by-case and usually is a natural market cap ceiling to the total value the owners can extract ahead of employees).
If the company I work at gives me shares in that company, I want the company to pay less for my labor (and everyone's) if my belief is that collectively all employees output will accelerate my own wealth creation when I sell my shares in the company. The share becomes a transitive store of value I believe my own labor alone will never be able to keep up with, and I want to make sure the value it's accumulating is not diminished because the company is paying out the full capital value of everyone's labor. Then there would be very little incentive for me to take the shares in the first place, and, honestly, very little incentive for anyone to start a company (why take on that risk if there's no payout in excess of just joining another company?).
The % of comp in RSU raises as you get promoted to higher levels, where you (theoretically at least) actually have more impact on the success of the company.
RSUs go a long way, but don't totally align the incentives.
At a company of, say, 100,000 employees, how much my individual contribution will makes the stock price go up is debatable, but getting more of those RSUs will materially boost my TC, where at upper levels the majority of TC is stock-based.
Even considering the risk-neutral compensation, this is not how much employment ought to be discounted. Especially not in the U.S. where many states have at-will laws.
Bezos' risk of spending other people's money rewarded him with billions.
Warehouse workers risk of personal injury are rewarded with starvation wages.
Why would you expect people to capture the full value of their labor?
Imagine you operate a business. You do the math and determine that hiring a new employee will cost you $100K/year, but it will bring in $100K/year of revenue. In other words, the employee would capture the full value that they create (assuming nothing goes wrong).
Do you hire that employee? Of course not. It doesn't make any business sense. It's more work for you, more risk for the company, and most importantly it provide $0 financial value to the company. It's an easy no.
Now if you can hire someone for $100K and their addition will bring in $150K, that's a different story.
You can't expect to capture the full value of your labor as an employee. However, you're also free from capturing the full value of the losses you might create. If you fail to ship your objectives or you accidentally drop the main DB and cost the company $100K, you don't receive a bill for the negative value you created. You get to keep your paychecks.
> which leads to people not being incentivized to increase the value of their labor.
This doesn't make sense at all. People increase the value of their labor all the time because it leads to more and better opportunities and gives more leverage in future negotiations.
You don't have to capture the "full value" of your labor to have an incentive to improve.
In theory, if you had a competitive and fungible marketplace where a specific employee would boost profits by $100k, and you offered her a salary of $80k, someone else would outbid you with $90k, and someone else would outbid them at $95k etc. Even if the "margins" are low, no one is going to pass up on free money.
In practice, the labor marketplace isn't nearly competitive or fungible enough to expect the above. However, there is still a very different problem. Even if the average salary is "fair", people get rewarded a tiny fraction of the value they generate. Imagine if I'm working at Google and I find a way to save Google $10M/year via improved hardware efficiency. Despite the fact that this isn't part of my job description. How much of that $10M would I get in the form of a salary increase or bonus? A pretty darn tiny amount. 1% if I'm lucky. Is it worth it? Probably not. I might as well just do what my manager asks me to do, and spend my extra time learning Haskell and going to happy hours. This is pretty much what GP was alluding to. If companies started giving people a significant fraction of the value they generate, corporate life would change dramatically.
The sole reason while your research generates millions of dollars of year of saving is because it would be applied at Google scale. So your work times google scale = $10M/year.
As stated above, you deserve to be compensated for a part of your work. But pretending that your compensation should also include the "Google scale" factor - which you did not contribute to in any meaningful way - is not right.
If you want your compensation to be based on the outcome of your work on the company as a whole, you need to work for equity and not for salary, and accept the associated risks - which might include getting nothing for a lot of efforts. Of course, your compensation will then also include the work made by others, which you might like or dislike.
If you want to be able to precisely measure your own contribution, exclude any other factors, and capture almost all of it, you probably are better of creating your own solo-founder type of company and stay solo. When 1+1=3, it's hard to precisely pinpoint which "1" generated the extra value.
Google probably runs at 25% profit margin, so $10M/y savings equate to $40M/y additional revenue. A Google cloud sales rep probably makes at least 5% sales commission, so they'd net at least $2M for equivalent sales (which they would only able to achieve because of Google scale, but if you make that argument with them, good luck keeping them employed). Conversely, a SWE delivering $10M/y savings would probably only see a small bump on their refreshers and bonus.
"Google scale" wouldn't exist without the workers that make it possible. Seems to me like they can get more of that value they enable than they currently do.
If I can make $1 on my own, and you can make $1 on your own, but together we can make $4, we each deserve $2. I don't deserve $3, even though I turned your lone $1 into $4. But I also don't deserve just $1, because I did contribute to the scale factor. In todays world, it seems like we'd each get $1.
How do we divide the extra $100k. Are you pretending that you should get $50k (50 thousands times what you were doing alone) and we should get $50k (1.005 times what we were doing without you) as well ? That does not seem very fair to me at all.
This isn't a good model. Boosting your company's profit by 100k doesn't mean they can boost any company's profit by 100k. If they could, they'd capture a lot more of the 100k.
That's what the model predicts, but it's unfortunately not how companies beyond a certain size work in practice. Hiring decisions are not made by the business owner to increase profit, but middle-ranking members of the hierarchy who have their own parallel goals.
Businesses can, and do, regularly hire employees that bring in zero or negative value. Often, these people will make up more than 50% of the company by headcount, and the only reason the company still turns a profit is because their existence is subsidised by a small minority of hyper-productive people.
There are people who take on big, flashy projects that generate a lot of measurable value, and there are people who do the boring stuff that needs to be done too. Without one, you don’t get the other.
I think at this point it's unfair if we were to say the specific people are the issue. A big business has a lot of required components in order to keep running, and some of them are not directly revenue generating, but you still need most of them. That's a value of small companies, being so lean you can be hyper-focused and efficient. Bigger companies can perform at scales smaller ones can't, but that comes at the cost of inefficiencies of orchestrating the bigger operation. Just getting all the people aligned to do the things the business needs them to do is a huge and messy cost that smaller companies don't have, but it's required else your conglomerate would fall apart.
There was no HR, no management class, no purchasing agents or head of IT, maybe one hour of meetings a month and everything worked ridiculously, buttery smoothly.
We built the products that needed building, everyone pitched in and morale was generally high.
I could name one person who I'd consider had a "bullshit job", and another who's job was semi-bullshit. This is out of maybe 100 people I met across multiple departments.
I agree that a lot of businesses can cut down on bullshit process and bullshit jobs and keep running fine, but there's a lot of "cost centre" style jobs that are non-negotiable, especially when it comes to compliance and government reporting. Compliance and reporting is a business requirement that the software industry very rarely has but I'm expecting to see that change over the next decade. Accounting kind of falls in that category actually.
An aside, Blackmagic sounds great to work at. I avoid big companies specifically to avoid the bullshit process and people, so that sounds like a dream.
There was an accounting team, of course, as well as support and the most competent IT department on planet Earth (consisting of two guys for the whole company), but they were nimble and didn't overreach in terms of their authority.
Legal was outsourced, AFAIK.
>An aside, Blackmagic sounds great to work at.
It really was. The culture was amazing.
In a company with no HR, whose role is it to deal with employment contracts, ensure the company's compliance with labour laws and deal with personnel issues (which, at 500+ employees, probably arise more frequently than either of us would think)?
Interviews were handled by the team that the new hire would be joining, and most personnel issues were handled locally too. Very rarely they'd be kicked up the chain to the department head, but honestly these issues were very rare.
Seriously, without an "HR police" to complain to, most people would just deal with interpersonal issues like adults and move on.
Who handles health insurance and 401k match?
The Federal Government.
>Who handles the sexual harassment complaints and the illegal hiring discrimination?
Team leads, or lawyers if it gets far enough. You don't need a team of people on full-time for an event that happens twice a year.
Or the company has a near monopoly over certain lucrative markets.
I think it is primarily due to de-risking. You agree with your employer that the biggest percentage of your income will be fixed and independent of how much value the company produced (be it profits or share appreciation or whatever). This makes sense because your life has high fixed costs, and your cash-flow cannot allow for years when you make zero (or even a negative amount), even if in the next one you would make 5 times your current salary.
> which leads to people not being incentivized to increase the value of their labor.
Don't think this is necessarily true. I would love to walk into an apple orchard now and spend an hour picking if I could keep 25% of the apples.
Assuming wages are a function of the free market. And the less mobile people are, the less job-applicants exist, and the higher wages need to be to poach. Incentivizing for good work might have diminishing returns after a certain point.
If the entire society had a similar level of appetite for risk, we'd see a different asset distribution in society.
Since most people are terribly averse to losing anything, they also shut down the perspective of winning big.
Imagine there is a lottery where for every 10 million tickets you buy you get one that is giving you 20 millions back.
No brainer, right? Except if you don’t have the 10 million to spare, buying lottery tickets instead of food doesn’t make sense.
Labor/job is your single lottery ticket.
Investors can afford to buy all tickets to make sure they win.
Applied another way, everyone in a given class of YC should share a bit of ownership with everyone else in their YC class, and then everyone of them is likely to end up a millionare.
I still wish that YC would provide some more concrete figures, and ideally include separate figures for first employees as well as founders.
From link: “Most of the returns have gone to a tiny minority of super-successes. The founders of AirBnB, Dropbox and Stripe are worth about US$7 billion, about 80% of all founders’ equity, although they account for 0.5% of the companies. Outside of the most successful companies, it was still possible to earn significant returns. 12% of companies from the first five years of Y Combinator are now worth US$40 million or more, and a further 10% have sold for US$5-40 million. The remainder probably earned little more than their (low) salaries.”.
Employees take on considerable risk by joining early startups, and they take on opportunity risk when working for other companies, as well.
An early employee risks their ability to house and feed themselves and their family, along with their ability to afford medical care or retirement, by working at a company that could fold or fire them at any moment. An investor might experience some capital loss they can write off at tax time.
I'd bet in most early stage startups nowadays developers are paid way more than the founders themselves. And they work way less hours, with way less stressful problems than the founders.
The difference in pay, hours dedicated and stress (along with damages to health and life in general) represents the founders' risk appetite for future earnings.
Employees are not at all open to bear this level of risk and they should not be compensated for not bearing this risk. Founders and investors deliver value to society by bearing higher risks. We have better and cheaper services as a result. They should be compensated accordingly, so we keep them motivated to continue servicing us in increasingly better ways.
Then there would be no incentive for investment.
There's three people (or entities) in this: the one who makes the tool, the one who buys the tool, and the one who uses the tool. All of them need some of the rewards from the increased productivity that the tool empowers, otherwise we stop getting tools that let us be more productive, and we're all worse off. So you have to pay both the capitalists and the workers.
Now, you can argue that the pendulum has swung too far in the direction of the capitalists. That's a defensible position. But the answer is not to move to "the workers get 100% of the gains". That's going to leave everyone worse off, including the workers.
The CEOs of such companies get multi million dollar packages for leaving.
This is not a comprehensive description of capitalism but it is the low level idea. Obviously there is a distribution of real world behaviors.
It's not anchored in labor exploitation.
> The basic concept of capitalism is that there are capital owners, and they hire workers who use that capital to generate value. The capital owners receive all of that value and then pay the workers for their time.
These are both true.
As the person you're responding to said, capitalism is the philosophy that concentration of capital should be rewarded. It's that simple.
Whether the state or private magnates concentrate the capital and get rewarded for it is irrelevant.
By the way I got this from Richard Wolff. Here is his education history:
B.A. History magna cum laude Harvard 1963
M.A. Economics Stanford 1964
M.A. Economics Yale 1966
M.A. History Yale 1967
Ph.D. Economics Yale 1969
But did Mr. Wolff really say – "The basic concept of capitalism is that there are capital owners, and they hire workers who use that capital to generate value. The capital owners receive all of that value and then pay the workers for their time." – ? Where?
If it does it's no longer capitalism.
15 years later, this is still a widespread problem everywhere. People don't capture the full value of their labor (which makes a sort of sense, given imperfect information and how risk is allocated), which leads to people not being incentivized to increase the value of their labor.
We've all heard stories about people being extra efficient and getting rewarded with raised expectations and maybe a paltry raise. If people were really incentivized to do their best work, I imagine we'd get a better world.