Do you know what the world is full of? Angry op-eds about CEO salaries. It’s happening again over at Yahoo, now that Marissa Mayer is going to be earning a fortune for having run her company into the ground, and then sold it to Verizon.
I’m not saying that there aren’t some points there to be made – but I also think that there is a real and pervasive confusion about the difference between “value” and “price”.
These writers are looking at a CEO’s price (his/her salary) as representative of his/her value in society… And they’re comparing it to what the poor teachers are earning, and how much value they add to the younglings that are going to grow up and make the world their oyster. Et cetera. But they are bound to be disappointed. Because the two concepts of “value” and “price” are only vaguely correlated – and mostly have nothing to do with each other.
What is value?
Value is intrinsic. It defines how well a particular good/service fits my particular needs/desires. With the most value belonging to the goods that are non-negotiable.
What is price?
Price is extrinsic and relative: a function of demand, supply, and availability of substitutes. Price is, in effect, almost entirely a negotiation.
An example of the difference
Let’s look at my value-hierarchy as an average human being, based on what I cannot live without right this minute, extending outward. It goes as follows:
- Oxygen – without it, I’d last about 90 seconds.
- Water – without it, 4 days.
- Carbohydrates – without it, maybe 10 days. Unless I’m banting.
- Protein – can last without it, but might be good to have muscles to find the water and the carbohydrate.
- Fibre – can also last without it, but now that I’m building muscle to search for the water and carbs, time to suspend some of the strain.
- Clothing – right, let’s stop the inefficient wastage of energy by having to run around to stay warm.
- Shelter – might be nice to have a cave over my head. Or a hut.
- Fats – well now it’s an idea to start storing some energy away for those winter months when the carbs and protein might be a bit thin on the ground.
- Utensils – oh look! That’s a much easier way of doing things. Love it.
- A tribe – might be a bit easier to do all these things if I could just spread the work around.
- Storage space – where to put all this STUFF that I’m getting. Time for a new cave.
- Status – how great would it be if I could get people to do the work for me?
- Aesthetics – wouldn’t it be nice if stuff looked nice?
- A holiday destination – how great would it be to get away from all these people who tire me so by bugging me with all these questions?
- Cellphone – I need to screen this sh*t with caller id. Hot damn.
But if I go and look at my budget (my price-hierarchy), here is what I spend money on, in order of priority:
- Rent (especially as I don’t like traffic, and I’m prepared to pay a premium to avoid it)
- Dining out (some months it comes in a close third)
- Coffee (some months it comes second)
- Cellphone bill (goodness)
- Fibre internet access
- Other stuff
- Water (only because it’s part of my rent)
- Air (does not get paid for)
And what am I trying to point out? That actually, based on life in general, the most necessary (and therefore, most valuable) commodities are the ones for which I pay the least. But I am willing to pay relatively high prices for items of near superfluous intrinsic value…
So then: why should the economy at large function any differently?
Let’s maybe agree that a teacher has more intrinsic value than a CEO – but even if we agree on that, a teacher’s intrinsic value has absolutely no bearing whatsoever on their salary. Their salary is determined by:
- Demand for teachers (how much do we want our kids to be educated – and how easy is it for one to get around that need)
- Supply of teachers (how easy is it to become a teacher, how many of them are there, and how do we distinguish between the good ones and the bad ones)
- The bargaining power of teachers as a group (are they unionised, and how effective are those unions at negotiating wages)
- The incentives of the salary-payers (who sits on the other side of the wage negotiation table, and how much do they really care what teachers are paid?); and most importantly…
- The relative worth of education (Does the economy reward education with higher and better paid jobs?).
Ironic, right? When you think about it, the average teacher’s salary is at least partially defined by how well we are paying the best-educated amongst us. And given that CEOs are generally some of the most educated people out there, one potential solution to the teacher salary crisis is to pay the CEOs more.
But either way, we should drop this myth about being paid what you’re worth.
Because the harsh reality is: you’re going to be paid based on wherever you position yourself in the demand-supply spectrum of the labour market.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.