Fair Wages, Part III

You can look at the concept of fair pay in several ways. Here are a few:

1. If you work hard, you should earn enough to achieve a minimally dignified life.


2. Your salary should reflect the worth of your job to society. If you make the world a better place, you should be rewarded for it.


3. Your salary should reflect the worth of your job to your employer, and how you help your employer turn a profit.


4. Your salary should reflect the difficulty, pain, and risk involved in the job you do.


5. Your salary should be determined by the free market, according to the laws of supply and demand.

A comment on the last formulation, which seems to be the dominant one in American society today. While I generally respect and appreciate the free market, I’m not one to worship before it and cede it power over what is right. The free market is good because it has generally made our lives better, not vice-versa. Proposing that humans should suffer (for example, with an inadequate minimum wage) to keep the market unfettered sounds heartless and is not in keeping with my brand of humanism.

Regardless, let’s consider the issue of CEO salaries with those criteria in mind. It’s easy to find scandalous examples. I googled “CEO Salary” and picked an article more or less at random: http://money.cnn.com/2005/08/26/news/economy/ceo_pay/

David H. Brooks of bulletproof-vest maker DHB Industries, raked in $70 million for 2004. By contrast, in 2001, he made $525,000.

I’ve never heard of the guy or the company, and maybe there are extenuating circumstances. I doubt it; more googling shows a class-action lawsuit over the matter that was settled. (By the way, most of that $70 million was in stock grants.) But let’s take it at face value. To put this salary in perspective, for 2004, the company had sales of $340 million over the last twelve months, giving it a net income of $30 million. Net income was $15 million in 2003, in case you were wondering if his 2004 salary reflected superb performance in the previous year. You can see the data at http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=US%3aDHBT.

When I go through my criteria above, I can’t see that this salary is justified by any of them. The guy may have worked hard to earn his money, but there are plenty of people out there killing themselves at their jobs and they don’t pull down seventy thousand, much less seventy million. The kicker for me is the supply and demand argument: does anyone really believe that you couldn’t find someone out there who would be just as competent a CEO but was willing to earn, say, a paltry $5 million per year? Heck, given the ratio of the guy’s salary to the company’s earnings, you could be a significantly worse CEO and the company and shareholders could be better off given the salary savings alone.

Hey, I have no problem with the big shots making the big bucks. Their job is a lot more important than mine – there’s a lot more riding on their performance – and they should be rewarded for it. I’ve also heard the argument that if a good CEO increases company performance by just a few percentage points, it’s only fair to reward them a fraction of the market gain. And that’s fine … to an extent … but I would feel better about it if they also had to pay a price if they sucked and drove the company into the ground. Still, I keep coming back to the supply and demand issue. No way is the talent pool that shallow to warrant such high salaries.

The original article I linked to listed these statistics:
In 2004, the ratio of average CEO pay to the average pay of a production (i.e., non-management) worker was 431-to-1.
…
In 1990 … CEOs made about 107 times more than the average worker, while in 1982, the average CEO made only 42 times more.

Now these numbers mean little by themselves and without knowing how they were calculated (what constitutes a CEO?). If there was a lot of industry consolidation, you would expect relative CEO salaries to rise. So I would want to control the numbers by company size, perhaps. Those reservations notwithstanding, it does seem like something fishy is going on.

Bringing the discussion full circle to my first post on wages, if DHB had only paid their CEO five million dollars in 2004, the savings on that one salary could have given 16,000 minimum wage workers a $2/hour raise for a year. If it hacks you off that McDonald’s is required to pay a burger flipper $5.15 per hour whether the market demands it or not, you should be fist-clenching, vein-popping, jaw-gritting furious about modern-day CEO salaries.

Holding Out For Victory

Today, President Bush denied that the U.S. should withdraw from Iraq. "We can accept nothing less than victory for our children and our grandchildren." Well that’s big of him. He could have added, “and I will spend as much of their money as it takes, more than the hundreds of billions I’ve already spent”, but that would have been too honest for the man.

A Football Probability Question

This came up in last week’s Broncos-Chargers game.

The Chargers scored a touchdown with a minute and a half left in the game. Broncos were out of timeouts. Before the extra point, the Chargers are up by seven. Question: if you are the Chargers, do you go for two, or kick the extra point? The announcers were debating the issue, and I’ve seen more debate online, but there is actually a mathematically correct answer here.

The arguments were: (pro) if you go for two, and make it, then the game is over. If you don’t, the Broncos still have to drive the length of the field; not likely. (con) Kick the point, then the Broncos have to drive the length of the field – not likely – and then make a two-pointer, also not likely.

Three assumptions. (i) If the Chargers go for two and make it, then the Broncos have a negligible chance of winning. (ii) If the game goes to overtime, each team has a fifty-fifty chance of winning. (iii) The odds of making it when you go for two are less than fifty-fifty.

It’s easy enough to write out some equations that reveal the truth, but there’s an elegant way to argue this. In either case, in order for the Broncos to tie the game, they have to both drive the field and score a touchdown, and there is a two-point conversion that has to go the right way. The only difference is that if the Chargers go for two, they are the ones that have to make the conversion, whereas if they kick the point, the Broncos are the ones to go for two. Since the chances of making the two-point conversion are less than fifty-fifty, the best choice for the Chargers is to force the Broncos to have to make the conversion, i.e. the Chargers should kick the point.

Not sure that’s an especially clear explanation. Here are the formulas. Say the probability of the Broncos driving the field for a touchdown is TD, and the probability of a team converting the two-pointer is C. Then if the Chargers go for two, the Broncos win with probability

        (1 – C) * TD    [Chargers miss the two-pointer and the Broncos score]

and if the Chargers kick it, the Broncos win with probability

        TD * C  [ the Broncos score and make a two-pointer]

Since C < ½, the latter number is going to be smaller, which is what the Chargers want. So they made the right choice – go figure.

Fair Wages, part II

As I noted in the last post, I think the minimum wage in this country is too low, and should be based on some objective cost-of-living criteria. But I’m actually more concerned about salaries for the really important jobs, like teachers, firemen, police, nurses, and so on. You know, the people who actually allow our society to function. Their jobs are way more important than mine; in a fair world, their salaries should enable them to enjoy a decent standard of living.

My grandmother just celebrated her 90th birthday. In the early 1950’s, my grandfather was a foreman at a repair shop for the Colorado highway department. In other words, he had a respectable lower-middle-class job. They bought a suburban house a few blocks off of Colfax in Aurora. A thousand square feet, three bedrooms, one bathroom, detached garage. It was a great house for them, and they lived there for thirty years, until they got old and the neighborhood fell apart.

Cut to the future. My cousin – my grandmother’s granddaughter – graduated from college recently and is on her second year of teaching in the Denver metro area. I’m too tactful to ask her what her salary is, but according to public data, the average starting salary for a teacher in the metro area is around $32,000 per year. My grandparents’ old house would probably cost around $130,000 today (source: www.zillow.com; not the most reliable data, but that’s probably a reasonable estimate). My cousin cannot afford that house right now on her salary.

Ok; well, she’s young, and my grandfather was around 40 when he bought the house, so it’s not a fair comparison. Average teacher salaries in the metro run in the mid-$40’s. Assuming you can afford a house costing three times your annual salary, an experienced teacher could probably afford that house. However, standards of living have risen, and that house is no longer considered the norm for a lower-middle-class family; especially because of the semi-blighted neighborhood. The going rate for a decent three bedroom, two bath home in the Denver area in a safe neighborhood is something over $180,000, which will always be out of reach for a single teacher’s salary.

Now, times are different, and these days a dual income family is the norm. My cousin is married, also to a teacher, so together, they could buy an average home and meet the standard of living that my grandparents had fifty years ago.

This doesn’t sound like progress to me. On one income, my cousin’s family can’t afford the same standard of living my grandparents had fifty years ago. This sounds unfair since my cousin’s job is arguably more important, and she has much more education than my grandfather did.

I don’t like it. I think that if you are taking on hard jobs, jobs that are essential to society, you should at least have an average standard of living. I’m not sure what to do about it – but I don’t like it.

Sometimes I think about my job and wonder if I’m being paid unfairly (meaning, do I make too much). As a computer programmer, I bring in significantly more than my cousin and her husband combined. Should I really be earning more than a teacher?

On the one hand, if you go by the laws of supply and demand – which is how things are currently playing out – my salary is completely justified. I have a lot of education, experience, and skill, and can command a high price because of that. It would be easier for me to step in and teach school than for most teachers to do my job. Moreover, there are relatively few barriers to entry in the software world. If you want a job with my salary, all you need to do is to outperform me, and you’ll get one soon enough. So I don’t feel too guilty about what I make.

On the other hand, I think that writing enterprise middleware is a lot less important to society than teaching, and my job is probably less demanding than that of most teachers, in terms of hours worked, physical effort, and emotional stress. That part doesn’t seem fair to me.

Questions of fairness aside, I keep wondering what the consequences are of underpaying some of our key citizens. Or conversely, how much better off would we be rewarding the important jobs more, and getting more qualified people to do them? Teachers have always had relatively low salaries, and I guess we’ve made it this far, but is that the best we can do?

Fair Wages, part I

The Colorado minimum wage increase ballot issue passed last week. I feel a little bad about voting against it, so I’ll make up for it by writing a blog entry on the subject. That’ll show ‘em!

The minimum wage in Colorado is the same as the federal rate, $5.15 an hour. That is shamefully low.

I’ve heard a number of arguments against raising the minimum wage. I won’t discuss them in detail, but will suggest that logically, they must boil down to one of two points:
· Having a minimum wage at all is a bad idea.
· A minimum wage is good, but the current rate is adequate, if not too high already.

I actually don’t hear too many people argue the first; perhaps because that is starting to lose its place as a socially acceptable position, and people don’t have the guts to honestly argue it. I’m sure there are some economists out there who will argue that the economy as a whole would be stronger without it. My guess is that such people are not likely to be earning anywhere near the minimum wage.

But once you accept that there should be a minimum wage, then the whole issue becomes exactly what the rate should be. And I’m not hearing that discussion from the defenders of the status quo, just that the current wage is high enough.

And logically, that’s a weak position to hold. If you think $5.15 an hour is just right, then you should want to raise it for next year to adjust for inflation. If you think it will be fine for next year, then shouldn’t you be arguing that the current rate is too high? Shouldn’t you have been saying that last year and the year before?

Here’s my take. This country is rich and fortunate enough that we should guarantee that everyone who puts in forty honest, hard-working hours a week is entitled to a minimally decent standard of living. This would include:
· renting a clean, safe, one-bedroom or studio apartment
· sufficient amount of groceries, clothes, and other necessities
· adequate health benefits, including long-term disability
· enough to furnish your apartment over the long-term; includes dishes, linens, as well as furniture.
· transportation to/from work
· enough for a small entertainment budget

Note that this doesn’t say anything about being able to support children or a family. I’m a bit undecided on that, actually. On the one hand, if you are in dire financial straits, you shouldn’t be starting a family. On the other hand, if you have a decent job, start a family, lose your job, and are reduced to working minimum wage, there should be some safety net to keep your family solvent. But for now I will say at the very least, you should be able to support just yourself on minimum wage.

Now $5.15 an hour, if you work 40 hours a week for 52 weeks, works out to $10,700 per year. That’s $890 per month, assuming no deductions. I don’t actually know how much you get deducted at that level; I believe there’s something for FICA and maybe Social Security. Still, call it $890 a month.

In grad school, back in the late ‘80’s and early 90’s, I was able to get by on about $900 a month (in 1990 dollars) by being extremely frugal – no eating out; new clothes were rare; furniture was either pulled from a dumpster or donated. My car and part of the insurance was a gift from my parents. When I got sick and insurance wouldn’t cover it, my parents picked up the bill. I did have a few luxuries: I generally didn’t have a roommate; I bought a CD or two a month, and after a while I was able to save up enough to buy a computer. Taking out the entertainment budget, I was technically able to live on less than $800 a month, but I had help. It wasn’t fun, although I had a safety net via my parents, so I never truly worried about going broke. And it was easier to tolerate knowing that it was only temporary (although it lasted five years).

Ahh, the good old days. So can you live on $5.15 an hour, and have the decent standard of living described above? Maybe. It would be very tight – especially if you needed a car. There would be no margin of error. I wouldn’t want to try it.

Anyways, the point is that if you’re against a minimum wage increase, what do you think the value should be? If it’s not enough to live on, why not? My personal take is that some subset of the people who decide the rate should actually try it out for a year and see how they like it.

A few other comments:
Minimum wage increases passed in six states last week – good for them. I saw some grumbling on a conservative website that people “went out and voted themselves a raise.” Ummm . . . no. Amendment 42 in Colorado received over 720,000 votes; way more than the number of people making minimum wage in the state. The whole idea that the minimum wage is some sort of entitlement and because of it, people are being unfairly rewarded is pretty rich … if you think a minimum wage job is some great scam, the McDonald’s down the street is hiring – try it out.



By the way - you can see a map of county results here: http://www.cnn.com/ELECTION/2006/pages/results/states/CO/I/02/map.html. The distribution is pretty interesting. It looks like the results track well with a combination of: Democrat/Republican breakdown in the county, and cost of living. The counties most heavily for the measure were Pitkin (Aspen), and San Miguel (Telluride), while the counties most against were the poorer counties out east. Which raises a good point – it would make sense for the minimum wage to be tied to the cost of living for a region. You need to earn more to live anywhere near Aspen than you to live in Yuma. But that gets back to my original point – let’s figure out what the standard of living should be, then calculate the right wage from that.

The Ted Haggard Affair

[Reposting this since I had some edits, but the blogger software is locking me out of the original post.]

So some bigshot anti-gay evangelical preacher has been outed on drug and gay sex charges which, apparently, are at least somewhat true. I’ve never heard of the guy, and I don’t really care much about the story. Such scandals are nothing new. But the phenomenon of the high priest being a major sinner is somewhat interesting, since naively you’d expect the opposite.

Here’s how I see it, by way of an analogy. Suppose the preacher at my church started railing against people eating grass. Now, I’ve never eaten grass, and never had any inclination to. Maybe there’s some percentage of the population that does, but not me. Over the years, the preacher goes on and on about how we must not give way to sinful urges to eat grass. Which just makes no sense to me. I mean, it never even occurred to me that people eat grass. Still the preacher carries on – we’re all tempted, but don’t give in. And I wonder – we all are … really? Are you sure? And then the day comes where he gets caught in his back yard, on hands and knees, shoveling fistfuls of fescue into his mouth. The congregation runs around, shocked, but maybe they should have seen it coming.

Not the strongest analogy, but hopefully the point is clear.

Keeping Score, continued

Let me expand on the idea that we should track the accuracy of commentators. Too often, it seems like these people are using debate-team rules, where the goal is to out-argue the other guy using rhetorical tricks, and real-world truth is lost in the balance.

For example, take the current debate over whether global warming is real. This lends itself well to making specific, measurable predictions. For example, the average world-wide temperature in year X will be Y degrees, or by year Z the ocean level will have risen W inches. Make the predictions and results public. Do that, and I predict – no, I guarantee – that you will see a lot more waffling among the naysayers, as well as the enviro-extremist-doomsters. The overall quality of the discussion would go up, and maybe some of the people who are consistently, egregiously wrong would have to find more appropriate careers.

I’ve been thinking about this in terms of my job as well. My job is all about trying to make good decisions, which requires anticipating the effects of the software my team writes. And we frequently get into debates over the right course to take. But my motives aren’t always pure – besides my appraisal of the future, there is also what the decision means to me personally, i.e. how much extra work do I have to take on. And the same applies everyone. So I’ve started asking myself whether my decisions would change if I had money on the line. And interestingly, sometimes they would.

Which leads to an interesting thought experiment. What if a company gave everyone a budget, say a couple hundred bucks, to use in an internal sort of futures market? So for example, I’m designing some feature that doesn’t support a certain obscure use case. A colleague calls me on it, and I say, well, no customer would ever try that use case. At that point, if they really wanted to challenge me, we could put money on it; if I was too chicken to do that, then it meant I had to acknowledge that my design was faulty and fix it. Obviously, there would be a lot of pitfalls and details to be worked out, but it’s an interesting idea.