Compensation in all its forms, salaries, wages, benefits, profit sharing, stock options and perks is certainly an incentive for an employee even if ideally not the source of their motivation. Can an executive be paid too much? Can a wage earner be paid too little? Who gets to decide? For an entrepreneur actively seeking the best employees what principles underpin the determination of their compensation?
Governments certainly attempt to impact compensation on both ends of the spectrum. Minimum wage laws attempt to impose limits on how little an employee can be paid. Simultaneously influential politicians like Bernie Sanders and Alexandria Ocasio-Cortez state “There should be no billionaires” attempting to set limits on the opposite end of the compensation spectrum. But do governments get to decide the limits of compensation? Or is it driven by economic principles like supply and demand based on even more fundamental principles?
“Fundamentally, there are only two ways of coordinating the economic activities of millions. One is central direction involving the use of coercion …… The other is voluntary cooperation of individuals – the technique of the marketplace.”
Milton Friedman
While one might debate the limits of compensation, fundamentally employee compensation is recognition of the value an employee represents to the employer and the value the employer represents to the employee. The employer values the employee’s time and effort more than the money to pay them. The employee values the money more than their time. At a minimum the economic principle of supply and demand certainly impact compensation as they do all prices in a market driven economy.
“ In a free market….. wages…., are determined…. not by anyone’s “greed” or by anyone’s need—but by the law of supply and demand.”
Ayn Rand
But there is even an even deeper principle underpinning employee compensation an Objectivist entrepreneur needs to be aware of, the “Trader Principle”.
“We, who live by values, not by loot, are traders, both in matter and in spirit. A trader is a man who earns what he gets and does not give or take the undeserved.”
Ayn Rand
The trader principle is based on a mutually agreed, mutually beneficial exchange of values, voluntarily agreed upon by both the employer and the employee. It is recognition of the value each offers to the other. By this principle an employer needs to compensate an employee as much as the market demands but no more than the employee is willing to work for. The employee should demand as much as the market demands but no less than they are willing to work for. Hopefully the employer and the employee can come to a mutually beneficial agreement on that amount, based on voluntary agreement between them. If they cannot they simply go their separate ways, the employer seeking out another employee, the employee seeking out another employer.
“A businessman cannot force you to work for him or to accept the wages he offers; you are free to seek employment elsewhere and to accept a better offer, if you can find it.”
Ayn Rand
Ultimately it is the combination of supply and demand underpinned by the trader principle that dictates the level of employee compensation. However many claim those on the top end of the compensation spectrum acquire their wealth by exploiting those on the lower end. In autocratic societies, where cronyism and the coercive force of government exist, and even in mixed economies where subsides and regulations are common, favored elites do in fact acquire wealth at the expense of others. But in a free society, where all relationships are based on voluntary mutual agreement, it is impossible for an employer to exploit an employee or for an employee to exploit and employer. With the arrangement being voluntary, both the employer and the employee can simply walk away.
The error of this exploitative thinking is based on what is called the “zero sum” fallacy. The “zero sum” argument is based on the false concept of there being one large economic pie, which everyone competes to get a bigger piece up. For one individual to acquire a bigger piece someone else must get a smaller piece. The first mistake with this argument is that there is no large economic pie everyone is competing to acquire a bigger piece of. There is only the pie each individual makes and exchanges with others (See Marketing). The second error is the idea that wealth is acquired. Wealth is not acquired; it is produced. As there is no limit to the amount of wealth someone can produce there is no limit to the compensation one rightly deserves for producing it. Everything that is produced is produced by someone. By virtue of the fact they produced it, it is theirs. In a free society, those on the top end of the compensation spectrum have not and cannot achieve it by exploitation, but only through their product achievement.
“Productive work is the road of man’s unlimited achievement and calls upon the highest attributes of his character: his creative ability, his ambitiousness, his self-assertiveness, his refusal to bear uncontested disasters, his dedication to the goal of reshaping the earth in the image of his values.”
Ayn Rand
As just stated, in a free society it is not possible for an employer to exploit an employee. However in societies where governments interfere by imposing restrictions on employer-employee relations it is possible for an employee on the low end of the compensation spectrum to suffer exploitation, not by the employer, but by the very government interference itself. One example of this is minimum wage or “fair wage” laws, which are common in mixed economies such as the U.S.
“There are no “rights to a ‘fair’ wage or a ‘fair’ price” if no one chooses to pay it, to hire a man or to buy his product.”
Ayn Rand
Let’s investigate the full ramifications of these laws and how they might impact an entrepreneur’s enterprise. On the positive side, when minimum wages are raised, there is clearly an initial benefit to any minimum wage earner. There wage has just gone up. But there are secondary consequences that are detrimental to everyone potentially even those who work for a minimum wage. Let’s explore how.
A few companies might go out of business and then everyone loses their job. But statistically this happens infrequently. What more often happens is the company raises their prices to compensate for higher labor costs. This means companies don’t actually pay minimum wage increases, consumers do. This impacts everyone. You may consider this acceptable, and be able to absorb those higher prices. But remember poor people are consumers as well. How do higher prices help them?
There are also potential negative secondary consequences for even minimum wage earners themselves. With higher labor costs automation now becomes more justifiable for companies. Just one example of this is with fast food restaurants and grocery stores. In place of people working tills at their first time job learning job skills, or part time employees earning additional income, they are being replaced with automated order and payment kiosks. Over time these previous jobs start to vanish.
But it gets worse. For people with minimum skills, such as first time employees, part time employees, many undereducated poor and challenged individuals, minimum wage jobs are stepping stones from such low paying jobs that can lead to higher paying jobs as their skills improve. When the minimum wage is raised beyond their skill levels they don’t get hired. They become trapped forever in poverty with no way up and out, a permanent burden on the welfare state.
“The minimum wage law is most properly described as a law saying employers must discriminate against people who have low skills.”
Milton Friedman
This is the reality of minimum, “fair” wage laws in the U.S. and most other mixed economies, but not all. It is interesting to note that Sweden, while it has a large welfare state, has no minimum wage. I expect they realize this is one way to maximize productivity while reducing welfare.
For the Objectivist entrepreneur, employee compensation along the entire spectrum is market driven based on supply and demand. It is not based on need or greed. They embrace the trader principle of value given for value received, with the arrangement being voluntary by both parties. They realize that wealth is not acquired but must be produced. With productive achievement in pursuit of their creative ambitions as their goal they seek out employees who share and want to contribute to achieving that goal, compensating them as much as is demanded and as little as is necessary.
“Money is made—before it can be looted or mooched—made by the effort of every honest man, each to the extent of his ability. An honest man is one who knows that he can’t consume more than he has produced.”
Ayn Rand