AskDong

I was reading Ask the Pilot at Salon, and Patrick Smith the writer used his column to defend against criticsm that Pilots are overpaid. I agree. I don’t think Pilots are overpaid. After reading through the comments, it dawned on me, is anyone paid fairly? Teachers? The Police? Doctors? High School Principals?

While I think most people tend to think CEOs and Hedge Fund Managers are overpaid, plenty of people also think that many a doctor is overpaid. I’ve even met a people who think teachers are overpaid. The person you never meet is the person who thinks he or she is overpaid. Talk to most people, and they’re express the feeling that they’re underpaid. Clearly something isn’t right. How is that we feel others are overpaid and yet somehow we’re all underpaid?

The ugly truth of the matter is that people are paid whatever someone else is willing to pay. I say this not because I think people are paid effciently and economically. I believe the job market is less than efficient. There are many jobs by virtue of being very specialized or artificial barriers of entry are compensated very well. In many way’s it’s a false concept to think of what people are paid as having anything to do with fairness. Fairness implies that’s there some objective measure of work. Should people be paid better if they hate their job? Our labor is more akin to a product that’s being sold. For example, I would never pay more than $100 for a watch, but plenty of people pay not just thousands but tens of thousands for watches from the likes or Rolex, Cartier, and Bvlgari.

Ultimately, we all need to escape the trap of thinking that others overpaid. If we truly believe that then we should be doing what they’re doing. Ultimately people work for one of two reasons. 1) because they love what they do 2) to earn money. Ideally our work satisfied both reasons, but if we’re only doing it for the latter it’s best only to worry about what others make in a way that helps us to get there.

This past weekend I got back from 10th year college Reunion. I didn’t reconnect with many lost acquaintances. This was no great shock. I was not a social person in college. I ended up going to reunion and hanging out predominantly with friends I already see regularly in Boston. Despite not being the most social person in college, I was also a pretty mediocre student. Returning to college, I was reminded exactly how unacademic I truly was. I passed all my classes (excepting one early withdrawal), but my GPA was rather unspectacular, and my class attendance less than exemplary. I had no relationship with any professors. I never made use of office hours. All in all I wasted the academics of college. This not to say college was wasted. I made good friends, and laid a solid foundation for the rest of my life.

Reunion provided a opportunity for reflection. I didn’t set myself up for future success with my college academics. However, I was fortunate that my academics in high school allowed me to attend a prestigious school such as Dartmouth, and I had solid work experience during my off terms. I graduated into a good job market and was able to land myself a job in consulting. From there I’ve caught some breaks to be in the place I am today. Thankfully I’ve worked harder at my career than I ever did in college.

Traveling back to school and reveling in my mediocrity made me both appreciate where I am today, and affirmed my belief that everyone can have a second chance, and even a third. While the mistakes of the past certainly impact the reality of today, they do not spell doom for the future. The key is a willingness to reevaluate and do what it takes to make changes to either or both work and personal habits. You might be in dead end job but that doesn’t mean you need to be in a dead end career.

Recently there was an article in the New York Times about people sharing salary information. Jim at Blueprint for Financial Prosperity was one of those interviewed and had his own response on the topic. This topic dear to my heart.  My girlfriend and I often discuss this topic because we’ve found a wide divergence in behavior amongst our friends. My friends who are mostly guys tend to talk openly about salary while her friends who are mostly women do not. I don’t know if it’s a gender difference or just difference in friends. She believes that the difference in behavior is gender correlated, and that ultimately women by being more secretive do themselves a disservice.

While my jury is still out on the gender difference, I agree on the latter. I believe it’s better regardless of gender to share information amongst your friends. While access to salary information is much better now with websites such as Salary.com, and Payscale. None of these online tool provide the nuance that you can get from a friend. I can find out exactly what my friends do when I ask and how much they earn for doing so. I can know exactly how much responsibility they have. Telling me what Financial Analyst Level IV in 100-400 person company earns is informative but less so than a five minute conversation with good friend who has a real job in a real company.

The salary conversation is most easily had right out of school when everyone is effectively starting at the same level. Envy and boastful pride generally don’t have the opportunity to rear their ugly heads when most people after college start roughly in the same levels. Sure, the Investment Bankers and Consultants make more, but they work those crazy hours. Few people take it personally that their friend might make more, at least not straight of school. The differences are small, and most people at that time acknowledge the trade off that’s often made to do something more personally rewarding.

As we get older, we do become more sensitive rightly and wrongly so. Some of us feel under compensated, and others hate to hear the braggadocio that might accompany salary gossip. I don’t disagree. As we get older the differences in pay become wider, and seemingly more arbitrary. However, we should all check our ego. Talking about money should not be ego or envy, but career advancement. There’s a time and place for sharing the information. Talk amongst coworkers is especially tricky and I have never had an explicit conversation on salary with a coworker. However, plenty of information can still be shared in the most general of terms with a coworker. Nadira Hira at Fortune.com points out the traps that might come with salary discussions at work. However, amongst friends outside of work when the conversation turns to careers, I firmly believe that information should flow freely.  How is someone to know they are underpaid unless they have friends who give them the dish? Networking isn’t about getting the next job through a friend or acquaintances, but knowing the opportunities that are out there.  Salary information is a big part of that.

I like many other employees I am partially paid in the form company stock. Companies rightly choose to pay their employers by stock options or outright stock grants as means to better align company and employee interests. Enormous stock option packages get a lot of press as they often pad CEO pay excessively, but stock options and outright grants are an important part of the pay package for many individuals. Stock options have made millionaires out of many Microsoft employees in the 80s and 90s. Today we have Google millionaires.

The real question of stock denominated benefits is are we to treat them like cash or are we to treat them as something more? I think most people treat them as something more. Some of this makes sense given that stock compensation typically have to become vested. Usually it takes at least a year before options or stock grants are vested. If an employee is terminated or leaves before the vesting period is over that employee forfeits his or her claim. That’s one issue - stock options and grants that have a lengthy vesting periods are only claims on compensation rather than outright compensation. For that reason, an employee might not want to count (reinvest) too early the chickens before they’ve hatched.

However, aside from the vesting issue which most employees have a pretty good sense if they will fulfill or not, there aren’t really all that many good reasons to hold onto stock grants or options unless required to by rules even when those grants haven’t vested. An employee can easily sell short company shares, or options without actually owning the shares or options. This might be seen as a vote of no-confidence, but it’s really an act of diversification. Most employees don’t have that much influence on the stock a price. If an employee were promised a cash payment, it would be generally be ridiculous for that employee to go and buy options or shares of the company. Effectively that’s what we do when we do nothing and hold onto shares or the options.

The risk because of the vesting period is that we never receive those grants or options. However, the only situation in which the hedges (i.e. selling short shares or options, or buying put options) would be out of the money is when the company is chugging along nicely, i.e. the stock price has risen. Under these circumstances, the most likely reasons for a employee not to meet shorter term vesting requirements are under the employee’s control. Either the employee chooses to leave or is terminated because of performance issues. The sensible thing for an employee with short term vesting options or shares is to hedge. This action would’ve certainly served the many employees at Bear Stearns well. Of course by hedging, it’s possible to miss out on millions like the ones reaped by employees of MSFT and/or GOOG. However for every Google there are dozens of pets.com. Keep the stock or options only if you think you would actually buy those same options in the open market.

Larry Page, and Sergey Brin of the I will do no evil folks of Google and Megalomaniac Steve Jobs have one thing in common. All three of them of earn a lot less than me in wages. Too bad that isn’t really saying something about me. All three of them take home a salary of $1 per year. Sergey and Larry have been earing $1 for a few years now. Steve has been doing it longer than those two. The nominal salary is intended to indicate a commitment to the company each of them works for (and founded). At the surface of it, it sounds like these CEOs have been able to eschew the greed that is so prevalent in the corporate world. However, like everything in life, it’s not so simple, especially in the case of Steve Jobs.

None of these billionaires are lacking in money. Their wealth is primarily determined by how the GOOG and AAPL stock performs. I applaud a compensation structure that rewards CEOs who truly add value to a company instead of just holding the job. Long term ownership is the key part of a proper incentive structure for senior executives. While I do believe that all three of these men have taken the $1 salary as symbolic gesture of how they feel about their work, I also feel that $1 salary is a bit of a sham.

In the case of Steve Jobs, his $1 salary is particularly disingenuous because he receives particularly generous compensation in the form of stock. The Googler’s $1 salary is a more genuine reflection of their compensation as they are not given gigantic stock grants. They have enough stock as is.

The problem of the $1 salary is that it’s another example of the problem with having two different tax rates for capital gains versus income. I have a problem with this in the realm of private equity, and with further reflection have an increasing problem with it in all aspects. Not only are capital gains taxed at lower rate, but income derived by capital gains avoid payroll taxes as well. The uber wealthy like Jobs and Larry Page can avoid paying social security and medicare taxes. Are they intentionally avoiding these taxes? In the case of Larry and Sergey, I doubt it. Steve Jobs, I’m not so sure of. Regardless of the reason for their compensation structure, it exposes flaws in what should be progressive tax structure.

At the same time I am conflicted. Fundamentally I do understand why it’s good to have a lower capital gains rate - to spur new investment. The problem is really with what is often an arbitrary distinction between regular income and capital gains. Salespeople who are paid by commission have as much income risk as as an executive who is paid by stock grants. Yet their incremental income is viewed very differently by the IRS.