Measurability = Accountability
Hypothesis: In organizations where performance can be directly measured, compensation approaches the fair market value of the output generated from such performance.
Case 1: Professional Athletes
The general consensus among sports fans is that professional athletes appear grossly overpaid. How can one player truly be worth the $20 million dollars a year that their team is shelling out for their salary?
In fact, I would argue that professional athletes are probably the most fairly compensated in our society. Why would I say such a thing?
The numbers don’t lie. Professional athletes are the most accountable because every aspect of their production is meticulously tracked and measured. At the end of the day when A-rod’s agent goes to negotiate his contract, he is selling a body of work based almost exclusively on measured results and future projections based of those past results. Of course there are some intangibles that are taken into account like personal character etc.. but for the most part, the fair market value of a player is determined exclusively by the numbers.
Case 2: Wall St. Traders and Hedge Fund Managers
In the business world, the equivalent of the professional athlete is the Wall St Trader or Hedge Fund Manager. Their value is determined strictly on the revenue’s generated from their trading activity. While the performance of each individual in an organization is not completely measurable (compared to athletes), there is still a high level of accountability and thus measurability of one’s performance.
This situation generally leads to fair value compensation in this industry under normal circumstances (putting aside the obvious manipulations and distortions of late). At the end of the day, your trades either lost money or made money. It is not hard to justify giving out a $1million dollar bonus to an employee who directly generated $10million in trading revenues for his firm.
Case 3: Everyone Else
In just about every other profession, there is decidedly less transparency and measurability when it comes to job performance. This can lead to enormous asymmetries in compensation packages and advancement opportunities. Instead managers have to rely on qualitative proxies for output such as performance reviews from fellow managers and employees.
Of course there are other good quantitative signals to use to gauge performance such as Sales #’s (for Sales Associates) and Students Grades (for Teachers). However, for the most part performance is still a black box.
Will this change as technology progresses and we acquire the means to effectively measure performance on a more granular level? I’m betting that it will.