The CEO of a tech start-up decided employees need to make at least $70,000/year to be happy, so he slashed his own salary and restructured the business to make it so. The company's average salary had been $48,000 year, so 70 employees will get raises, and 30 of them will double their pay.
Sounds good, right? No, it isn't...at all. This means employees will be earning far more than their market value, and capitalism abhors such distortions (see the story of the hell I was put through when I tried to share Chowhound's acquisition pay with our two most hard-working volunteers). It's a recipe for unintended consequences.
The big problem is that these employees will quickly adapt to the extra income, and their overhead will rise accordingly. They'll soon come to depend on it, with at least two ghastly results:
1. Serious peril if the company ever goes under (or if they're laid off). They'll be forced to withstand a crippling 50% cut in pay when they take employment elsewhere. With lifestyle and overhead engorged far above what their true market value can support, this won't amount to a simple matter of resetting to a previous status quo. It will be a catastrophe.
2. The workers will essentially be slaves to their employer. Since they can't ever leave, they can't ever say "no". To anything. The boss will effectively own these workers. Worse, every manager will effectively own his/her underlings. And we all know how graciously a certain proportion of our species is prone to handle power.
The CEO should have taken all this into account. The fact that he didn't makes him a poor leader (leadership is all about considering contingencies). It's a perfect example of what perturbs me about a certain strain of liberalism, which operates on ditzy feel-good impulses with brain happily disengaged. The coiffure of pseudo-generosity barely combs over a wide bald patch of vain sanctimony. In the long run, I suspect this guy will still feel like a hero even after his ill-considered maneuver brings catastrophe to many of these lives.
When I first read this I thought the CEO was thinking "people can't live on this low of income."
ReplyDelete"The big problem is that these employees will quickly adapt to the extra income, and their overhead will rise accordingly. They'll soon come to depend on it, with at least two ghastly results:" Leff, Jim.
I know there is some fancy name for the above. There's two dilemma's with assuming that the more people earn the more they spend. Sometimes the expenditure grows at a higher rate than the earning. Classic example is a couple gets a huge windfall blows it all and then goes bankrupt. Simpler way of putting it couple gets 40k windfall and spends 60k.
1. Donald Trump isn't bankrupt. It sounds silly but if this was true ever billionaire would be homeless within a year. Believe it or not some people have a little bit of self discipline.
2. You can only cut expenses so much. Best example I can think of is delaying getting new tires damaging the rim and risking a ticket. If you walk to work your employer may fire you if your late during bad weather. In some areas of the country like New Jersey the property taxes are really high and you have to live somewhere.