Saturday, June 12, 2010

More on compensation -- compensation and pyramid schemes

As Joseph mentioned before, Ph.D.s don't take post-docs because they like being overworked and underpaid; they take the positions because they believe that the post-doc will lead to better things. This kind of implicit compensation isn't uncommon nor is it necessarily a bad thing. (I'm trying to think of how you would go about making future opportunities part of an explicit compensation package even if you wanted to).

Implicit compensation is, however, particularly prone to problems with asymmetry of information and fraud. Let's say you're recruiting garbage collectors and you start your pitch with a story about collector who found a fifty dollar bill in a trash can by the side of the road. You don't mention that in the past twenty years, this was the only case of cash in trash that you knew of. This would be asymmetry of information. Now let's say you changed the story and made the fifty into a thousand dollar bill. This would be fraud.

At least some of the post-docs in Joseph's post probably took those positions because of asymmetry of information. If they had known the actual odds of getting the careers they were hoping for many of them would have picked other jobs (usually ones with higher explicit compensation).

There's a common private sector version of this that occurs in companies that recently experienced rapid growth in size and or stock price. When you go to work for one of these companies, you will find yourself bombarded by stories of skyrocketing careers. You'll hear about salaries doubling and vice-presidents who started as interns five or six years earlier.

Some of these stories are probably apocryphal but even if every single one were true they would still be tremendously misleading because career advancement at a growth company is basically a pyramid scheme. The first generation of employees experience huge gains (though they also faced a high risk of having a company collapse under them). The second generation experiences large gains. After that things quickly level off, partially because growth inevitably levels off and partly because the company gets better at recruiting and particularly at luring in higher-level people.

But the stories of amazing career paths become part of the corporate mythology and take years to fade. In the case of Wal-Mart, new employees were still hearing about millionaire cashiers more than a decade after the jump in stock prices that created them.

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