It’s not just about status

Rob Henderson writes that in general, relative to the value they add to their firms, senior employees are underpaid and junior employees are overpaid. This, he reasons, is because senior employees trade off money for status.

Quoting him in full:

Robert Frank suggests the reason for this is that workers would generally prefer to occupy higher-ranked positions in their work groups than lower-ranked ones. They’re forgoing more earnings to hold a higher-status position in their organization.

But this preference for a higher-status position can be satisfied within any given organization.

After all, 50 percent of the positions in any firm must always be in the bottom half.

So the only way some workers can enjoy the pleasure inherent in positions of high status is if others are willing to bear the dissatisfactions associated with low status.

The solution, then, is to pay the low-status workers a bit more than they are worth to get them to stay. The high-status workers, in contrast, accept lower pay for the benefit of their lofty positions.

I’m not sure I agree. Yes, I do agree that higher productivity employees are underpaid and lower productivity employees are overpaid. However, I don’t think status fully explains it. There are also issues of variance and correlation and liquidity (there – I’m talking like a real quant now).

One the variance front – the higher you are in the organisation and the higher your salary is, the more the variance of your contribution to the organisation. For example, if you are being paid $350,000 (the number Henderson hypothetically uses), the actual value you are bringing to your firm might have a mean of $500,000 and a standard deviation of $200,000 (pulling all these numbers out of thin air, while making some sense checks that broadly risk pricing holds).

On the other hand, if you are being paid $35,000, then it is far more likely that the average value you bring to the firm is $40,000 with a standard deviation of $5,000 (again numbers entirely pulled out of thin air). Notice the drastic difference in the coefficient of variation in the two cases.

Putting it another way, the more productive you are, the harder it is for any organisation to put a precise value on your contribution. Henderson might say “you are worth 500K while you earn 350K” but the former is an average number. It is because of the high variance in your “worth” that you are paid far lower than what you are worth on average.

And why does this variance exist? It’s due to correlation.

More so at higher ranked positions (as an aside – my weird career path means that I’ve NEVER been in middle management) the value you can add to a company is tightly coupled with your interactions with your colleagues and peers. As a junior employee your role can be defined well enough that your contributions are stable irrespective of how you work with the others. At senior levels though a very large part of the value you can add is tied to how you work with others and leverage their work in your contributions.

So one way a company can get you to contribute more is to have a good set of peers you like working with, which increases your average contribution to the firm. Rather paradoxically, because you like your peers (assuming peer liking in senior management is two way), the company can get away with paying you a little less than your average worth and you will continue to stick on. If you don’t like working with your colleagues, there is the double whammy that you will add less to the company and you need to be paid more to stick on. And so if you look at people who are actually successful in their jobs at a senior level, they will all appear to be underpaid relative to their peers.

And finally there is liquidity (can I ever theorise about something without bringing this up?). The more senior you go, the less liquid is the market for your job. The number of potential jobs that you want to do, and which might want you, is very very low. And as I’ve explained in the first chapter of my book, when a market is illiquid, the bid-ask spread can be rather high. This means that even holding the value of your contribution to a company constant, there can be a large variation in what you are actually paid. And that is a gain why, on average, senior employees are underpaid.

So yes, there is an element of status. But there are also considerations of variance, correlation and bid-ask. And selection bias (senior employees who are overpaid relative to the value they add don’t last very long in their jobs). And this is why, on average, you can afford to underpay senior employees.

Selling yourself for job and consulting

So for the first time in over eight years, I’m looking for a job. This was primarily prompted by my move to London earlier this year – a consulting business where you rely on networks rather than a global brand to get new business cannot be easily transplanted. Moreover, as I’d written a year back, a lot of the objectives of the “portfolio life” have been achieved, so I’m willing to let go of the optionality.

While writing a “Cover Letter” for a job application yesterday I realised what makes selling yourself for a job so much harder than selling yourself for a consulting assignment – in the former case, you need to also communicate a “larger purpose”.

For the last 5-6 years I’ve been mostly selling myself for consulting assignments, and while it hasn’t been easy, all I’ve needed to do to sell has been to convince the potential client that I’ll do a good job solving whatever problem they have, and that my fees is a worthy investment for them. And to some extent I’ve become better over the years making such arguments.

When you’re applying for a job, you not only have to convince the counterparty that you’ll be good at whatever you need to do, and that you are worth the salary that you are asking for, but also need to argue how the job will “improve your life”. You need to explain to them why the job fits in to the list of stuff you’ve already done in your life. You need to talk about where you see yourself 5/10/50 years from now. You need to actually express interest in the job, and irrespective of how mundane the job description, you need to act like it’s the most exciting job ever.

And this is a part I haven’t been good at, basically since I haven’t done any of it for a long time now. And in any case, this is a part of the cover letter that people routinely bluff about, so I don’t know if recruiters even take this part seriously. In any case, I’ve been filling most of my cover letters so far with explanations of how I’ll do an awesome job of the job, and keeping only a cursory line or two about “how the job will improve my life”!

Visas to India

Between January 2012 and October 2013, India issued over 34000 employment visas. Where did these 34000 foreign workers come from?



Notice that the number of people with employment visas from Japan and Germany outstrip all other countries, by a long way! The United States is not even in the top 12! The other notable exception? Bangladesh!

What about tourists? Where do India’s tourists come from? Between January 2012 and October 2013, India issued about 4.5 million tourist visas. And where did these tourists come from? This graph here shows the percentages:



And which country contributes the maximum number of tourists to India? Bangladesh! 800,000 or almost 18% of India’s tourists in these 22 months came from Bangladesh! And they didn’t come here for medical treatment – that has been taken care of in another category of visas!

Go figure.

Workforce Participation of Women

Krish Ashok and Puram Politics have been collecting data from various government sources and converting them to excel. This data contains a wealth of information on social indicators in India. You can expect the next few issues of RQ to be based on this dataset. Data is drawn from various government sources including the Ministry of Statistics and Program Implementation (MOSPI).

Today we will look at the workforce participation of women across the states of India. First, let us look at rural women. Notice that the all India average participation is close to 60%. Himachal Pradesh ranks the highest with over 83% while (perhaps surprisingly, developed states such as ) Delhi, Kerala and Punjab bring up the rear.



Next we will look at the workforce participation of urban women. Note now that the all India average drops to an abysmal 20%! While migration to urban areas is generally associated with increased standard of living, it is interesting to note that more and more women don’t work in urban areas. It is perhaps a reflection of the kind of jobs that are available in urban India.



Notice that once again, Himachal Pradesh is top and Punjab and Delhi bring up the rear. Actually there seems to be a correlation between workforce participation of rural and urban women across states. Let us explore that with a scatter plot.



Notice that there is a strong positive correlation. Interestingly, Himachal Pradesh and Tamil Nadu (states associated with excellent education levels) display superior participation of urban women in the workforce relative to the participation of their rural women. Karnataka, Andhra Pradesh and Rajasthan are also found to be above the regression line. Interestingly, it is hard to draw a pattern from this data in terms of which state is more developed.