I don't really understand what you're saying. I gave a pretty concrete example: I have Andrew or Alice who does graphics design, Barbara or Bob who does finance, and Carol (m/f) who does the back-end coding and all operations. They're pretty young, and I can't pay them what they're worth or anything near it. Now, I get some cash into the company: how do I now pay them what they're worth? What is your suggestion?
If my company competes successfully in its niche because of the level of fit and finish, and design, should I pay Andrew/Alice proportionally more than Barbara/Bob or Carol? Now what if my company competes successfully because of the scalable infrastructure - it's really an ops company, and it's just a faster service and that's why everyone uses it. Nobody cares about design. Then suddenly does Carol deserve more money than Andrew/Alice or Barbara/Bob?
Now what if it's an excruciatingly tough market where everyone is incredibly price-sensitive. But by doing market research and have our financial acts together the best out of the companies competing in our space, we grow and prosper and persevere over them?
No. This is wrong. This leads to talented designers and finance gals and guys leaving because they're not being paid what they're worth OR appreciated. It leads to the ops company saying: "You don't get what you'd make elsewhere BECAUSE you're less important". This is the WORST POSSIBLE SOLUTION.
Of course, at an executive level you can choose to hire a BETTER designer/lead designer in one type of company, a BETTER or BETTER-CONNECTED or MORE EXPERIENCED finance gal or guy in another context, or a BETTER or MORE EXPERIENCED or whatever gal or guy for ops and back-end in a third context. You pay them more because they're WORTH more.
If you really want to go above and beyond, sure, pay them MORE than they'd get elsewhere. Show appreciation by paying or rewarding above market.
But your suggestion is right in line with command Communist economies, and goes about as far. By the way I think that's great in a small 1-5 person socialist setting (as in a family for example!). It's no way to run a company though.
*I also want to add that on the small level, "to each according to need" is also valid! If only one of the three first employees has a mortgage, then they might get a bit more to start off. This doesn't scale, and I'm telling you what needs to be done when you become an actual company with sound finances and a desire to grow, acquire and retain talent that won't be bitter.
I think you think I'm suggesting paying people what they're "worth", as if that has some intrinsic value.
That's not what I'm suggesting at all. My argument is entirely based on orthodox Western economics and free markets; and that's the jargon I use.
What I'm talking about is the market price for labour, in an efficient market with perfect information.
The labour market is not an efficient market. In particular, there are large information problems. It's only after you've worked with someone for a while that you reduce the information gap. And then you can pay them closer to the true market price. This reduces the risk of them getting a better offer elsewhere, because offers from elsewhere underprice labour owing to the information gap; unless they could be creating more value elsewhere (and hence command a larger salary, even taking into account the information gap) - in which case, for the (theoretical) good of society at large, they should move!
(Theoretical merely because not all utility is priced.)
I have a better understanding of what you mean, but I think we're talking about totally different things. You're talking about a few percentage points around a 'true' price (under or over), that account for whether someone is worth more like $80k or $95k.
I'm talking about who you'll pay $35k, who you'll pay $60k, who you'll pay $30k, and who you'll pay $80k when you first get funding, and whether you will pay anyone over $100k at all.
When market price of two of your employees are each 80-95k depending on how much information a potential employer in your geographic/other market (including you) has about them, then it is the worst possible result for you to justify a salary of $40 or $35 for either on some grounds of fairness. It's also wrong to pay one $95k and one $60k also alluding to internal factors, how much information you have about them.
You don't pay someone $60k who's worth $90k if you're being fair (it's different if you just don't have the money). We're talking about a 50% difference here, not the few percentage points that come from inefficiency of information.
I think if you had any idea what the average first employees of hackernews/yc type outfits get as initial offers, you would feel quite different about where the problem lies. (just my humble opinion).
your suggestion is not about such radical differences as compared with 'true' worth, but only smaller ones.
Most companies aren't startups, in the HN/YC sense of the word. I was addressing the majority scenario.
First employees in startups are playing a different game; a combination of risk and novelty. The employees are gambling on stock options and a payout (not a particularly rational gamble, of course); but they're also working on new technology, greenfield development, in an exciting environment, often with younger people who are less, shall we say, "conservative" in their career trajectory. All of this is utility to such first employees; and it compensates for salary, depending on their utility function.
As a company ages, the profile changes. Depending on how the employees have changed along with it, they may seek a different mix.
they may also get no stock or options. when they are young, recently educated, as you say they will jump on for the combination of novelty and a chance to grow and extend themselves.
when it comes time to pay them fairly, either after they have acquired the experience or simply you raise enough money to do so, fair becomes determined by what they get elsewhere.
If my company competes successfully in its niche because of the level of fit and finish, and design, should I pay Andrew/Alice proportionally more than Barbara/Bob or Carol? Now what if my company competes successfully because of the scalable infrastructure - it's really an ops company, and it's just a faster service and that's why everyone uses it. Nobody cares about design. Then suddenly does Carol deserve more money than Andrew/Alice or Barbara/Bob? Now what if it's an excruciatingly tough market where everyone is incredibly price-sensitive. But by doing market research and have our financial acts together the best out of the companies competing in our space, we grow and prosper and persevere over them?
No. This is wrong. This leads to talented designers and finance gals and guys leaving because they're not being paid what they're worth OR appreciated. It leads to the ops company saying: "You don't get what you'd make elsewhere BECAUSE you're less important". This is the WORST POSSIBLE SOLUTION.
Of course, at an executive level you can choose to hire a BETTER designer/lead designer in one type of company, a BETTER or BETTER-CONNECTED or MORE EXPERIENCED finance gal or guy in another context, or a BETTER or MORE EXPERIENCED or whatever gal or guy for ops and back-end in a third context. You pay them more because they're WORTH more.
If you really want to go above and beyond, sure, pay them MORE than they'd get elsewhere. Show appreciation by paying or rewarding above market.
But your suggestion is right in line with command Communist economies, and goes about as far. By the way I think that's great in a small 1-5 person socialist setting (as in a family for example!). It's no way to run a company though.
*I also want to add that on the small level, "to each according to need" is also valid! If only one of the three first employees has a mortgage, then they might get a bit more to start off. This doesn't scale, and I'm telling you what needs to be done when you become an actual company with sound finances and a desire to grow, acquire and retain talent that won't be bitter.