Chapter 2 was about how far apart pay can be. This chapter is about something stranger. Two people can be paid exactly the same and still end their working lives far apart, and two people paid differently end up much further apart than their pay alone would suggest.
The reason is that a paycheck is only where money begins. Where it ends depends on two more things: how much of it a person is able to keep, and what the kept part is able to earn.
Same pay, different outcomes
Take two people who are each paid $100,000 a year for twenty years.
The first rents, has two children in childcare and is paying off student loans. After tax and the costs of living, $3,000 a year is all that is left to invest. The second has no dependants and lives in a home a parent helped to buy. They can invest $30,000 a year.
Now give both the same return, 7 percent a year, and let twenty years go by.
They were paid the same, and they did the same work. One ends with ten times what the other has, and nothing either of them did at work explains it.
Now add a third person, a venture capitalist whose fund pays them the same $100,000 salary. They came to the job with money. Their living costs are already met from it, so $70,000 of the salary is free to invest. That alone would put them far ahead. But the venture capitalist does not only have more to invest. They have somewhere better to invest it. Private funds are open to them and closed to the other two, and over the long run private buyout funds have beaten the stock market by more than three points a year.1 So where the others earn 7 percent, give the venture capitalist 10.
All three were paid $100,000 a year. The venture capitalist ends with more than thirty times what the first person has. Two things did that. More of the pay could be invested, and it could be invested where it earns more. Neither was earned at work. Both came from the money the venture capitalist started with.
| Person | Pay each year | Invested each year | Return | After 20 years |
|---|---|---|---|---|
| First | $100,000 | $3,000 | 7% | $123,000 |
| Second | $100,000 | $30,000 | 7% | $1,230,000 |
| Person | Pay each year | Invested each year | Return | After 20 years |
|---|---|---|---|---|
| First | $100,000 | $3,000 | 7% | $123,000 |
| Second | $100,000 | $30,000 | 7% | $1,230,000 |
| Venture capitalist | $100,000 | $70,000 | 10% | $4,010,000 |
The evidence
The three people are an illustration. The two effects that separate them are not. Both have been measured.
How much people can keep. Saving rises steeply with wealth. One study of American households estimates that in recent decades the top 1 percent saved about 35 percent of their income, and the bottom nine-tenths, on average, about none of it.2 At the low end there is very little room. In 2024, 37 percent of American adults said they could not cover an unexpected $400 expense from cash or savings. Most of them would have had to borrow or sell something, and 13 percent of all adults could not have paid it by any means.3
What people can earn on it. Returns rise with wealth too, and not merely because a larger sum earns more at the same rate. The rate itself goes up. Norway’s tax records cover every resident’s assets and debts, and a study using twelve years of them found that the rate of return people earned on their net worth rose steadily with how much they had. Between the 10th and the 90th percentile the difference was 18 percentage points a year before tax, and 10 after.4
Part of this is written into law. In the United States, private funds and shares in private companies are mostly sold only to accredited investors. A person qualifies with an income above $200,000 or a net worth above $1 million, not counting their home. In 2022, 18.5 percent of households did.5 The investments open to the venture capitalist in the example are reserved, by law, for people who already have money.
The record of those investments is uneven, and that belongs in the account too. Buyout funds have beaten the stock market consistently, while venture funds beat it in the 1990s and trailed it in the 2000s.1
Kinetic Compensation
FairShare’s name for what separates the three is Kinetic Compensation. A dollar that has to be spent on rent is at rest. A dollar that can be invested is in motion, and what it becomes depends on how much of it moves and how fast.
It can be written as a formula for what a sum of pay becomes:
K = P \times IC \times (1 + CR)^{t}
- P is the pay.
- IC is investment capacity, the share of the pay the person can invest.
- CR is the compounding rate, the yearly return available to them.
- t is the number of years.
Apply it to a single year’s pay of $100,000, left for twenty years, and the same paycheck becomes three different sums. For the first person above, IC is 0.03, CR is 7 percent, and that year’s pay becomes about $11,600. For the second, IC is 0.30 and it becomes about $116,000. For the venture capitalist, IC is 0.70 and CR is 10 percent, and it becomes about $471,000.
Nearly every argument we have about fair pay is an argument about P. The other two terms are set by a person’s circumstances, they are almost never discussed, and they multiply.
At the top
The formula also explains why very large pay does more harm than its size suggests.
Someone paid $50 million in a year can live very well on $1 million and invest the rest. For them IC is 0.98. At 7 percent, that one year’s pay becomes about $190 million in twenty years. The first person’s year became $11,600.
In pay, the two are 500 to one. In what the year’s pay leaves behind, they are more than 16,000 to one. This is what Chapter 1 meant when it said the cost of the large mistake does not stop with the mistake.
The money does not sit idle while it grows. It buys shares, property and loans, which are claims on profit, rent and interest that other people will pay. A gap in pay becomes a gap in ownership, and ownership is inherited. In the middle of 2026 the top 1 percent of American households held about 32 percent of all household wealth. The bottom half, taken all together, held 2.5 percent.6
What follows for a pay system
Three things follow, and Part Two builds on each.
- Equal pay is not enough. A system that looks only at P will treat the three people in the example as equals and leave one of them thirty times better off than another.
- The gap in pay has to be narrow. Whatever gap there is in P, the other two terms widen it. A ladder with a top three times its floor is narrow enough that they have little to work on.
- A system can act on the other terms. A company cannot give people wealthy parents. It can meet the costs that leave some people with nothing to invest, and it can open a better return to everyone who works there. Chapter 10 does both.
There is a limit here, and it should be said plainly. A company controls what it pays and what it offers. It does not control what people arrive with. FairShare narrows the differences that pay creates. It does not remove the differences that people bring with them.
Notes
- Harris, R. S., Jenkinson, T., & Kaplan, S. N. (2014). Private Equity Performance: What Do We Know? The Journal of Finance, 69(5), 1851–1882.
- Saez, E., & Zucman, G. (2016). Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data. The Quarterly Journal of Economics, 131(2), 519–578. The figures are from the authors’ summary, Exploding Wealth Inequality in the United States. https://cepr.org/voxeu/columns/exploding-wealth-inequality-united-states
- Board of Governors of the Federal Reserve System. (2025). Economic Well-Being of U.S. Households in 2024. https://www.federalreserve.gov/publications/2025-economic-well-being-of-us-households-in-2024-executive-summary.htm
- Fagereng, A., Guiso, L., Malacrino, D., & Pistaferri, L. (2020). Heterogeneity and Persistence in Returns to Wealth. Econometrica, 88(1), 115–170.
- U.S. Securities and Exchange Commission. (2023). Review of the “Accredited Investor” Definition under the Dodd-Frank Act. Staff report, December 2023.
- Board of Governors of the Federal Reserve System. Distributional Financial Accounts, second quarter of 2026. https://fred.stlouisfed.org/series/WFRBST01134