Consider a piece of software. It runs on a few million phones, and the company that makes it lives on what it earns. Ask who made it, and the first answer is the engineers. They wrote it, line by line.
But follow any one of those lines backward. It was written because a customer complained about the version before, and someone listened and wrote the complaint down. The customer was there because someone, months earlier, persuaded them to buy. The engineer was at their desk because someone found them and made the offer, because someone else saw to it that the salary arrived every month, because the lights were on and the network was up, which they were, since somebody climbed onto the roof in October and cleared the drains. Pull on a single thread and the whole company comes with it.
We are in the habit of asking how much of the result each of these people produced. It feels like a question that must have an answer, the way the weight of a stone has an answer. It does not. The profit was never a pile of separate contributions, stacked up and waiting to be counted. It is more like a chord. You can name every finger on the keys, and still there is no telling how much of the sound belongs to each.
Economists have a name for this. In 1972 Armen Alchian and Harold Demsetz called it team production, and they saw its central difficulty clearly: when people make something together, what each one added cannot be read off the result.1 They drew a different lesson from it than this paper does. For them the difficulty was a reason to have an owner who watches everyone and keeps whatever is left over. But the observation is theirs, and it has been standard economics for half a century.
So it is worth being careful about what we actually know. We can see how well a person does their own work. We can count the days they give. We can read the company’s result at the end of the year. What we cannot see, and what nobody has ever measured, is the share of that result that belongs to any one of them.
Almost every pay system in use behaves as though that fourth thing were known. It hands some people hundreds of times what it hands others, and it calls the difference a measurement. The chapters that follow argue that it is nothing of the kind. What the difference records is who had the power to set their own pay, who happened to be scarce that year, and who was holding which position when the money arrived.
None of this says that everyone contributes the same. People plainly differ. The claim is narrower, and harder to escape: nobody can say by how much, and a pay system should not be built on a number that nobody has.
FairShare starts from what can be seen, and its proposal fits in a sentence. Pay people individually for what can be seen individually, and share equally what can only be seen together. A salary pays for how well a person does their work. The year’s profit is divided by days worked, the same for everyone.
A better system, not a perfect one
FairShare does not offer a perfect system. There may not be one. Any way of paying people is a set of guesses about human beings, and we will go on guessing wrong.
So some of the people who work under it will find its results unfair, and some of them will be right. Some complaints will rest on evidence and some on feeling. Some can be answered, by changing the model or by a company applying it with more care. Some cannot be answered at all. Part Two names the costs this paper has found, in the chapters where they arise.
Unfairness comes in degrees. FairShare claims less of it. It does not claim none.
The reason to expect less follows from the software and the chord. If nobody can measure what each person added, then every pay system will misjudge people. It will give some more than a true accounting would, if there could be such a thing, and others less. What a system can decide is how large it allows those mistakes to grow.
The question is how wrong we are prepared to be. FairShare takes a position on that. It is better to pay a hundred thousand dollars to someone who deserved nothing than to pay a hundred million to someone who deserved a hundred thousand. The first mistake is small, and it is in plain sight. The second is a thousand times larger, and its cost is carried by people who will never learn where it came from.
That money had other uses. It could have been a thousand people’s pay, or lower prices, or the next piece of work. And the cost does not stop there. Chapter 3 follows a large sum forward through the years and shows what it becomes in one pair of hands.
The two mistakes also reach us differently. The small one has a face. Most of us have known a colleague who seemed to be paid too much for what they did, and could have said who it was. The large one is felt just as surely, but it arrives with no name on it.
Researchers have spent decades tracing where it lands.
- Pay. Had the incomes of the bottom nine-tenths of American earners grown in step with the economy after 1975, they would have been $2.5 trillion higher in 2018 alone. The median full-time worker earned about $50,000 that year. On the same calculation the figure would have been between $92,000 and $102,000.2
- Children’s prospects. About 90 percent of Americans born in 1940 went on to earn more than their parents had. Of those born in the 1980s, about half did. More than 70 percent of that fall would be reversed if growth were shared as evenly as it was for the earlier generation.3
- What companies do with profit. From 2003 to 2012, 449 of America’s largest listed companies spent 54 percent of their earnings buying back their own shares and another 37 percent on dividends. That left little to invest or to raise pay, and the study’s author ties the practice to paying executives in shares.4
- Public money. The top 1 percent of American earners are estimated to account for 36 percent of unpaid federal income tax, about $175 billion a year missing from public funds.5
Nobody meets these findings as findings. We meet them as a raise that did not come, a living that buys less than our parents’ did, a public service short of money. It took economists decades of data to follow each one back to its source. A person holding a single bill has no hope of doing the same. That is what makes the large mistake so hard to challenge. We bear the cost, and we cannot point to where it came from.
FairShare makes the opposite trade. It keeps the mistakes small and puts them where they can be seen. In the example used throughout Part Two, the widest gap in pay between two people who work the same days is $100,000 a year, and the figures behind it are published. Someone who thinks a colleague is in the wrong band can see the placement and has a say in reviewing it. An unfairness that can be seen can be argued with.
None of this is an excuse for whatever goes wrong. FairShare is a proposal, and a proposal earns its place by surviving tests. If it does not do its job it should be dropped, and Chapter 16 sets out what would show that.
The rest of Part One
The remaining chapters make the case.
- Chapter 2 takes the hardest test of the claim, the pay of chief executives, where the belief in individual value is strongest and best defended.
- Chapter 3 shows that even equal pay is not equal, because of what a dollar can become in different hands.
- Chapter 4 looks at equity, the usual way of sharing a company’s success, and at why it shares so little of it.
- Chapter 5 asks what a role is worth once the market’s answer is set aside.
- Chapter 6 states what a fair system would have to do.
Notes
- Alchian, A. A., & Demsetz, H. (1972). Production, Information Costs, and Economic Organization. The American Economic Review, 62(5), 777–795.
- Price, C. C., & Edwards, K. A. (2020). Trends in Income From 1975 to 2018. RAND Corporation, WR-A516-1. Summarised in A $2.5 Trillion Question: What If Incomes Grew Like GDP Did? https://www.rand.org/pubs/commentary/2020/10/a-25-trillion-question-what-if-incomes-grew-like-gdp.html
- Chetty, R., Grusky, D., Hell, M., Hendren, N., Manduca, R., & Narang, J. (2017). The Fading American Dream: Trends in Absolute Income Mobility Since 1940. Science, 356(6336), 398–406.
- Lazonick, W. (2014). Profits Without Prosperity. Harvard Business Review, 92(9), 46–55.
- Guyton, J., Langetieg, P., Reck, D., Risch, M., & Zucman, G. (2021). Tax Evasion at the Top of the Income Distribution: Theory and Evidence. NBER Working Paper 28542.