Are wages determined by the value of the product produced?

[ektrules]

Is payment for employment determined by:

1) the value of the product produced,
or
2) by the employees minimum requirements for survival, and the employer's need for employees in relation to the number of people competing for jobs?

Seems to me like it's #2, but isn't that a little a**-backwards?

 

[Evo]

For larger companies there are many tiers. You have the bottom tier that answers phones, handles billing, and minimal tech support. Then you have the engineers that design and build the product, then (pay wise) the sales people, then upper managent. Although the engineers and sales people are both usually management. In the technical sales jobs I've held, annual pay was usually $100,000 to $500,000 annually, but it takes some of the knowledge of an engineer combined with the ability to sell, project manage, manage people across many groups, train the clients, understand contracts, and fix billing. I used to work 12-16 hours a day 7 days a week. And trained on the all of the processes constantly, I had to know a lot about everyone elses' jobs, and be constantly certified in new technology. But then you make a freaking lot of money. Until you burn out.

 

[talk2glenn]

The short answer is yes, the wage is a function of productivity.

The long answer is there is a supply and demand side. Willingness to work (supply) is a function of many things, including cost of living. Willingness to hire is a function of productivity; the more an employee would produce, the more an employer will be willing pay him.

The intersection of the two determines the wage and the quantity supplied (say, working hours). When worker productivity increases, the demand for labor goes up (which puts upward pressure on prices) and vice versa.

 

[WhoWee]

I agree with Evo (love her discription) and talk2glenn. It also depends upon the stage of development. If it's a start-up situation (no company and the product is an idea) the experts might work for free with the expectation of being paid once the product is marketable. At the same time, they may choose to pay a few people a labor wage of some type - even though there aren't any revenues.

 

[WhoWee]

How would we characterize this pay structure?

http://biggovernment.com/dspady/2011/05/06/200000-lifeguards-to-receive-millions-in-retirement/

"Newport Beach has two groups of lifeguards. Seasonal tower lifeguards cover Newport’s seven miles of beach during the busy summer months. Part-time seasonal guards make $16 to $22 per hour with no benefits. They are the young people who man the towers and do the lion’s share of the rescues. Another group of highly compensated full-time staff work year-round and seldom, if ever, climb into a tower. According to the City Manager, the typical Daily Deployment Model in the winter for these lifeguards is 10 hours per day for four days each week, mainly spent driving trucks around, painting towers, ordering uniforms and doing basic office work—none are actually manning lifeguard towers.

Like many communities across California, the city of Newport Beach is facing the harsh realities of budgeting with less revenue after housing values and the stock market plummeted. Now the city’s full-time lifeguard force has finally come under scrutiny. Next week the city council will decide if cuts are needed to the full-time lifeguard force where last year the top earner received $211,000 in pay and benefits, including a $400 sun protection allowance. In 2010 all but one of the city’s full-time lifeguard staff had annual compensation packages worth over $120,000.

Not bad pay for a lifeguard – but what makes these jobs most attractive is the generous retirements.

These lifeguards can retire at age 50 with full medical benefits for life. One recently retired lifeguard, age 51, receives a government retirement of over $108,000 per year—for the rest of his life. He will make well over $3 million in retirement if he lives to age 80. According to the City Manager, a new full-time guard costs less to hire than what is spent on this one retiree. The city now spends more taxpayer dollars on retired lifeguards than it does on those who are working."

 

[ektrules]

How would we characterize this pay structure?

http://biggovernment.com/dspady/2011/05/06/200000-lifeguards-to-receive-millions-in-retirement/

"Newport Beach has two groups of lifeguards. Seasonal tower lifeguards cover Newport’s seven miles of beach during the busy summer months. Part-time seasonal guards make $16 to $22 per hour with no benefits. They are the young people who man the towers and do the lion’s share of the rescues. Another group of highly compensated full-time staff work year-round and seldom, if ever, climb into a tower. According to the City Manager, the typical Daily Deployment Model in the winter for these lifeguards is 10 hours per day for four days each week, mainly spent driving trucks around, painting towers, ordering uniforms and doing basic office work—none are actually manning lifeguard towers.

Like many communities across California, the city of Newport Beach is facing the harsh realities of budgeting with less revenue after housing values and the stock market plummeted. Now the city’s full-time lifeguard force has finally come under scrutiny. Next week the city council will decide if cuts are needed to the full-time lifeguard force where last year the top earner received $211,000 in pay and benefits, including a $400 sun protection allowance. In 2010 all but one of the city’s full-time lifeguard staff had annual compensation packages worth over $120,000.

Not bad pay for a lifeguard – but what makes these jobs most attractive is the generous retirements.

These lifeguards can retire at age 50 with full medical benefits for life. One recently retired lifeguard, age 51, receives a government retirement of over $108,000 per year—for the rest of his life. He will make well over $3 million in retirement if he lives to age 80. According to the City Manager, a new full-time guard costs less to hire than what is spent on this one retiree. The city now spends more taxpayer dollars on retired lifeguards than it does on those who are working."

LOL, at the Baywatch picture in that article. Perhaps it was hard to find qualified lifeguards with large breasts in that city, and now it's easier, so wages are declining? :) It's also worth noting that Newport Beach is "the richest city in the U.S.," with median home prices > $1 milliion, and 1/4 the population making > $200,000/yr.. So, with all the very upper-class and, assumedly, highly skilled population, I could see why it would was hard to find someone willing to get certified, and work as a lifeguard; especially when the economy was doing much better.

 

[WhoWee]

LOL, at the Baywatch picture in that article. Perhaps it was hard to find qualified lifeguards with large breasts in that city, and now it's easier, so wages are declining? :) It's also worth noting that Newport Beach is "the richest city in the U.S.," with median home prices > $1 milliion, and 1/4 the population making > $200,000/yr.. So, with all the very upper-class and, assumedly, highly skilled population, I could see why it would was hard to find someone willing to get certified, and work as a lifeguard; especially when the economy was doing much better.

At a pay rate of $120,000 per year, wouldn't a lifeguard commute 20 to 40 miles? I thought unemployment was a problem in CA?

 

[Prairie]

I'm not sure if you're asking how an employer determines a wage or how the job market determines the wage? But here's my take on how an employer might do it.

Before I'd ask monetary value, I’d ask what the value (importance) of the job is to the employer. There’s also a differences between private and public sector salaries and wages and how these sectors value jobs. But it does boil down to what the market is asking and how much the employer is willing to either meet or beat that rate. But valuing a job, and attaching a monetary value to that job, are two different processes. How important is the job to the employer; and how much should I pay?

When valuing a job an employer needs to know how valuable a job/position/work is to them. You can risk analyse and cost benefit duties, rank task complexity, scale workloads, or measure skills and knowledge requirements. The employer should try as much as possible to understand what the value (or importance) of a job/position/work is to them. This way an employer can figure out what quality of employee they need to get that particular job done.

If the employer has a large workforce they could keystone a few positions and rate the salaries for the whole of the organisation based upon the keystone positions. Provided, of course, the employer understands, and has ranked, what the value of all the positions in their agency or organisation are. But like I said, I prefer to approach it as what the value of the job is to the employer. That way you have a reference point from which to start before you ask what will I pay.

 

[WhoWee]

I'm not sure if you're asking how an employer determines a wage or how the job market determines the wage? But here's my take on how an employer might do it.

Before I'd ask monetary value, I’d ask what the value (importance) of the job is to the employer. There’s also a differences between private and public sector salaries and wages and how these sectors value jobs. But it does boil down to what the market is asking and how much the employer is willing to either meet or beat that rate. But valuing a job, and attaching a monetary value to that job, are two different processes. How important is the job to the employer; and how much should I pay?

When valuing a job an employer needs to know how valuable a job/position/work is to them. You can risk analyse and cost benefit duties, rank task complexity, scale workloads, or measure skills and knowledge requirements. The employer should try as much as possible to understand what the value (or importance) of a job/position/work is to them. This way an employer can figure out what quality of employee they need to get that particular job done.

If the employer has a large workforce they could keystone a few positions and rate the salaries for the whole of the organisation based upon the keystone positions. Provided, of course, the employer understands, and has ranked, what the value of all the positions in their agency or organisation are. But like I said, I prefer to approach it as what the value of the job is to the employer. That way you have a reference point from which to start before you ask what will I pay.

While the value of duties to be performed and other factors will help the employer make a hiring decision - the first priority however, will be to identify a total labor budget for the venture. This budget is typically part of a larger budget and part of a comprehensive business strategy.

 

[Prairie]

In a lot of business cases that's likely very true WhoWee. Mine was just one scenario though. How an employer chooses to prioritise resource allocation is always a consideration, and a bit of a chicken and egg situation.

Edit: rereading your response WhoWee, I think that you misunderstood the purpose of assessing the value of work. My scenario wasn't just about hiring decisions. But to help the employer determine where their wage/salary priorities might be. And understanding what they value most about the organisations work. Determining budget restrictions before understanding the labour needs could shoehorn your decision making. But I suppose that's a choice of the employer.

 

[WhoWee]

In a lot of business cases that's likely very true WhoWee. Mine was just one scenario though. How an employer chooses to prioritise resource allocation is always a consideration, and a bit of a chicken and egg situation.

Edit: rereading your response WhoWee, I think that you misunderstood the purpose of assessing the value of work. My scenario wasn't just about hiring decisions. But to help the employer determine where their wage/salary priorities might be. And understanding what they value most about the organisations work. Determining budget restrictions before understanding the labour needs could shoehorn your decision making. But I suppose that's a choice of the employer.

I agree, an employer must decide the value of the key personnel and a strategy to retain those employees - long term. However, the business does start with an overall budget - with a specific limit for labor. All key personnel decisions will be weighed against Government imposed requirements or union contracts. If the person sweeping the floor costs $25 per hour (wages, benefits, safety investments, training) as compared to minimum wage for the same work in the open market - the cost must be adjusted elsewhere in the budget.

 

[WhoWee]

Edit: rereading your response WhoWee, I think that you misunderstood the purpose of assessing the value of work. My scenario wasn't just about hiring decisions. But to help the employer determine where their wage/salary priorities might be. And understanding what they value most about the organisations work. Determining budget restrictions before understanding the labour needs could shoehorn your decision making. But I suppose that's a choice of the employer.

Another thought - the "value" of input is sometimes relative to the immediate priority.

Specifically, if a company needs a source of revenue to operate (survive) - a salesperson (a "hunter" working on straight commission) - might be compensated at a very high rate.

Now, does the engineer (with 6+ years of specialized training) that designed a product or keeps a system running deserve a higher level of compensation? My response is (probably) yes - but (ideally) the engineer will be compensated in the long term - a more secure position with greater benefits to secure retention. The salesperson may not be needed any longer after the "hunt" is concluded (depends upon the type of business).

 

[WhoWee]

Another thought - the "value" of input is sometimes relative to the immediate priority.
......
The salesperson may not be needed any longer after the "hunt" is concluded (depends upon the type of business).

To expand this a bit further - sometimes the highest paid persons are the salespeople who fund a venture (Wall Street). It can be argued that it isn't fair - but without the investment capital many business models would never exist.

 

[Prairie]

If one were to go through the scenario of valuing each position's work, an employer might get a better idea of what positions are most valuable to them, as the employer. Such as the sales rep vs an engineer. It might surprise an agency as to which position (what work) turns out to be most valuable/critical to what they're measures of success are. Really depends on the agency and their operational philosophy.

Measuring risk and the complexities of tasks and etcetera etcetera gives an agency some idea of which positions work best for the efficiency the agency, as opposed to revenue generation, as opposed to quality of production, or the quantity of production. Prioritizing (investing more) in different positions will have different impacts. Plus, investing doesn't always mean higher wages/salaries. It could simply be to provide bigger and better tools to the employee. It is though really about what work is most valuable to your strategy.

 

[WhoWee]

If one were to go through the scenario of valuing each position's work, an employer might get a better idea of what positions are most valuable to them, as the employer. Such as the sales rep vs an engineer. It might surprise an agency as to which position (what work) turns out to be most valuable/critical to what they're measures of success are. Really depends on the agency and their operational philosophy.

Absolutely, however risk is an inherent part of business. Because there are no guarantees of success (in the sales rep/engineer comparison) sometimes an immediate need will shift the priority of payment. Another aspect of business planning is when should the owner compensate themselves? The answer typically depends upon how the venture was capitalized - often the owner is the last to be paid (if at all). It's not unusual for a small business owner to pay an employee more than the owner earns (at least for a period of time).

 

[Prairie]

I agree, and it really does depend on what the priorities are of the employer. But in terms of measuring risk though. Good managers do this in their head as part of their second nature. But to an agency, they need to know what the impacts are if A doesn't get done, and B happens, what then? Or, what happens if contracts like C fall through, how does this then impact the agency? Are there redundancies (other positions) which can take up the slack. But risk is still just one aspect in measuring the value of work (or position).

 

[WhoWee]

In my experience, the treatment of employees is also important. I've worked in environments where the management treated (key) employees like opponents - and it didn't work long term.

I'll cite a recent example: I'm active in the insurance industry and inter-react with large and small agencies. Last November, a day before the Open Enrollment Period (very busy time) for Medicare began - an agency owner with 200 agents (each professionally trained experts - typically holding 20+ state and 15+ carrier appointments and average earnings over $80,000 per year) decided the chairs were TOO COMFORTABLE. The CEO and President actually went to an office supply chain the night before and selected "functional" chairs with no arms and unable to recline. The purpose was to replace (expensive) leather executive chairs - because they didn't want anyone relaxing. The good chairs were then given to a group of temporary customer service reps. The agents were told not to complain - that they could go work with the other group for less pay if they had a problem. I heard the agency is closing (all but 10 of the agents left).

 

[Prairie]

lol, that shows a bit of a lack of understanding of the impact of management style on corporate culture. I'm sorry for that agency, but that was simply a poor management decision. It was likely based on either a simple hunch, or poorly modeled (thought out) idea.

Gracious me. What was the CEO's goal. Every purpose should have a goal? Saying the chairs are too comfortable isn't good enough. If this were an experiment, one should never experiment without a purpose, goal, plan and measurable in mind. Like I said, good managers do this kind of stuff as second nature.

EDIT: You know, some companies have managers whose purpose it is to close down offices. As cheaply as possible, I might add.

 

[WhoWee]

lol, that shows a bit of a lack of understanding of the impact of management style on corporate culture. I'm sorry for that agency, but that was simply a poor management decision. It was likely based on either a simple hunch, or poorly modeled (thought out) idea.

Gracious me. What was the CEO's goal. Every purpose should have a goal? Saying the chairs are too comfortable isn't good enough. If this were an experiment, one should never experiment without a purpose, goal, plan and measurable in mind. Like I said, good managers do this kind of stuff as second nature.

I interpreted the situation as the CEO and President felt the agents were paid too much. The reality being that without (licensed) agents - there is no business. Btw - from the Agent perspective, the compensation package was less than generous - they were able to make more sales than if they worked independent - but at a GREATLY (roughly 75% less) reduced commission structure.

 

[WhoWee]

About 15 years ago, I helped set up a factory in a closed auto plant to manufacture pre-engineered (structural) metal-foam building panels. The production line was 600' long, ran at a maximum speed of 1M/sec and was operated with 6 PC's. A separate space was utilized to construct custom design/build commercial structures. All engineering (including plant design) was in-house. I was the rain-maker.

My first client ordered 1,000 custom oil change buildings before we figured out how to get our on-line cutoff saw to operate (let alone make high speed precision cuts) - we had to keep shutting down the line and manually make cuts at certain intervals - lot's of wasted time and material. Because I wasn't sure of the exact costs - I added $15,000 to the President/engineer's cost estimate (per building) to be safe - that was my compensation in addition to my production pay. Dare I say (luckily) my client's financing was sporadic and we managed to fulfill our obligations - lot's of fun! Did I mention the plant was located 1,000 miles from my home and I drove back and forth every 10 days on average?

I apologize for the long story to reach the point of relevance. We faced the decision making process you've outlined. This was a new venture - nothing to compare. Accordingly, we prioritized staffing requirements first from a minimum operations point of view up through maximum operating levels.

We ultimately determined a plant manager and 2 floor supervisors would be the most important factory workers. The President was an engineer (he designed the plant) and was capable/enjoyed designing custom projects, we identified a key administrative person, and I was charged with sales. The plant personnel and the administrative person were paid from day one. The plant could be operated at minimum production levels with these 4 key persons and myself. As rainmaker, I needed to sell roughly 1 turnkey commercial building or about 10,000 linear feet of material per month to pay all of the bills - both were do-able.

The President was vested but also negotiated a base package of about $125K with a 7 figure+ long term target and (as indicated) I agreed to a (very generous) straight commission structure - basically 2.5% of production/material sales and an exclusive distribution arrangement for select commercial segments - I typically added 25% to 35% to the factory price for custom/turnkey commercial units or residential packages and was still competitive. I've always enjoyed working in a start-up environment where the challenges have never been thought of in textbooks.

The base salaries for the key factory people ranged from $50k to $60k plus significant quality control and production bonuses. The administrative person was scheduled at $40k but also had incentives that could double her pay. We (management) believed very strongly in incentive programs. Eventually, everyone from the truck drivers to the factory assemblers and office staff had a base plus incentive agreement - everyone was paid a reasonable living wage and everyone shared in the success.

Unfortunately, I agreed to a very aggressive performance requirement to maintain exclusivities and preferred pricing structures and eventually moved on to the next venture when the in-house sales force settled into selling price instead of the competitive advantages.