[yangez]

Employee compensation is absolutely not associated with the value of the work the employee does.

Instead, it's associated with the best replacement that the company could find.

If Joe makes $2M a year for a company and gets paid $150k but Steve can do the same work at the same level for $100k, Joe's out and Steve's in. The initial $2M of value doesn't matter, except to lower the chance that a replacement could outperform you.

Cynical and unfair? Sure. That's how it works, though. Start your own company if you don't like it.

[gringofyx]

That's an interesting calculation.

Using that formula, how would management like to compensate Joe given the following:

* Steve is hired for $100k

* A year passes

* The company starts to lose money, let's say down to $1.5M a year.

* It is decided that Joe's industry knowledge - and only Joe's knowledge - had been making extra money for the company. It was some non-transferrable knowledge.

* Aside from the previous caveat, Steve and Joe had precisely the same skillset

* Joe is happily employed somewhere else for $150k

[digikata]

That's a broken model for many reasons. For one is that it replacement omits or undervalues the cost to acquire and retrain a replacement to being a) competent in the context of the position, and longer term b) being truly integrated into the company and able to bring deeper value to the business.

Time to a) can be short, particularly if the candidate is a good fit, but time to b) is typically three years. Early in my career, I took a little offense when a manager once told me that it would take three years to become useful. After some discussion, that wasn't a comment about my technical ability or level of work (they were actually very happy about that), but it was just a realistic timeline to get to b), the point that they could throw about anything at me and I could reliably pull resources and people together to get things done for the company in an independent and cost-effective manner. Depending on the work, time to (b) could be shorter or longer, but it's surprisingly long - longer than many want to admit to themselves. Over the years, I've looked at people in companies through this lens, and three years is typical.

Companies with an employee "replacement cost" model often have churn rates so employees stay with the company well below (b).

The "replacement cost" model also leads unwillingness to invest in employees, either by explicit training, or on the job training anticipating increased responsibilities. After all, they might be gone soon and we just have to go shopping for a replacement.

Longer term employees (typically the mid-level management) are then stuck because they're managing details that they really wouldn't otherwise need to, masking time to take care of problems that they would otherwise should be the sole owners of.

They're both subtle outgrowths of undervaluing people, leading to company underperformance.

[ori_b]

Note that the corrections you propose still have nothing to do with the value that the employee produces. They just adjust the replacement cost to something more realistic.

It's still about minimizing expenditure to bring in a certain amount of profit.

[digikata]

If, because of the replacement cost model, you don't spend time and some effort to get and keep well integrated employees, the business misses out on deeper value the employees could bring. Further, those deep-value employees can handle more issues, freeing higher level management to focus on bigger, higher value issues. I think that has a lot of relevance, but then I think a lot of companies miss out on expanding value when they're focused on squeezing costs.

[coldtea]

>Cynical and unfair? Sure. That's how it works, though.

That's how it doesn't work. Except if you sell bricks or something.

In the IT industry it's a surefire way to replace loyal and precious employess with talentless slobs, while you're thinking you're getting a better deal for your company.

[pekk]

And now your company is full of bottom-dollar workers who just nominally fulfill management's probably quite flawed idea of what the work requires.