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date: Sa 22. Apr 18:31:31 CEST 2023
Efficient markets are ones in which all participants have all the information they need to make rational decisions. Examples of such markets include the stock market, the price for homes, the price of apples in the supermarket. Many other examples exist but let’s look at the stock example for argument’s sake.
You log into your broker. I happen to use E-Trade. So I log into E-Trade, look at what Apple is trading at, and decide to buy or not, and if I do, I buy the shares at some amount. Easy peasy. The market showed me what the price was. I decided if I wanted it. And each party is none the wiser and all are happy.
Are they?
In my days of day-trading stocks (stay tuned for that fiasco of a story) I subscribed to multiple feeds of pricing data and different exchanges would offer very very slightly different prices for a share of say Apple. This is because market-makers (the very deep pocketed financial institutions facilitating the buying and selling of trades) are by their very nature setting the price of what they will buy or sell a share for. Luckily there’s competition in the exchanges a bit so you can sort of shop around. But again only for a sophisticated investor and not the average one.
This is a case where if the “average” investor knew this they could potentially make evenmore efficient choices – buying the share for the best possible price. Of course you can see how now algorithmic trading companies are ingesting this data and using computer programs to find the minimum price to buy and the maximum price to sell – all of this is not new, it’s been done since the dawn of time – it’s just that the access to this for the “average” investor is obscured and by buying via a broker like an E-Trade you give away some of that margin or the ability to find the cheapest price to buy a share to the middle-man, here E-Trade.
Okay, so, as one looks closer and closer at a seemingly efficient market one sees that things could be improved and by increasing one’s knowledge – in this case finding the best price an exchange would sell a share – one could make even more rational choices.
What is rationality? Economics is built on the assumption that people are rational agents – they’re not haha, just take inventory of your own past choices and you’ll see not everything you do is rational – and that people are marginal utility or marginal revenue maximizers meaning they seek to increase the value they get from every unit increase in expenditure and when that amount – the marginal utility or revenue goes to zero they stop consuming or in the case of a business seeking to maximize marginal revenue they stop producing. This is the first derivative of the supply-demand graph if you remember from Econ 101 days.
I’m glad you asked.
Remember that as wage or salaried workers, workers trade their time for compensation. That’s it. And if one is a rational person one would seek to maximize that.
Compensation could be non-monetary as well: more time off, flexible hours, flexible working arrangements etc. So it’s not all about money but the idea is the same. Workers trade their time, talent, etc., for wages.
Let’s look at the dilema a business or employer finds itself in. What they pay, the total compensation and perks etc., is an important bit of information that their competitors could use against them to lure away talent or estimate cash burn or other such metrics to see how well the company is doing. It makes sense for the employer to not want to divulge that.
Luckily for potential employees laws in the US are coming into force that are requring jobs to have the salaries posted. But companies are getting clever with this and posting the entire base salary to the highest possible salary for the role making the information useless. Let’s see if that improves with time.
That being said, imagine you’re going into a salary negotiation. You’re in the top 10% of your team. Your team looks up to you for guidance, you’re always the engineer with the answers, you get along well with others, you mentor others, you are technically competent and have even saved the company lots of money. You should be getting a promotion which usually comes with a raise. But let’s say that you don’t. Let’s say that in this round you keep your current title and level but within the range for the salary for the role your raise will bump you up a bit.
Wouldn’t it be nice to know what the range for the role is? Imagine there’s this strata for the roles where “IC” means individual contributor and the integer after it denotes the level at which the engineer is.
IC1 aka Junior Engineer – either very new to the field or just out of university, or just somehow unproven but very smart and capable and just needs to be trained up and will be good to go. Tasks will need to be very detailed so that this individual can work in isolation and get the task done. The tasks are low-level ones that give the person a chance to get to know the system.
IC2 aka Junior Engineer/Engineer. Here the engineer has been in the industry a while but has not had much in the way of leadership or been exposed to very complicated systems. Still, this is a person who is capable and expected to grow into IC3.
IC3 aka Senior Engineer. This is your proverbial superstar. They are capable of scoping tickets, mentoring junior engineers, adding feedback and support and advice for larger scale topics and are the backbone of any strong team.
Ok, so given that we have these levels and some descriptions for them let’s take the example of an IC3. And let’s say that there are 3 IC3’s in a team of say 9. 2 of these 3 IC3s are in the top 5% of the team in terms of tickets completed and if surveyed the other 7 engineers would rank them at the very top. And then the last engineer of these 3 in terms of productivity and the like is progressing but albeit not in the top 5%.
Now say the first two IC3 engineers, in the top 5% of their team, have a salary delta between them of 10,000 euros! And the delta between the highest paid top 5% engineer and that of the middle-of-the-pack IC3 in our group of 3 engineers here is only 7,500 euros behind the highest most productive engineer.
And there’s the dilema. That last engineer, the one with 7.5k between them and the top paid one might have been hired after the other IC3 with a 10k euro gulf between the top engineer. And since the market was tougher to get engineers the company had to pay for that IC3 but they’re not even the most productive, highest performing and yet they’re getting paid more than the other engineer in the top 5%.
The company can do salary adjustments on a global scale and that’s fine but it’s not solving this example.
These engineers do not know where they stand. They might not know what the ceiling for the salary band is nor do they know if they are being paid more or less than their teammates. Of course this knowledge could create some internal strife if a seemingly middling engineer is found to be making more than more productive ones. But you know who knows this information? Management. Management knows! So when it comes time to negotiate one’s salary each of these engineers goes into the negotition blind!
This is why I think it’s important to respectfully amongst the team without management involved share the salaries that folks are being paid.
This will help juniors to know what they can look forward to as they get promoted, to level set for the higher performing engineers to make sure they’re getting a fair rate, and to do away with time or passport arbitrage.
In the case of H1B workers in the US, US employers can exploit the fact that many people want to go to the USA to work, to take part in the American Dream, and will do so for less than market rates – the rates that an American wouldn’t think twice about demanding.
Employers can do this because they know the H1B worker’s ability to legally reside in the US is in the employer’s hands. So there could be the case that a H1B worker living and working in the USA in the same office as a US citizen doing the same role and performing at the same level could be paid vastly differently.
This is passport arbitrage.
And this is only possible because the employer has far more information than the worker does.
The above is an extreme example. Let’s go back to our example of the 3 IC3’s and look at the two top performing IC3’s with the 10k difference in salaries between them.
Imagine these two engineers are friends. They could disclose their salaries to one another and immediatley it would be known that the engineer making less but seemingly doing the same work at the same level should have a talk with their manager and HR to remedy that or look elsewhere (all things being kept equal) for a company that would value them the same.
If that engineering co-worker and friend didn’t disclose that information they would not have the ability to maximize their utility (Economic’s speak for happiness, here used as how happy one is with their salary) when it came to renegotiate compensation. By putting all the cards-on-the-table so to speak this inefficient market is made even more efficient and all parties are better off because of it. By aggregating the salaries of the members of the team and their IC levels one can get a sense for what the internal salary bands are and make better choices.
The company ostensibly get’s happier, better compensated workers. The workers are more likely to stay as they are making a market rate or at least a rate that is inline with the given salary bands from within the company are.
So, if you’re convinced, consider disclosing your salary. You have nothing to lose. You help those that would be too shy to advocate for themselves because now they can better negotiate their own rates. And it feels good to do so.
Yes of course there’s levels.fyi for folks to see salaries. And the ever popular GlassDoor and others. I trust what my collegues would say as their salaries than what folks I do not know are saying in these anonymous sites aggregating self-volunteered information.
Copyright Alex Narayan - 2023