Sorry, guys, I am going to have to disagree with both this article and the suggestion that counter-offers should be turned down by employees.
The truth is that despite the fact that lots of hn (yc) type startups have employees working for enough to cover their rent or whatever, and a bit of equity that has absolutely no defined value, when the company does take off, it's only fair to ask: All right, thanks for sticking by me, now what are you guys really worth! What is this killer graphics designer worth ; what is this DBA back-end coder worth who has just scaled us from a bedroom to millions of customers ; what is this accountant worth.
If they don't have other offers, there is NO answer to that question. You can't appeal to the cost of their bedroom or car, you can't appeal to the chance to build something great, none of this is external or fair.
Fair is what the market says.
I remember somewhere years ago on Slashdot that it's impossible to be "ripped off" in a transaction, reasoning thus: "When you have a fistful of cash in one hand, and the offered good or service in front of you (forget what the example was), and you say 'ok' and get it, that's your choice, if you get what you thought you would get giving the money that was asked, you physically can't be ripped off. The money was in your hand and it was your choice".
Well, sorry slashdot poster from years ago: that's false. When you have a fistful of money and buy something, but you are radically misinformed about the market price (to your disadvantage) then you just got ripped off. If you sell your vintage gold (whatever) for a couple of bucks, being told it's just for the value in gold, but a vintage gold (whatever) is worth 100x what you just paid: then you just got ripped off.
The thing about talent like this is there is no market price because everyone is unique. The market price is whatever other offers you get.
In the vintage gold whatever example, if someone says "This only has a tiny bit of gold in it, I can give you $100 for it", but in the same town five out of the five other specialists you would sell it to if this person wasn't in front of you offer at least $3,000 - then you just got ripped off.
I'm not talking about if you were to sell it yourself (instead of to a specailists) to another buyer: maybe buyers themselves pay $8,000. I'm talking about other opportunities in the exact same circumstances and market.
The fact is, "intrinsic" arguments (like how many ounces of gold is in something), what food and rent costs, what you paid the last guy, whatever, are worthless:
the ONLY thing that establishes the market price in my market of my graphics designer is their other offers (not their own other work, which is a different market).. The ONLY thing that establishes the market price of my back-end engineer is their other offers (again, not their consulting work, which is a different market).
I want to be fair with my employees, and I want to be treated fairly. I don't want to rip anyone off, nor do I want to be ripped off.
The ONLY way to do this is to explore market prices, and the best mechanism to do this is through other offers (since no one is fungible with other people in this industry; you can't just 'look it up').
So I'm going to have to strongly disagree on all points here.
The market is inefficient because of the information problem - precisely as you say, everyone is unique. That harms your appeal to the market as a pricing mechanism.
Anyone making an offer for an unknown potential employee logically and necessarily discounts the offered salary by a certain amount to take account of the unknown. So the market price for a developer is lower than what that developer should be making once they are a known quantity for the most profitable position for them in the market.
And companies should give raises based on this - not on the market price, but on the known quantity, such that the only way that an offer exceeding the salary could be made is either (a) a position that creates more value (in which case the employee really should move, should money be their motivation) or (b) an irrational company.
I don't really understand what you're saying. I gave a pretty concrete example: I have Andrew or Alice who does graphics design, Barbara or Bob who does finance, and Carol (m/f) who does the back-end coding and all operations. They're pretty young, and I can't pay them what they're worth or anything near it. Now, I get some cash into the company: how do I now pay them what they're worth? What is your suggestion?
If my company competes successfully in its niche because of the level of fit and finish, and design, should I pay Andrew/Alice proportionally more than Barbara/Bob or Carol? Now what if my company competes successfully because of the scalable infrastructure - it's really an ops company, and it's just a faster service and that's why everyone uses it. Nobody cares about design. Then suddenly does Carol deserve more money than Andrew/Alice or Barbara/Bob?
Now what if it's an excruciatingly tough market where everyone is incredibly price-sensitive. But by doing market research and have our financial acts together the best out of the companies competing in our space, we grow and prosper and persevere over them?
No. This is wrong. This leads to talented designers and finance gals and guys leaving because they're not being paid what they're worth OR appreciated. It leads to the ops company saying: "You don't get what you'd make elsewhere BECAUSE you're less important". This is the WORST POSSIBLE SOLUTION.
Of course, at an executive level you can choose to hire a BETTER designer/lead designer in one type of company, a BETTER or BETTER-CONNECTED or MORE EXPERIENCED finance gal or guy in another context, or a BETTER or MORE EXPERIENCED or whatever gal or guy for ops and back-end in a third context. You pay them more because they're WORTH more.
If you really want to go above and beyond, sure, pay them MORE than they'd get elsewhere. Show appreciation by paying or rewarding above market.
But your suggestion is right in line with command Communist economies, and goes about as far. By the way I think that's great in a small 1-5 person socialist setting (as in a family for example!). It's no way to run a company though.
*I also want to add that on the small level, "to each according to need" is also valid! If only one of the three first employees has a mortgage, then they might get a bit more to start off. This doesn't scale, and I'm telling you what needs to be done when you become an actual company with sound finances and a desire to grow, acquire and retain talent that won't be bitter.
I think you think I'm suggesting paying people what they're "worth", as if that has some intrinsic value.
That's not what I'm suggesting at all. My argument is entirely based on orthodox Western economics and free markets; and that's the jargon I use.
What I'm talking about is the market price for labour, in an efficient market with perfect information.
The labour market is not an efficient market. In particular, there are large information problems. It's only after you've worked with someone for a while that you reduce the information gap. And then you can pay them closer to the true market price. This reduces the risk of them getting a better offer elsewhere, because offers from elsewhere underprice labour owing to the information gap; unless they could be creating more value elsewhere (and hence command a larger salary, even taking into account the information gap) - in which case, for the (theoretical) good of society at large, they should move!
(Theoretical merely because not all utility is priced.)
I have a better understanding of what you mean, but I think we're talking about totally different things. You're talking about a few percentage points around a 'true' price (under or over), that account for whether someone is worth more like $80k or $95k.
I'm talking about who you'll pay $35k, who you'll pay $60k, who you'll pay $30k, and who you'll pay $80k when you first get funding, and whether you will pay anyone over $100k at all.
When market price of two of your employees are each 80-95k depending on how much information a potential employer in your geographic/other market (including you) has about them, then it is the worst possible result for you to justify a salary of $40 or $35 for either on some grounds of fairness. It's also wrong to pay one $95k and one $60k also alluding to internal factors, how much information you have about them.
You don't pay someone $60k who's worth $90k if you're being fair (it's different if you just don't have the money). We're talking about a 50% difference here, not the few percentage points that come from inefficiency of information.
I think if you had any idea what the average first employees of hackernews/yc type outfits get as initial offers, you would feel quite different about where the problem lies. (just my humble opinion).
your suggestion is not about such radical differences as compared with 'true' worth, but only smaller ones.
Most companies aren't startups, in the HN/YC sense of the word. I was addressing the majority scenario.
First employees in startups are playing a different game; a combination of risk and novelty. The employees are gambling on stock options and a payout (not a particularly rational gamble, of course); but they're also working on new technology, greenfield development, in an exciting environment, often with younger people who are less, shall we say, "conservative" in their career trajectory. All of this is utility to such first employees; and it compensates for salary, depending on their utility function.
As a company ages, the profile changes. Depending on how the employees have changed along with it, they may seek a different mix.
they may also get no stock or options. when they are young, recently educated, as you say they will jump on for the combination of novelty and a chance to grow and extend themselves.
when it comes time to pay them fairly, either after they have acquired the experience or simply you raise enough money to do so, fair becomes determined by what they get elsewhere.
one more thing. If I'm generous I'll pay everyone 10% more than they're worth. How do I do that?? I have to know what they're worth first.
someone else in this thread said: "It's a productivity killer. If everyone knows that John is a better developer than Bill, but Bill gets paid twice as much because he understands corporate politics, then people focus on politics, feel like life is unfair, etc. The money saved by underpaying your best employees is rarely worth the inevitable productivity hit and loss of talent."
If everyone knows that Bill and John each get 10% more here than anywhere else, then I am a generous and fair employer.
If Bill and John respectively get -20% and -40% here as compared with what they would get elsewhere, then I am both non-generous and unfair. If they both get -10% as compared with anywhere else, then I am not generous, but at least fair.
And if they get +20% and +35% as compared with what they would get elsewhere, then I am generous but unfair.
The truth is that despite the fact that lots of hn (yc) type startups have employees working for enough to cover their rent or whatever, and a bit of equity that has absolutely no defined value, when the company does take off, it's only fair to ask: All right, thanks for sticking by me, now what are you guys really worth! What is this killer graphics designer worth ; what is this DBA back-end coder worth who has just scaled us from a bedroom to millions of customers ; what is this accountant worth.
If they don't have other offers, there is NO answer to that question. You can't appeal to the cost of their bedroom or car, you can't appeal to the chance to build something great, none of this is external or fair.
Fair is what the market says.
I remember somewhere years ago on Slashdot that it's impossible to be "ripped off" in a transaction, reasoning thus: "When you have a fistful of cash in one hand, and the offered good or service in front of you (forget what the example was), and you say 'ok' and get it, that's your choice, if you get what you thought you would get giving the money that was asked, you physically can't be ripped off. The money was in your hand and it was your choice".
Well, sorry slashdot poster from years ago: that's false. When you have a fistful of money and buy something, but you are radically misinformed about the market price (to your disadvantage) then you just got ripped off. If you sell your vintage gold (whatever) for a couple of bucks, being told it's just for the value in gold, but a vintage gold (whatever) is worth 100x what you just paid: then you just got ripped off.
The thing about talent like this is there is no market price because everyone is unique. The market price is whatever other offers you get.
In the vintage gold whatever example, if someone says "This only has a tiny bit of gold in it, I can give you $100 for it", but in the same town five out of the five other specialists you would sell it to if this person wasn't in front of you offer at least $3,000 - then you just got ripped off.
I'm not talking about if you were to sell it yourself (instead of to a specailists) to another buyer: maybe buyers themselves pay $8,000. I'm talking about other opportunities in the exact same circumstances and market.
The fact is, "intrinsic" arguments (like how many ounces of gold is in something), what food and rent costs, what you paid the last guy, whatever, are worthless:
the ONLY thing that establishes the market price in my market of my graphics designer is their other offers (not their own other work, which is a different market).. The ONLY thing that establishes the market price of my back-end engineer is their other offers (again, not their consulting work, which is a different market).
I want to be fair with my employees, and I want to be treated fairly. I don't want to rip anyone off, nor do I want to be ripped off.
The ONLY way to do this is to explore market prices, and the best mechanism to do this is through other offers (since no one is fungible with other people in this industry; you can't just 'look it up').
So I'm going to have to strongly disagree on all points here.