Paying young people for their performance

4 points

16 years ago

"Now companies increasingly have to pay employees market price for the work they do. One reason is that employees no longer trust companies to deliver deferred rewards: why work to accumulate deferred rewards at a company that might go bankrupt, or be taken over and have all its implicit obligations wiped out? The other is that some companies broke ranks and started to pay young employees large amounts. This was particularly true in consulting, law, and finance, where it led to the phenomenon of yuppies." - http://paulgraham.com/credentials.html

As a college student who has been looking at entry-level law, consulting, and finance jobs for a while now, I really don't think this is true. These organizations pay young people "a lot", but it's "a lot" only by middle-class American standards. By internal standards, these organizations pay young people a pittance, in comparison to what they pay their senior people.

I would certainly agree that, during the 1980s, there began an increasing trend of job-hopping: working at a new company every few years, instead of working at the same company for forty years or more. This, notably, did not increase salaries; median salaries in the US, adjusted for inflation, have not risen at all since the 1970s (cite: http://www.eurotrib.com/files/3/051014_US_median_income.jpg). However, it probably did lead to the top performers getting paid more, and the bottom performers getting paid less. It also accelerated the breakup of large unions, whose bargaining power was diminished when companies found it increasingly easy to hire and fire at will.

This trend, even though it is real, does not really apply to consulting, law and finance, because these organizations are run very differently from the rest of the economy. For one thing, they operate as partnerships rather than public companies- the profits the company generates go directly to the high-level employees, rather than to outside shareholders. This insulates these companies from any threat of outside takeover, which was a major motivation for the destruction of the "corporate ladder" during the 1980s.

Secondly, they are all professional services companies, where the high-level people do sales and schmooze clients, and the low-level people do all the grunt work. A salesman can be measured directly by how many customers they bring in and how many deals they do. A low-level grunt, on the other hand, is much more difficult to measure (see, eg.: http://www.mergersandinquisitions.com/how-to-win-friends-and-influence-people-in-investment-banking-by-slacking-off-and-pretending-to-work-hard/, which describes how to get ahead in investment banking without actually doing a lot of work).

As a result, the top people in these industries get paid spectacularly more than the newer, young people, frequently more than ten times as much. A new investment banker, just out of college, can reasonably expect to make six figures (http://www.mergersandinquisitions.com/investment-banking-salaries-mcdonalds/). However, the top people, the Managing Directors, get paid seven up to eight figures. It's the same thing in consulting: you can make $70,000 straight out of school, but the partners will make $500,000 or $1,000,000. And in law (specifically corporate law), the starting salary may be $160,000, but the salary after five years is more like $400,000, and the partners take home millions.

And the higher salaries of these young people doesn't really reflect their value, in most cases; it just reflects the fact that they work an insane number of hours. If you're an investment banking analyst making $100,000 (including bonus), but you have to work 100 hours a week, that comes out to about $19 per hour, which is not much at all for someone with a 3.8 GPA from an Ivy League school (most of these companies only recruit at top schools).

So, why do these salaries seem like "a lot"? Probably because most Americans have little contact with the upper class, and don't have a good idea of how large it is, or how much money the people in it make. When most people think of "rich", they think of people like their neighborhood doctor, who makes around $150,000 a year; in comparison, making $100,000 just out of school seems like a lot. However, if you look at the actual numbers (cite: http://www2.physics.umd.edu/~yakovenk/papers/EPL-69-304-2005.pdf), 99th percentile income in the US is $400,000. If we define the "rich" as the top 1% of the US population in terms of annual income, that means that there are 1.5 million rich people in the US. By this definition, there are more rich people in the US than Muslims, Hindus, or Buddhists (assuming that the children of the rich also count as "rich"). The minimum income needed to be rich is $400,000, and the average income of a rich person is more like $700,000 or $900,000. So these law, finance and consulting companies certainly don't allow young people to join the ranks of the American upper class, even if they do get paid $100,000 a year.