Efficiency Wages

by Dave Schuler on July 13, 2014

In the past I’ve said that the reason that wages in the financial industry are so high is that it’s like a room filled with money and the people who work in it are covered with glue. There’s actually a term for that, “efficiency wages”, and Tim Worstall mentions it in his recent Forbes piece that uses ex-CEO of CalPERS, Fred Buenrostro’s guilty plea on charges of corruption as a jumping-off point.

I do not believe in efficiency wages for a simple reason: they rely on a flawed theory of human nature. The reason that avarice is listed as one of the 7 Deadly Sins is that it’s not self-limiting. There is no wage, salary, inducement, or reward that is high enough to discourage someone who would otherwise steal from you from doing so. I think it’s almost exactly the opposite. If your love of money is great enough, you’ll do anything to get it. If you’re hiring risk-takers, the risk you’re assuming increases.

The reason to pay high wages is that the employees are worth it. No other reason.

{ 9 comments… read them below or add one }

TastyBits July 13, 2014 at 12:47 pm

The article writer like most people have never known criminals, and therefore, their knowledge of the criminal mind comes from the imaginations of the non-criminal mind. They do not think they are going to get caught, and if they do think it is possible, they think of it as a cost of doing business. Drug dealers can make more money in a few weeks than most people make in a year.

The easy solution is to not hire crooks, but crooks also go where there is plenty of easy money. If crooks are stealing your stuff, it is because it is easier to steal your stuff than the next guy’s stuff.

From the article:

Hedge fund management and pension fund management are not exactly the same thing, this is true, although they are close neighbours.

Here is your problem. They are not close neighbors. Strippers and sorority girls are both females, but when one shows their tits, they are girls gone wild. For the other, it is just another day at the office.

Hedge funds, regulated institutions, wall, etc., same rant different day.

Guarneri July 13, 2014 at 1:28 pm

Heh. The personality profile of a hedge fund manager and a pension fund manager couldn’t be more different, even though there is overlap in skill sets.

TastyBits July 13, 2014 at 2:11 pm

@Drew

These pension funds are trying to get hedge fund returns, and you know the dangers. I have nothing against hedge fund managers managing hedge funds. Hedge fund managers managing pension funds is trouble.

michael reynolds July 13, 2014 at 2:56 pm

As the (probably) only person here who has actually committed a serious crime, and as a former restaurant manager and headwaiter, this . . .

There is no wage, salary, inducement, or reward that is high enough to discourage someone who would otherwise steal from you from doing so.

. . . is simply not true. It rests on the assumption that theft = greed. Wrong. Human motives are never monochromatic. A lot of restaurant skim and pilferage is about revenge, about pushing back against tyrannical bosses.

Early in my career I gave some freebees to a table at a restaurant where I had worked only a short time. You know who called me out? One of the cooks. His explanation was simple: (Owner) was good people who treated us fairly. He was right, I was ashamed, and that was the last food I gave out for free at that restaurant.

The next place I worked the owners were assholes and the skimming operation was so organized that we held our own secret waiter meetings to decide who got what and how much we skimmed. We had a waiter mafia.

I have many more examples, those are two. At least in restaurants the staff will punish a management that is seen as too cheap or unfair. When I worked at Hyatt the controls were so onerous and the managers such jerks we actually stole stuff we didn’t even like, sake for example. When I worked at Middleton’s neither I, nor anyone I knew, ever took anything – we all liked the management.

Dave Schuler July 13, 2014 at 2:58 pm

That part is phrased wrong.

Let me put it this way. There are some guys you could pay a billion dollars to and that wouldn’t stop them from skimming. When you hire for greed and risk-taking you’re going to get greedy guys who take risks. To think otherwise is foolish.

michael reynolds July 13, 2014 at 2:59 pm

And that doesn’t even touch the question of how hard a staff will work. A staff that doesn’t like management is man-for-man far less productive than a happy team.

If you don’t like your manager you’ll carry fewer tables, you’ll run fewer line stations, you won’t care about that grease smear on the plate, and you are out the door at shift end, period, done, and screw you.

If you like your bosses you’ll pick up that extra brunch shift and stay late to babysit a table and catch the bad food and clean like you mean it.

TastyBits July 13, 2014 at 5:47 pm


… serious crime …

Depends upon the definition of serious, and that depends upon your world.

Guarneri July 13, 2014 at 9:39 pm

TB at 2:11

The last sentence is correct. That’s my point. They are different cats.

But in my experience there are a vanishingly small number of pension managers trying to get hedge fund returns. About zero. If for no other reason than the nature of managing the cash flows precludes it. They would have to be real cowboys. Make that just about crooks.

Mankiw has a recent post showing recent endowment returns for some major academic institutions. Didn’t surprise me at all. And lays to waste the 7.5 – 8% return assumptions you see for public pensions. They are screwed.

TastyBits July 14, 2014 at 10:36 am

@Drew

I meant the public pensions. They are a mess, but you cannot get these guys to acknowledge that 2+2=4. Somehow if they wish hard enough, they can change reality to fit their fantasy. You can read between the lines for any additional meanings.

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