Impactful Work Versus Salary

The common wisdom is that working in fields with high social impact such as environmental protection or education requires lowering one’s salary expectations whereas some of the fields that have the reputation of being lucrative financially also face the suspicion of exploitative culture or frequent moral hazards such as finance or the petrochemical sector.

While this reputation is certainly based on some factual observations, I also find it a bit paradoxical, at least if you believe that markets are somewhat efficient in allocating resources. In an efficient market, shouldn’t the highest paying job that I can find also be the one that maximizes my positive impact on society?

Let us go through the argument in favor of this perspective before considering the caveats.

Argument 1: The job market identifies the company that values you most.

Firstly, note that the market that allocates an employee’s work to an employer is a matching market: We have a number of sellers (job seekers that offer their work as a product) and a number of buyers (companies seeking to hire). The mechanism that allocates job seekers to employers is a form of auction: The buyers can place a bid (proposed total compensation) for a candidate’s work which the candidate can accept or reject taking into account other offers they may have received. The employer can then decide to make a new offer.

Further, note that each employer j assigns a value V_{ij} to the work of a potential employee i. This value V_{ij} corresponds to the marginal monetary benefit that the employer expects to get out of the employee. V_{ij} forms the absolute upper bound of what a rational buyer can offer.

Similarly, the candidate can have a reserve price R_{i} which is the lowest possible offer they are willing to consider. Every bid that a company j makes to a candidate i will be lower than V_{ij} and for a match to happen, it needs to be at least R_{i}.

Let us make the somewhat hand-wavy assumption that the above-described mechanism simplifying the job market approximates the auction procedure proposed by Demange, Gale & Sotomayor in 1986 and hence produces a set of market-clearing prices. This means: A set of compensation offers so that every company gets the candidate they prefer at that price assuming that each candidate accepts the highest paying offer.

One of the properties of a vector of market-clearing prices p is that the resulting match of a candidate i to an employer j maximizes the value V_{ij} - p_i.

What this effectively means for a candidate i is that by increasing the price until there is only one company left that is willing to pay this price, they also identified the company with the highest value V_{ij}, meaning the company that places the highest value on the employee’s work.

Argument 2: The value that an employer assigns to your work is your marginal revenue.

Following the argument above, for a candidate i, optimizing for total compensation should identify the company j that values this candidate the most. Where does this value V_{ij} come from? It is the marginal revenue that the company thinks it can gain by hiring i: The expected revenue with the candidate on board should be V_{ij} higher than without the candidate on board. (You may notice that I am glossing over a lot of counterarguments here, please bear with me!)

Now, this marginal revenue that an individual i is able to contribute can be different from company to company for the following reasons:

  • Assume company A and company B would use the candidate’s work with the same efficiency. At both companies, the candidate has a similar contribution. However, company B simply has a more valuable product and is able to ask for a larger markup. Therefore the net marginal revenue will be bigger at company B.
  • Assume company A and company B produce products of similar market value, however company B can make more efficient use of the candidate’s work. Again, company B has the highest marginal revenue.

Both points make a lot of intuitive sense: If you would hire me to repair cars, my contribution would not be very valuable. Not because the service as such is not valuable but because I don’t know anything about cars. If you bring me into a team to build a data analytics solution to predict the most frequent swear words tagged in university toilet stalls, I might be effective but the result would not be very valuable. In both cases my overall impact is low.

In conclusion, following these arguments, by maximizing for total compensation as described above you should identify a company that either has a very valuable product or can make efficient use of your particular talent or both.

Argument 3: By selecting such a company, you maximise your impact on society.

Lastly, in the absence of negative externalities or market failures, using similar logic to the one above, the margins that a company can command should be directly derived from the value they offer to society: The bigger the need for a certain product or service, the higher the prices that the market should be willing to pay. Margins go down either if the good itself is not very valuable (low demand) or if we’re dealing with an essentially solved problem (high supply).

Putting all of these three arguments together, we arrive at the logical conclusion that by optimizing for compensation you select a company that can efficiently use your particular skills to solve an important need.

Note that none of the steps above depends on the actual level of the compensation. In a seller’s market (as we experience it at the time of writing for software engineers in some areas of the world), compensations will move closer to the company’s estimation of the individual’s value and in a buyer’s market, it will be the other way around. Furthermore, I am not at all making a value judgment whether or not a certain compensation level is justified or desirable.

This is too simplistic

You have probably already yelled at me at several places where my economics 101 model clashes with the real world. There are many, many things that this leaves out.

  • Companies don’t have a reliable way of assessing a candidate’s impact on revenue.
  • There are negative externalities and market distortions:
    • For example, at the time of writing, greenhouse gas emissions are only slowly beginning to be priced and not yet to an amount consistent with the damage they cause.
    • A company providing a service to rich people can probably hope for a better margin than a company offering a service to the less affluent, irrespective of how big the total utility is.
  • Public budgets cause inefficient markets as they form a planned economy which is why you can see a shortage of a certain class of public employees without an automatic increase in salaries in that category and vice versa.
  • The salary negotiation process is not a perfect auction either and human psychology plays into all of these steps.
  • Big companies can make use of your work more “effectively” because they have a scale that allows them, for example, to more efficiently avoid taxes. That was not the kind of efficiency which I was aiming for, of course!

Applying these calculations naively would therefore be a dangerous oversimplification.

Concluding Thoughts

Nevertheless, just because this line of thinking is not completely right does not mean that it is completely wrong either. If the discrepancies result from market failures and suboptimal budget allocations, then it is probably that which we should fix first:

If a small company that solves an important environmental need simply cannot return a high profit because environmental concerns are not priced high enough, the people accepting a sub-market rate to support this endeavor effectively subsidize the company. A specific tax on that narrow group if you will. That does not appear fair to me.

In other parts of the economy where markets are not as distorted when comparing companies of similar scale or in similar industries, the above math might still work out in the aggregate. At least enough to call total compensation a useful signal for impact beyond the simple self-interest of a rational, greedy econ.

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