I don’t imagine many workers in the US circa 2015 would like to trade places with an 1890s West Virginia coal miner. All but the very poorest today make more money for easier, safer, and shorter work. And as you slide up the pay scale, you’ll find people getting not just money for their work. They get health insurance, vacation days, catered lunches, ping pong tables, and so on. Daycare, dry cleaning, massages. Go all the way up the scale and you’ll find drivers, oriental rugs for the office suite, and private jets. People compete for these things. Companies compete to provide them. And a coal miner would recognize almost none of them. But getting paid with something other than money? That, he’d know all about.
To varying degrees, 19th century coal miners were paid with a mix of money and scrip, or credits that could only be spent at a specific (and usually company-owned) store. Workers — particularly poor ones — throughout history have dealt with similar systems. Extreme versions paid workers entirely in scrip, overcharged at the company store, and were indistinguishable from debt slavery. In less rural areas, where companies had to compete against unaffiliated merchants for workers’s spending money (and workers’s work, too), compensation leaned more towards cash, and the scrip that workers did get tended to go further.
There’s nothing unpredictable there. It’s natural that all else being equal, a company in 1890s coal country and in San Francisco today would like to get more work for less money. Employees, all else being equal, would like the inverse. Adam Smith said, “Let the market magically resolve that down to stable, predictable terms of employment based on job, location, supply, demand, and so on.” And he saw that it was good.
What is unpredictable is that scrip hasn’t gone away. If your company subsidizes your health insurance plan, you’re getting paid partly in scrip. It’s called health insurance, but functionally, it’s scrip that you can only spend on health insurance. If the office has a ping pong table, that’s scrip. The catered lunches? Scrip. The snacks in the fridge? You’re getting paid in yogurt.
So why are workers today choosing to be paid with a mix of money, health insurance, and yogurt? Suppose the Chobanis in the fridge run $1.50 each and you eat 100 of them in a year. You’ve essentially asked the company for $150. Actually, to be more precise, you’ve asked the company for $150 of value. But there were two ways to do that:
- “Could I have $150 in the form of a currency that I can then trade for any goods and services I’d like?”
- “Could I have $150 in the form of 100 bowls of fermented milk?”
Option 1 is the obvious choice because you can use it for anything, including yogurt, whereas Option 2 locks you into a single tangy choice. Even worse, when companies give everybody $150 in yogurt, the employees who only want $50 of yogurt are subsidizing the people who want $250-worth — functionally donating $100 of salary to their coworkers. If everybody instead got $150 in cash, they’d buy exactly as much yogurt as they wanted.
Repeat this thought experiment for every type of non-cash pay and you’ll find the same thing. In a vacuum, every time a company pays people with something other than cash, cash would have been more efficient. That’s why currencies replaced barter systems in the first place.
The reason that employment still has these vestigial barter elements is that we don’t work in a vacuum. There are more forces acting on the employer–employee relationship than just those two parties’ wishes. I’ve been able to think of four reasons why you might rationally choose Option 2 above.
- Having the company pay is a way of buying the thing with pre-tax money and thereby getting a 25–50% discount on it.
- The company will probably purchase in bulk, which could get you discounts that you wouldn’t get on your own.
- Some products may only be available through your employer. Discounts at partner stores, advance access to tickets at a stadium that your company sponsors, etc.
- It saves you the headache of thinking about the item and going out to get it yourself.
But even in those cases, Option 2 is only better for you if the item is something you would have bought anyway and the company doesn’t buy more of it than you would have bought (before taxes). It’s likely that just a small minority of your company’s benefits meet both of those conditions for you. For everything else, you would have saved money with Option 1.
What we have, then, is an economy full of companies structuring their pay packages as deeply inefficient, one-size-fits-all baskets of cash and benefits. Some benefits, such as nice hallway decor, are non-excludable — it’s impractical to control access based on who has paid, so a one-size-fits-all solution is tough to avoid. But wherever practical, each term of employment should come with an option to cash it out.
This includes not just fringe benefits, but also contract details like non-compete clauses. Employees who don’t want a benefit should be able to opt for the equivalent cash (after taxes) instead, and those who don’t want a restrictive contract term should be able to pay to avoid it. That second clause sounds like sweatshop-style nickel-and-diming, but flip the phrasing and it becomes quite fair: employees who sign restrictive contract terms (which today are often mandatory) should get a raise in exchange.
That’s a high-resolution employment contract. I think that companies that switch to high-res contracts will quickly and easily start poaching from competitors who use the old one-size-fits-all system.
Here’s how a high-res contract could deal with typical benefits and contract terms. (The specifics will vary widely between industries and companies.)
Catered lunches and snacks
Employees who don’t want the catering get an equivalent raise. As a side benefit, this is a much more efficient way of accommodating everybody’s diets and likes/dislikes than averaging them into one centralized decision.
Gym membership, yoga, massage, etc.
Employees get these perks or an equivalent raise.
This is an interesting one. You’ll often find companies bragging about providing employees with motorized standing desks. The same policy could also be phrased as “we withhold $800 of each employee’s pay in the first year to buy them a special desk that empirically most people don’t want”. If the company is willing to spend
w on an employee’s workstation (desk, computer, chair, etc.), the employee ought to be able to choose options whose prices sum to an amount
s ≤ w. The employee then gets a raise to the tune of
w – s.
There’s a common concern here along the lines of “Won’t people just pocket all the cash and make their workstation crap?” If an employee would like to keep their job, that’s unlikely. What they will likely do is spend just enough to buy the things that actually make them better at their job. This sounds like hopeful speculation, but there’s a real-world test case: contractors. Every dollar a contractor spends on work tools is a dollar they don’t get to take home. So they have a strong incentive to half-ass it. And yet in competitive fields, contractors buy good (and often very expensive) tools because if they don’t, they’ll be replaced by someone who did.
Subsidized insurance (health, life, disability, etc.)
Employees get a raise equivalent to the amount that the company would have spent subsidizing any insurance plans that the employee doesn’t want. Be careful about thinking, “This doesn’t apply to me, my company pays for all of my health insurance.” Remember, that’s just another way of saying, “My company spends $800–1200 per month on my health insurance, whether I want it or not.” If it weren’t going to health insurance, it would be going into your paycheck. (See the final section of this essay for why that’s true.)
If your company matches, say, 3% of your 401(k) contributions, that’s functionally equivalent to giving a 3% raise only to those employees who are willing to put 100% of the raise into retirement savings. In a high-res contract, employees simply take some or all of the match budget (after taxes) as a raise and do with it what they please.
An argument here goes that companies match 401(k)s out of good-faith paternalism, to promote saving for retirement. If companies think they benefit from having employees who save wisely, 401(k) matching is a theoretically sound way to promote that behavior.
But there’s little real-world evidence that companies care about that. You’d expect a company that matched 401(k)s out of paternalism to do other, similarly paternalistic things. For example, give those employees a raise who abstain from alcohol consumption. That would be consistent since empirically, alcohol harms workplace performance far more than not putting enough money into a 401(k) does.
(My best guess is that matching is in reality an emergent phenomenon to help avoid taxes on retirement money.)
Paid time off
The idea of paid time off demands an essay of its own, so in this short space, I’ll have to summarize it without much of a supporting argument: there’s no such thing as paid time off. If it intends to keep the lights on, a company can only pay employees to the extent that they create valuable things. And if you’re on vacation, you’re not creating value. (Net, of course, the very real restorative value that a vacation has on your performance. But the overall profit of a vacation is negative, or else the longer you stayed on break, the more money you’d make.) So you’re not getting paid. Your paycheck keeps showing up, but the money in it exists because of things you did on days you were working. People would benefit from understanding this as reality, and embracing it.
Put another way: an employee gets the free and equal choice to take four days off a year or forty days off a year, and they’re paid in proportion to that. Let’s imagine how this would work. There is a standard PTO quota of, say, 15 days. Employees who take less than 15 days off in a year get a raise of 1/250 of their annual salary (assuming 250 work days a year) for each extra day they work. Similarly, employees who take more than 15 days off simply pay 1/250 of their annual salary for each extra day. This gives people the freedom to do whatever works best, and quite reasonably pays them proportionally.
(There’s a separate issue here that the relationship between value created and hours worked is often strongly non-linear, but that’s a much tougher problem to solve. An ideal scale would pay purely for value created, without regard for hours worked. But humans haven’t yet figured out a reliable way to measure value-add. To account for this imprecision and avoid what could feel like nickel-and-diming, the standard PTO quota could be a range of, say, 10–25 days instead of a single number. Any number of days off within the range would result in no changes to an employee’s pay.)
Remote work and flexible hours
There’s an emerging idea that offering these as options is actually win–win for companies and employees. So interestingly, whether a high-res contract bundles these with a pay cut or a pay raise will depend on each company’s perspective. Companies that think work flexibility hurts them will ask employees who opt for it to take a pay cut. Companies that would prefer remote work and flexible hours (perhaps, for example, to save money on office space or because they want round-the-clock phone coverage) will join it to a pay raise.
Shift work presents a challenge that a lot of salaried workers don’t have to deal with: who gets stuck working holidays? The traditional ways of solving this problem are random selection, favoritism, or strong-arming junior employees. None of those are good at matching employees with the shifts they’d actually prefer (and, it follows, do best at).
In economic terms, holidays create a labor shortage. A high-res contract solves this straightforwardly — pay more, and more workers show up. Holiday shifts pay more, and the employee who gets the shift is the one who’s willing to do it for the lowest price, i.e. the one who least-doesn’t want to do it. And all involved get what they want.
(This is a bit oversimplified. There may be performance differences that make a more expensive employee a better choice for a holiday shift. And for consistency, this has to go both ways – extremely popular shifts pay less than average. But the average wage across all shifts stays the same, so the company’s outlay and the workers’ incomes will stay about the same. It’s the same money, just allocated more efficiently.)
Non-competes are interesting for a couple reasons. One is that courts in some jurisdictions refuse to enforce them. Another is that for all but a handful of specialized roles, they hamstring the employee while actually adding very little value for the employer that a non-disclosure agreement doesn’t already take care of.
Since employees are harmed by non-competes (their flexibility to go elsewhere, and therefore their potential salary, are reduced), a high-res contract would pay people more to sign this clause. This would look like “your salary is
x + y if you sign the non-compete”. The value of
y will depend largely on how badly the company wants a signed non-compete for the specific job in question.
At many companies these could also be an option in a high-res contract. Often, NDAs really do protect valuable information, so it’s likely that someone would have to be willing to take a massive pay cut for their company to employ them without an NDA. And in many circumstances, even getting a great employee at a salary of 0 wouldn’t be enough to convince the employer to skip the NDA.
But in principle, for some jobs, there is a level of pay cut that would get both parties to agree not to sign an NDA. A high-res contract would offer that as an option.
These can be handled the same way as NDAs.
Some people will have some mental hurdles to jump before this approach feels right. The allure of free lunches and all the rest of it is real and powerful. That’s why these programs exist at all. The key is to understand that the money spent on those programs is money that would otherwise be in your paycheck.
That money is part of the all-in cost of employing you. The company budgets
x to spend on you, and that’s unaffected by the specific permutation of subexpenses that
x happens to get spread across. Whatever portion of
x that doesn’t go to health insurance or catered lunches or a motorized standing desk will materialize in your bank account.
The natural fear here is “What if the company keeps the money? Why wouldn’t they cut the standing desk and then pocket the savings?” For the same reason that they offered the standing desk in the first place — if they underpay you (for a broad, “total value of
x” definition of pay), you’ll go somewhere else. Companies that cut benefits without increasing salaries would essentially be paying tens of thousands of dollars less than their competitors, which is a reliable way to lose employees.