Wednesday, March 14, 2007

Comparing Oranges with Apples

This is another of the economics dilemmas that I have been trying to find an answer to. This is related to my previous post but this is from an employers perspective. Suppose you have two very sincere, loyal and efficient persons working for you in two different positions. If one happens to be working in a high ROI job while the other in a low ROI job then how would you have an equitable distribution of the salaries.

One could argue that I should pay the employees based on the value contributed to the system. But what if they play very crucial roles in their respective departments? Should I pay the employee working in the low revenue department lesser than the other employee? Would the employee understand that I am paying for the net value brought into the system through his contribution? Would that mean that his commitment and sincerity does not count? But they do count.

The same issue would arise in case of sharing of profits. Should the division of profits be proportional to the salaries? Wouldn't that give lower incentives for people earning low salaries than those earning high salaries. On the contrary if you divide the profits equally then it wouldn't incentivize the high performers to keep performing.

I guess the solution is to go midway between equal distribution and ROI-based distribution and scaling the curve a little based on employee performance.