Monday, 10 November, 2008

Chance and compensation

In an article titled Proximity is key to raking it in in today’s Times of India, columnist Santosh Desai argues that you get paid according to your closeness to money. He says, “We get paid not for what we do, but for where we are. Salaries are all about location; the closer one is to money, the more of it one makes. Like the arms dealer who makes a few hundred million dollars for putting the right people in touch with each other, the key is proximity to money. Schoolteachers and college professors sit very far from money, so no matter how much their personal ability or how much value they add to our lives, they earn what they do. The market is impatient with distance; it discounts one's worth, the further one gets from it.”

The same point is expanded in John Kay in Culture and Prosperity: Why Some Nations Are Rich but Most Remain Poor. At any rate, that’s what I made of that book.

But somewhere else I remember reading another, probably complimentary explanation. Income is also reward for taking risks. The superstar is paid millions to attract thousands to stardom; only a few make it; and the average income of actors is quite low, because for each superstar there are literally hundreds of out-of-work actors, surviving on handouts or part-time jobs, and scores of minor ones who live no better than a middleclass life.

Similarly, executives, especially in finance, can have prolonged lean periods where they earn little or nothing. And a CEO who sits through bad times will have his career and reputation terminally ruined. The ruin of one’s good name can hurt one more than the loss of several fortunes.

Fat paycheques are compensation for these risks. It’s not just nearness to wealth; it’s also closeness to ruin.

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