I often read of outrage by people at the “outrageous” amount of money top CEO, actors, or sports athletes get paid. This puzzles me.
What puzzles me is that when people are reminded of this simple business principle, people still don’t get it. That saddens me.
The principle is this.
If you make people enormous amounts of money, they will pay you sizeable sums of money.
The same principle applies to if you save people enormous amounts of money.
A variation of this is if you save many people a small amount of money or time or inconvenience. McDonald’s was initially successful because they sold 15 cent hamburgers. Also, you got your meal immediately which was a radical change from the typical half an hour you waited for your food before the fast food industry was invented.
There are two discussions on Quora that puzzle me. One is about the expensive gifts that Oscar winning celebrities get. The other is about the amount of money stars like Harrison Ford make.
First, I would like to address what some people call an obscene amount of income.
Be worth many times what people are paying you.
When I worked in the hi-tech industry, I had to earn or be worth at least 9X what my employer paid me. Fortunately, this was not hard to do for me. I was very good at saving factories money. I typically could prove I saved my employer $3 million/year. This was normal in my line of work. Not difficult to do if you know how.
I was paid $25/hour to do this.
First, for employers to keep them, people have to earn more than the employer pays them. There are a few exceptions for jobs due to government regulation, such as safety jobs.
Lawyers make good money because they save or get people a lot of money. I am a fan of lawyers. In the 1980s, I made $25/hour. Twice I paid lawyers $100 for a half hour consultation. Worth every penny because it allowed me to keep my job.
Another lawyer saved me $27,000 by helping me avoid a terrible mistake. I have yet to paid $27,000 to a lawyer (knock on wood).
Harrison Ford’s movies often make $300 million. Movie companies happily pay him $20 million to make a movie that will make them $300 million.
Isn’t this unfair to the other actors and movie staff? Not really.
One, if Harrison Ford declines $20 million for a “normal” actor’s wage, the other actors will not make more. The movie company will happily keep the $20 million themselves as more profit.
Also, the average actor will not draw enough of an audience to make a company $300 million. Maybe they will, but likely they will not.
Harrison Ford and Julia Roberts draw that many people to the theatres. As a result, moviemakers want Harrison Ford or Julia Roberts in their movies. These top-tier actors can command top tier pay. It is a win-win for everyone. The big name actor gets a great income, the movie company makes hundreds of millions of dollars. The audience gets great entertainment at a good price.
You cannot be easy to replace.
I have a relative who is very intelligent and has a lot of great ideas for businesses.
His problem is, he does not want to work. He is in his 70s, so that is understandable.
He also does not have enough money to buy a building, etc. so that he would have a lock on owning a business.
He wanted a business partner who did all the work. People kept stealing his business ideas.
He kept telling the entirely of his business idea to prospective business partners and made it clear that they would do all the work. He would be an ideas man only.
After laying out all of the details of a business venture, his potential partner would dump him and start the business themselves.
He once wanted me to start a dessert business with him. He told me what desserts to sell, when to be open (evenings). He told me to make it a delivery business primarily. The customers would be mostly stoners.
He told me how to market it.
He even found when buy the counters, display cases, etc. for the business. Another business was going out of business and selling off equipment. Everything for $1000.
I asked him what he would be doing. The answer was “supplying ideas”. He wanted me to do all the work.
I never did do a dessert business, as I was not interested.
I described hypothetical situation as if I were interested.
“Why wouldn’t I start up the business without you? You just told me everything I need to know. What do I need you for?
If I have to do all the work, and you are not financing it, what do I need you for?”
To this day, he does not understand why after describing a business plan in its entirely, people dump him and start the business without him.
They know what to do. They have just been told they will have to do all the work themselves.
They dump him because he is easy to replace. Plus, he has no “value add” to the business.
Harrison Ford and Julia Roberts are not easy to replace.
There is only one Harrison Ford. One Julia Roberts. One Steve Jobs (OK, was one Steve Jobs). There is only one Lee Iaccoca.
If someone can be replaced cheaply or easily, it is hard to command a high income. McDonald’s can replace cashiers with a kiosk or cellphone app. It is hard for these employees to demand $100,000 per year. It just isn’t going to happen.
There are robots that can cook and flip burgers to perfection. Some day, burger flippers will be replaced by machines. If the people are cheaper than robots, they have a job. If they are much more expensive than a robot, their job will be done by a machine.
It is a sad, but true fact of life.
This does not mean people who are in minimum wage jobs don’t work hard; they do. The hardest work I have ever done was when I worked for minimum wage. Plus, the public treats minimum wageworkers terribly.
Irreplaceable people earn good money.
The reason I never commanded a six figure salary was because even though I had good skills, I was easily replaceable. Most people who did my job could save their employer $3 million each year.
Save your employer $3 million? If you are lucky you get a 3% raises at review time. Most likely you get 1% just like everyone else.
I know people who worked at a paper mill and saved their employer $1 million. What was their reward? A $40 coffee maker.
Yes, it isn’t fair. Why? We were easily replaceable. Not as easily replaceable as a fast food worker, but still easily replaceable.
This explains why union jobs typically pay more than nonunion jobs. One person is easily replaced. It is very difficult to replace a large group of people at once.
Would you take a lower wage to do the exact same job?
If yes, then why haven’t you? If you already have, then you are rare indeed.
People claim it is unfair; why do people like Harrison Ford or Julia Roberts get $20 million per movie when many people are working for minimum wage?
I am going to attack this from the common person’s point of view. Most people start at a minimum wage job. Eventually, they get an education; they work hard, and eventually have 30 years experience.
They make their employer lots of money and usually have a good middle-class income after 20-30 years.
Let’s say a person has 20 years experience at a trade and is very good at what they do.
Usually, if a person has that much experience, they are making a good middle-class salary.
Should they refuse the good salary and demand minimum wage instead because of “fairness”? Do they believe they should not make a great salary because other people are paid minimum wage?
Few people would do that. They would reason, “I got a good education and struggled to pay my student loans. I worked hard, very hard. For decades!”
“How many people have 20 years experience in my field? Not many. I save my employer $3 million a year.”
“I would be crazy to voluntarily take a huge cut in pay!”
Again, it is a simple concept:
If you make people a tremendous amount of money, they will gladly pay you a vast amount of money.
This isn’t rocket science.
Harrison Ford makes filmmakers lots of money. So they pay him good money.
A CEO figures out how to make his company make billions of dollars by guiding it to new markets. So the company pays the CEO hundreds of millions of dollars.
FedEx saves me money by delivering a package across North America for considerably less than I could deliver it myself. So I pay them money.
Millions of people and businesses pay FedEx money for the same reason.
FedEx makes billions of dollars. So the person at the top is paid millions of dollars.