I recently spent a few days with my best friend who happens to be a very successful surgeon. At dinner one night we got to talking about how medicine is changing and how his peers make much less than someone with the same profile did back in the 1990’s when he came out of medical school. To add insult to injury, my friend noted, while the income of surgeons has decreased in real terms, sports stars’ salaries continue to climb, a phenomenon that (to my endless amusement) genuinely baffles so many extremely well-educated people.

When he was finished with his lamentations, I replied that his comparison of his income and that of sports stars was ignoring one key economic theory I have developed over time, something I call the Maximal Minimum Wage. What my theory states is that all classes of workers, with one exception, are paid the least amount required to get them to do their job. In other words, a neurosurgeon who makes $700,000 a year is paid the least amount required to get him to cut open people’s brains. If he were paid less, he would take his talent and do something else. If he were paid more, the patients and hospitals that pay him would be wasting their money. As I noted above, this law applies to almost everyone. Companies pay designers the least they can pay them to design things. Movie studios pay actors the least they can to get them to be in a movie. Hospitals pay doctors the least they can pay them to care for patients. Universities pay professors the least possible salary required for them to show up and teach every day (something I know about from firsthand experience).

Employers don’t always get this number right, of course, but I don’t know of any CEO whose goal it is to pay one dollar more for talent than she needs to pay. Indeed, in my years as consultant, executive and researcher, all I have ever heard are requests for strategies that minimize the aggregate labor costs required to achieve any given level of organizational performance. In other words, every CEO wants to maximize the number people to whom her company is paying the least amount possible, i.e., the maximal minimum wage. By the way, according to classical economic theory this position is entirely logical and in the best interest of shareholders, who should punish any CEO who is spending more on labor (at any level) than is really necessary.

For very good reasons, those workers at the bottom-end of the income ladder who are paid the Regulatory Minimum Wage, which varies by state, are generally the focus of minimum wage discussions. Generally speaking, their individual impact on rich people is so microscopic that this class of worker can barely exist on what it’s paid. However, we need to be clear that the phenomenon that applies to someone serving food in McDonald’s for a few dollars an hour also applies to the execs who market the company’s products back at headquarters.

Now, let’s return to the one class of worker who is exempt from the maximal minimum wage. This fortunate group happens to be people who make rich people richer. Sports stars fit neatly into this category: they make rich team owners even richer, so star athletes can ask for pretty much whatever they want. Great hedge fund managers make rich people a lot richer, which is why some command salaries of over $100 million per year. The same goes for advisors who find ways for rich people to hide their wealth from tax authorities or get laws passed that favor their interests. This lucky group, whose great contribution to society is to enable those who have much get even more, is the only class of worker who can pretty much unilaterally set the price of their services. Everyone else is stuck with the maximal minimum wage.

So, I explained to my surgeon friend, you may have trained at Harvard and become a world-class surgeon, but your work rarely touches truly wealthy people and when it does it merely keeps them alive — it does not make them any richer. You shouldn’t expect to get paid any more than the least it takes to keep you in the O.R. every day. It so happens that for the work he does $700,000 a year is the maximal minimum wage required to get him not to leave medicine and devote all his time to the gold mine he owns in Alaska. Come to think of it, though, that’s just what he just might do after reading this post.

 

Read this article on LinkedIn here.

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Posted by Carlos Alvarenga

Carlos A. Alvarenga is the Executive Director of World 50 Labs and Adjunct Professor in the Logistics, Business and Public Policy Department at the University of Maryland’s Robert E. Smith School of Business.

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