Labor markets calibrate satisfaction

May 10, 2022

It's clear that different career paths have vastly different earning potentials. What explains the discrepancy?

Talent is a combination of intelligence, grit, and access. Before talented people start to specialize after high school, I firmly believe they can do almost anything. Their decision of what they will do reflects some internal prioritization of interest and priority systems. But every industry wants these talented individuals. So what explains the differing pay? Something is clearly lost in our typical conversation about what a salary includes.

Traditionally:

Compensation = Equity + Salary

Tech companies have some tradeoff between these two factors. Startups offer more equity in return for lower salary, with the promise of more upside. Established players offer less equity in return for higher salary and more stable returns. Across all of technology - regardless of firm - you'll notice that talented employees command the same rough total compensation. The market is clearly somewhat optimal in setting this tradeoff between equity and salary.

This equation misses out on a key element that becomes evident when you actually talk to people who are deciding between jobs: satisfaction. In reality, we should think about compensation more as an aggregate between material and immaterial:

Compensation = Equity + Salary + Satisfaction

Speaking in general strokes:

  • Investment banking: High pay, low satisfaction
  • FAANG: High pay, low satisfaction
  • Startups: Medium pay, medium satisfaction
  • NGOs: Low pay, high satisfaction

So not only is the market optimal within salary and equity. It also calibrates across different job types with intrinsic returns, where total compensation between these roles is relatively equal. Does that mean we can put a financial price on job satisfaction?