2 min read

The Anatomy of Your Salary

The Anatomy of Your Salary

In this post, I explain the core factors that determine salaries.

I’m going to start off by making a bold statement: your salary is largely disconnected from how valuable your job is to your employer or society.

This may sound crazy the first time they hear it, but just stick with me for a minute.

Consider the price of water compared to the price of diamonds. Diamonds are far more expensive than water, even though water is essential for life and diamonds are basically useless.

Water is cheap because it’s relatively easy to acquire, whereas diamonds are much harder to get. Salaries work precisely this way.

Your salary is determined by how much your employer would need to pay someone else to do your job. The harder it is to find someone else to do the job, the more they’ll be willing to pay.

Three main factors determine how hard a job is to fill:

  1. What it takes to get qualified to do the work - the more challenging it is to become qualified, the fewer people there are who can do the work. That’s why actuaries or neurosurgeons get paid so much.
  2. How attractive the work is - more desirable jobs are easier to fill because more people are willing to do the work. That’s why game developers earn less than developers working at a bank; games are fun!
  3. Demand for the role - the more companies there are looking to hire for the role, the higher salaries will be. That’s why AI engineering roles will be so highly paid in the next few years.

It's common to hear someone say that teachers are underpaid. So, let’s apply these principles to teacher salaries:

⬇️ Becoming a teacher is relatively straightforward
⬇️ It’s attractive work that usually includes a lot of time off
⬆️ There’s a lot of demand for teachers

So that gives us a sense of the dynamics that affect their salaries.  But I've only outlined the classic supply and demand considerations above. In the real world, there are a few factors that complicate things.

Salaries tend to be suppressed when:

  1. The relative value contribution of employees is hard to evaluate
  2. The organization has limited incentive to perform better

The relative value contribution of employees is hard to evaluate: A top-performing salesperson could earn 2-10x the average on the team, but the best teachers aren’t earning much more than the average. The reason is that schools can't properly quantify the value that teachers create.

The organization has limited incentive to perform better: Schools don’t typically have a performance incentive beyond helping their students achieve certain marks and getting them into universities. So while kids can and do develop across many other aspects at school, there is a limited reward for the organization to help them to do so…and therefore limited reward for teachers.

Considering these last two factors, it shouldn't surprise you that schools often lose their best teachers to edtech companies. Those companies do have the ability to assess relative performance and do have a strong performance incentive!

Closing thought: People often moralize salaries - claiming that this or that role is unethically underpaid - instead of taking the time to understand the forces that shape salaries.

It's only by understanding the incentives and forces behind salaries that we can empower ourselves to make informed decisions about our careers and reshape what these systems reward 💎