Never completely invest yourself in a single institution, my father always said to me when I was coming of age. Institutions will betray you, he warned. What makes for a great career are good relationships based on trust plus skills you acquire and keep.
It’s the tragedy of men that we rarely take our fathers’ advice. We realize that it was correct only in time to pass on the advice to our own children. So on it goes.
Let’s unpack my father’s insight with an anecdote from a friend. He did everything right in college, studying finance and economics, including an advanced degree, and then landing an entry-level job only to discover the need for a battery of credentialing exams. It was entry-level but with great potential.
Then he bumped into an extremely low ceiling for advancement. He took the position with the hope of a permanent home but could never get over the way that managers and owners treated him always as a newbie or intern. He had this personae that he could never shake, no matter how well he performed.
Then salary did not advance alongside his value contribution to the firm. He asked for a raise, and it was declined. In time, he found another position at another firm and left, much to the dismay of his previous institution. They had no idea that he possessed the gumption and marketability to manage such a feat. They had lost a great man with real potential because they could not see his value until it was too late.
Then it happened again. He arrived at his new firm with a good reputation but never could shake off the role in which he started, which was as a competent achiever in a rather low role. Two years went by without anything but perfunctory raises. He asked for more, and it was declined.
The experience repeated: He found another firm that more than doubled his salary. Shocked and amazed, and feeling profound regret, his firm bid him goodbye amid recriminations all around: How could we have messed up so badly as to lose this high performer?
It’s a feature of institutions. They are not good at recognizing value in their ranks and rewarding it. I’ve seen this time and time again. I worked for a nonprofit that was forever hiring inexperienced and low-skilled workers to show up and make messes until they were fired. Meanwhile, the high performers on staff were given only casual attention. Truly, they could have declined to hire three low-level losers and doubled the salaries of every experienced performer on staff.
For some weird reason, this never happened. Firms always think they are getting a good deal in paying low salaries to new people, but they are almost always wrong.
Why is this the case? I’m not sure, but it seems to reflect a kind of myopia that traces to a psychological hole in the thinking of management.
As I think back on my father’s advice and his own career, I know of one incident that may have informed it. For years, he volunteered as a music director of our church. He worked extremely hard, directing all of the holiday concerts, showing up several nights a week for rehearsals, and spending the whole of Sunday at services. The program grew and grew.
Then the deacons of the church decided to hire a new music director. He had half my father’s competence but was paid a salary higher than my father’s day job. My father was rubbed wrong, understandably, and asked why he was never offered payment. A man told him: “You did the work for free, so why should we pay?” Ouch. I suspect that he never quite got over that sense that he had been used rather severely.
A word about economic theory: In a competitive market economy, wages and salaries are determined by the marginal contribution a worker makes to the firm’s revenue stream. Profit-maximizing firms hire until the marginal revenue product of labor (MRP_L) equals the wage. In perfectly competitive product markets this is the same as the marginal value product (MVP_L) equaling the wage. In equilibrium: MVP_L = MRP_L = W.
In plain language, this means that, over time and under competitive conditions, workers are paid roughly in accordance with the value they create for employers. In any case, that’s the theory.
What would this mean for you? It means work hard, stick around, be loyal, and wait for the rewards. In other words, the market will take care of it. It’s not bad advice for gaining skills, and no one likes a complainer. The trouble is that the theory diverges from reality to too great an extent.
In most real-world cases of which I know, the above theory does not pertain. Indeed, the theory is bullocks. Instead, workers are paid the minimum amount to retain their skills. This means that the wages and salaries tend to be slightly higher than the perceived opportunity costs of the worker. That is to say, managers assess what other opportunities are out there for worker X. If he decides that there are not any, worker X will be paid a low salary.
This same psychology affects the problem of golden handcuffs. If a firm really wants to retain an employee, they pay him extremely well plus stock options plus elaborate benefits. The guy might hate the job but never leaves because it’s the best deal around. Nice problem if you can get it, right? The more common problem is the opposite: low pay because the worker’s skills are not fungible.
Fungibility refers to the property of a good, asset, or service that makes individual units perfectly interchangeable. One unit is exactly as good as another—buyers or users have no preference which specific unit they receive. Classic examples include gold, crude oil, U.S. dollars, or shares of the same stock.
The same concept can be metaphorically applied to labor and skills. Skills are more “fungible” when they are general, portable, and in demand across many different employers, locations, and contexts. A highly skilled barber or hairstylist can usually move to almost any town or city and quickly find work—the service they provide is relatively standardized and the demand is broad. The same is true of a waiter at a restaurant or a bartender.
By contrast, a tenured professor of microbiology at an Ivy League university has highly specialized, context-specific human capital. His or her expertise, reputation, network, and even the prestige of the institution are not easily transferable. Losing that particular position could make it very difficult to find an equivalent role elsewhere.
To be sure, the professor is paid more than the bartender but has less job security. This is why professors tend to be so risk-averse and unlikely to depart from the consensus. They fear that if they make one wrong move, their careers are at an end. By contrast, waiters, haircutters, and barbers are free to tell the boss to “take this job and shove it.”
This is also why you are more likely to get the truth about politics and public life from your barber than from a tenured Ivy League professor. The professor lives in fear, but the barber is free to speak his mind.
To be sure, the waiter and the accountant (two fungible professions) might have good job security, but they also face a highly competitive environment with others who have the same skill, thus driving down the wage. Prestige professors, on the other hand, possess a non-fungible skill that is rare enough to call forth a high salary from an institution willing to pay it.
In the commercial private sector, people are paid in weighted balance of the need to retain them against possible other competitors. If you have no options in this world, you are very likely going to be stuck in a fixed role and lower salary. But if your skills are both high and in high demand, and you are mobile due to your skills-based fungibility, you are in a position to extract the highest possible payment for your services.
That’s the sweet spot: possessing refined skills in a market that demands them while retaining the ability to move from one firm to another. Hence my father’s advice: Don’t trust the institution; good relationships based on trust plus skills you acquire and keep are what make for a great career.
Too often, workers are thrilled to have a job and make every effort to keep it, while not noticing that they might be at a dead end. The more correct positioning is to stay in the market, work to acquire and refine new skills, build a friend network based on trust, and keep your eye out for new opportunities. Always.
This is how you avoid the trap.
And if you’re managing people: Treat your high performers well. If you don’t, someone else eventually will.
