Compensation market inefficiency - sports vs. tech

Here's a mystery: in sports, some players on a team make more than their coach, but in the tech world (and the business world, for the most part), almost no employees make more than their manager. Which of the compensation distributions is more equitable?

First, there is a similar inefficiency in both markets, and that is that salaries for those fresh out of school tends to be bounded. In sports it's because of the agreed-upon arrangement between owners and players in each sport. In MLB, for example, a player is under team control for the first 6 years until they become free agents and can hit the open market. They have three years before they can even start to go to arbitration if they don't like the team offer. All of this is a huge suppressor for player salary. Albert Pujols will be paid more over the final 10 years of his career than the first 10, but it's almost certain that he produced more the first half.

In the tech world, most employees come out of school and get slotted into rough salary bands. In the beginning, that's largely fair. You can't tell how someone out of school will work with others or adjust to the more relentless rhythm of corporate life as opposed to the more lumpy work distribution in college.

But young developers, to take a group of people I think are particularly underpaid, typically produce a ton very early in their career, certainly more than they're paid for. It's not always evident right away, but within a short period the best quickly rise to the top. A lot of this has to do with the amazing leverage one software developer's code can have in the marketplace. Code can be made almost infinitely scalable. Even the greatest sports player can only have so much impact. The maximum is probably either a sport with few players on the floor at once (like basketball) and enormous marketing power in the global marketplace, or an individual sport where the player is responsible for nearly all of his/her performance (coaching being the other factor in an individual sport).

A huge difference between sports and the technology industry is thatInformation transparency on the true worth of a tech employee is much lower. Companies have a huge information asymmetry advantage over employees. In sports, the contracts of players are public knowledge, you know how much the guy in the locker next to you makes. Everyone's performance is highly visible, analyzed by thousands of professional and amateur analysts and fans.

In the business world, information about what different people are working on and how productive they are is not publicized that well within a company, and it's even less discoverable outside a company. You are typically limited to what you can put on your resume and who you can list as references if you take yourself on the open market.

[Incidentally, the lack of easy ways to quantify an employee's impact with much objective precision is exactly the reason that tech companies, who love to preach the virtues of transparency, can't be transparent with things like compensation. The disparity between one's compensation and one's impact, which will vary widely depending on who's judging, would cause way too much friction and gridlock. Imagine employees, like sports player unions, going on mass strike every so often.]

My sense is that both the sports world and the tech world are inefficient in their compensation schemes, but in different ways. In sports, I suspect many coaches are paid too little. Bill Barnwell makes a strong argument for Jim Harbaugh as a highly underpaid asset. In this article behind the ESPN Insider paywall, Bradford Doolittle makes a similar argument for the value of Tom Thibodeau to the Bulls.

In the tech world, I suspect the opposite, and that is that many employees are underpaid relative to their managers. Hiring great developers straight out of college and owning them during their equivalent of their pre-arbitration or pre-free agency years (to use a sports analogy) is one of the most important things a tech company can do, and Google, in particular, was the first to really exploit this inefficiency by quickly raising compensation and perks across the board. They drove the compensation bar up towards what is likely a more equitable equilibrium.

It's difficult for young developers to really assess their true worth because they typically have a very limited view on their impact. Even if they had a more global view, the ability to quantify the impact of a young developer versus a hypothetical replacement, to calculate the equivalent of WARP (to use a baseball term meaning Wins Above Replacement Player), in other words, remains very difficult. Will things like Github change this? Perhaps over time, we'll have more quantitative measures on something that will serve as a replacement for a resume, something more like the statistics on the back of a baseball card.

A related inefficiency that many claim is rampant in Silicon Valley compensation markets is age discrimination. It feels like some reporter needing to file a story will write a story on this once a year. Some recent examples include this one in Reuters and this one in the Mercury, but you can go back a few years and find earlier articles that say the same thing. This phenomenon is not unique to technology, you'll see it in sports, too. The brutal truth is It's partially the number of hours a young, single worker is willing to put in versus a married, middle-aged worker with kids, but it can also correlate to the willingness or familiarity of young developers with newer programming languages and techniques. Given how ruthless the technology recruiting battle is and how valuable great developers are, I suspect this inefficiency, if it exists at scale, will be ruthlessly exploited by some tech companies and closed over time.

Employees have some recourse for getting closer to market value. One way is to shop around frequently, like a free agent in sports, to determine true market value. Since there isn't an equivalent of a team's exclusive rights to your pre-arbitration or pre-free-agency years as in sports, you are essentially always a free agent. The downside is the increased stress from spending time selling yourself. Another option is to go do a startup, where, in a smaller team, you earn more visibility and credit for your output than you would within a giant corporation. One downside is that the nature of the work can be much different than in a larger company. Also, it's a much higher risk proposition, and it's not for everyone, but for entrepreneurial, risk-taking folks it's usually worth trying at some point if for no other reason than self-education.

Today we have headhunters in the tech world, or placement agencies, but at some point I wonder if we'll have the equivalent of a CAA in tech, with some knowledgeable agents representing the strongest developers and finding the most interesting work and highest compensation for them.