One of the great issues of the day is the inequalities seen within the modern corporation whereby executives are rewarded very well financially while many laborers executing the day to day tasks that make the corporation possible are not even paid enough to make ends meet. Often the people doing the physical work required to keep the company moving rely on food stamps or other forms of government support for basic needs. The goal of this paper is to provide a framework for the valuation of individual contributions that fairly and accurately reflects the value that each individual throughout the organization is actually bringing to the corporation. At the moment, compensation is often determined by what other businesses are willing to pay for similar labor. Unfortunately this framework has often led to a significant and systematic undervaluation of manual labor to the lowest common denominator due to the price giver versus price taker relationship between employers and employees. An accurate assessment of the labor value provided by each individual will help inform decisions about pay and hopefully lead to a more equitable distribution of the total value created by the corporation among all labor participants from line chefs to corporate executives. Labor value of entrepreneurs, people working at startups, researchers, inventors, and other economic labor participant outliers are not addressed in this paper.
Frameworks for quantifying individual value
Before we can quantify the value of an individual contributor, it must be understood that it is assumed the company or organization in question is creating wealth. For the purposes of this paper the definition of wealth is that defined by the essay “On the Creation of Wealth” by Paul Graham. Fundamental assumptions behind this theory is that the organization or corporation creates value. The value can by systematically measured by money, although this is not a perfect measure, in particular when it comes to investments that take a lot of money and time upfront before delivering any monetary value to the company. For the purposes of this paper we will be focusing on established businesses with an established and relatively stable (<20% annual variation) source of revenue and expenses. In order to create a basic framework for understanding individual contributor value we will start with a simple organization where there are distinct labor and management roles. For simplicity we start with an organization where 2 people are managers and 12 people are performing direct labor tasks. After quantifying the labor values and dynamics in this simple organization we will then scale this up to an organization with 3 executives, 18 middle managers, and 120 direct labor employees or about 10 times the size of the initial organization. This second study will be used to see how the dynamics change as the organization grows and scales up. The next stage assumes an organization ten times larger at around one thousand and then again at around 10,000 people in the total organization. Analysis at four different scales of operation is conducted in order to evaluate the scalability of the theory across different organization sizes. In addition, the same analysis needs to be conducted across different industries with different labor and management distributions in order to evaluate the applicability of the theory across various industries. Last but not least, the same analysis should be conducted in various countries around the world in order to evaluate the applicability of the theory across different cultures and economic situations. For future study it may be possible to look at historical performance of companies in order to see the applicability of the theory over time.
The basic premise behind this theory is to measure the value of employees, managers, and executives with two very different metrics and then find a way to combine the two values to create a fair valuation of the contribution of each role within the company to the overall performance of the company. The first measures the impact of non-performance of work roles on the revenue generation capacity of the company. The second metric evaluates the impact of decisions on the value of organization. In other words, the potential for bad decisions to impact the performance of the company.
Labor Value by Revenue Loss from Non-Performance
The first method is via labor inputs required to keep the company running. This might also be measured by what happens if a specific labor segment completely stops, how much value can the organization continue to put out. This is an attempt to isolate specific values of various sectors of the company which are typically intertwined to estimate the impact of any individual sector to create a weighted average of all the various sectors. So, for example, if all amazon delivery drivers stopped working, how much revenue could amazon continue to bring in. Then continue the same process for all the IT support staff. How long, and how much of the company could continue to operate without that support staff. In some cases this may be difficult to quantify for example IT where it is a support function may range from 100% to 1%. In the 100% case the company would be immediately non-functional without IT support whereas in the 1% case the company can theoretically operate for about 360 days (99% uptime) without IT services before having to shut down. This same function can be applied to executives, if they all stopped working, how much of the organization could continue to operate without them. Once the impact of each role or sector of the company has been calculated the values would then be added up to provide a total. Then each sector would become the numerator over the total. In the case of an architecture office, if all the drafters stopped working, no projects could be drawn, but projects in construction administration could continue for a certain amount of time until the project completes construction at which point the whole office would grind to a halt. Therefore the value of the drafters might about around 60% to 70% of the company revenue. IT in an architecture firm might be around 5 to 10% of the company revenue by contrast. In an information security the distribution might be completely different. IT might be 100% of the revenue and secretaries within the company that keep the lights on month to month and the rent paid on time might be 30% to 40% of the value. It is important to note that the values are based on revenue in order to quantify the value of each portion. As such, in more interconnected organizations with many critical functional roles for day to day operations required to continue operation the total value may greatly exceed 100%. In more simple structures with only one or two mission critical roles the total value of the organization might be closer to 100% but in all cases the total should theoretically always be above 100% as every role within the company has some level of criticality over the course of an entire year. It may be evident here that executives and researchers who are not critical to the day to day operations of the company would be significantly undervalued if only using this approach. For this reason, a second approach evaluating the impact of decisions on company performance is used.
Decision Making Value by Non-Performance Impact
The second method also uses a “non-performance” model of value creation. Basically it assumes that every time an individual within the company has a decision to make, they make a bad decision. Starting with executives we can see that the decisions executives make have a tremendous amount of leverage on the company. In contrast, middle manager decisions might only have impacts on the specific projects they are working on and line workers can only mess up the amount of burgers they are producing. In the software engineering sector just as in the fast food industry, the processes of the company reduce the room for decision making by the laborers doing the ground work or provide for checks from management in order to immediately rectify any bad decisions or prevent the results of bad decision making from reaching the customer.
Odd-Ball Value Creation
Researchers and inventors on the other hand might have an outsized impact that is difficult to truly quantify due to the lack of a systematic nature. Furthermore, due to the many unique considerations related to these fields the value created by inventors and researchers is not addressed in this paper. This would be a great area for further research.