Saturday, August 12, 2006

If You Pay Peanuts, You Get Monkeys

Here's an interesting paper from SSRN. Glen Boyle, a finance professor from Victoria University of Wellington, examines whether paying "low" wages results in a lower quality work force. Here's the abstract:
Does the payment of peanuts tend to result in the hiring of monkeys? Unfortunately, privacy and other constraints on data mean that surprisingly little is known about this issue. In this paper, I use some unique data from the New Zealand academic system to provide direct evidence that pay levels do matter in determining the available pool of quality workers. Academic salaries are independent of discipline in New Zealand universities, but because different disciplines face different outside labour market opportunities, their ability to recruit high-quality academics is also likely to vary. Utilising the results from a national research assessment exercise first undertaken in 2003, I find that discipline research performance is indeed negatively related to the value of outside opportunities: the greater a discipline's average salary in United States universities, the weaker its research performance in New Zealand universities. The latter apparently get what they pay for: disciplines in which the fixed compensation is high relative to opportunity cost are best able to recruit high-quality researchers and/or motivate their researchers to be productive. Paying (relative) peanuts attracts mainly monkeys
You can get the paper from SSRN here.

His findings make sense - if a discipline pays "low" salaries, a "high quality" person considering going into it faces higher opportunity costs. This is becasue there's a bigger spread between the compensation they could get in that discipline and what they could get in their outside options .

In New Zealand, faculty receive the same salary regardless of their academic discipline (with a few exceptions - the medical and dental fields). So, a high-quality researcher in finance would give up a lot to go to New Zealand as an academic, since academic finance salaries are higher elsewhere. In contrast, an English professor considering a position in New Zealand has lower opportunity costs, since English professor salaries are relatively low outside of New Zealand.

If this argument is correct (and if slalaries were the only factor determining job choice), it would result in the average quality of Finance professors in New Zealand being lower than the average quality of English professors (measrured by the standards of their respective field). And this exactly what Professor Boyle finds.

Of course, there are other things that also affect the choice to go to New Zealand - the cost of living, proximity to the ocean, etc...

But it's a good idea, and some very interesting findings.

The paper's conclusions are definitely consistent with my own experience. My current university pays finance salaries that are about 15-20% below the going rate for finance faculty at similar universities. They had interviewed five highly qualfied candidates for the job before they looked at me. None of them took it - in all cases, they ended at places with much higher salaries. And in the 5 years prior, they'd lost 5 assistant professors (and their curent faculty numbers 6). So, they had trouble getting good peple, and the ones they did get tended to leave for greener pastures.

In my case, however, the salary wasn't that important - the chance to get within 100 miles of family was. And I can always make extra money doing consulting and teaching CFA prep on the side.

But I'll still put an (anonymous) copy of the paper into my Dean's mailbox.

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