PRELIMINARIES

I begin with a few preliminaries. First, my approach to the justification of wages is unusual. I do not start with moral principles or, more generally, reasons why it might be good for a certain worker to be paid a certain wage. Rather, I begin by reflecting on the ontology of wages, i.e., by thinking about what a wage is. To be sure, moral principles, or reasons for paying people certain wages, are present in my address. But the principles and reasons follow from the ontology. This has the effect of limiting the range of reasons that are typically found in normative discussions of wages.

Second, I will speak of the justification of wages. I will say that wages are justified, unjustified, or not justified (i.e., neither justified not unjustified). To say that something—e.g., an action or outcome—is justified is to say that there is good reason for it. Of course, there may be disagreement about what counts as good reason to perform a certain action or bring about a certain outcome. So there may be disagreement about whether a person is justified in doing something or in bringing something about.

Why do I ask whether wages are justified, as opposed to whether—as is often the case—they are just or fair (Moriarty, Reference Moriarty2012)? I do so to remain neutral among the kinds of reasons that might be given to defend wages. There are different kinds of reasons: moral, legal, prudential, aesthetic, and so on. Moral reasons can be given for certain actions and outcomes. But there may also be legal or prudential reasons for those actions and outcomes. To show that a wage is just or fair is to say that there are good moral reasons for it. Moral reasons are important, but other kinds of reasons are important, too.^{Footnote 2}

Third, I do not claim that the conceptions of wages I explore are the only conceptions of wages possible. It is natural to think of wages as rewards, incentives, and prices, and these conceptions, as we will see, connect easily to moral considerations at play in familiar debates about wages. There is also a satisfying temporal completeness to these conceptions, considered as a set. Rewards look backward to what a person has done; incentives look forward to what she will do; prices refer to transactions that occur in the present.^{Footnote 3} Yet it is possible that alternative conceptions of wages will be identified. This would not undermine my argument. Instead, it would show that, when it comes to the justification of wages, things are even more complicated than I have suggested.

It will be useful in what follows to have a case at hand. Our case will be the 2017 compensation of W. Craig Jelinek, the chief executive officer (CEO) of the Costco Wholesale Corporation. Jelinek was paid $6.6 million in 2017, including salary, bonus, stock grants, and other forms of compensation.^{Footnote 4} This is a lot of money, but not that much for a CEO of a large corporation in the United States. By market capitalization, Costco is one of the one hundred largest corporations in the United States, but at least 850 CEOs in the Russell 3000 index were paid more than Jelinek.^{Footnote 5} And many CEOs of private firms and hedge fund managers were paid considerably more. It is also noteworthy that, relative to its competitors, Costco pays its employees well (Cascio, Reference Cascio2006; Gray, Reference Gray2018). The starting pay of a Costco employee is $14 per hour, which is 27 percent higher than the starting pay at Walmart and 16 percent higher than the starting pay at Target (Gray, Reference Gray2018). Finally, Costco had a good year in 2017, as its stock price went up 16 percent. My point is not that Jelinek’s pay is beyond question; my goal is simply to forestall knee-jerk objections to it. People object to CEO pay when it is very high compared to other CEOs’ pay, when the ratio of CEO pay to worker pay within a firm is unusually high, or when CEOs are paid a lot and their firms perform poorly. Arguably none of these is true in Jelinek’s case.

REWARD

One way to think of a wage—e.g., Jelinek’s $6.6 million—is as a reward. A reward is a valuable thing or treatment that a person receives for something valuable that he or she has done. A person might receive some money for finding a lost dog or providing information about a crime to the police. The valuable thing—the money—is given in recognition of the valuable action—finding the dog or calling the police. Similarly, the wage an employee receives can be understood as a reward for the valuable thing that he has done for the employer. The wage recognizes the value of what the employee has done.

If we think of wages as rewards, then we are thinking of them as deserved, for desert is bound up with the recognition of value. Thus the normative logic of reward, I suggest, is desert. To say that someone deserves a certain thing is to say that, because of what she has done, it is “fitting” that she gets it. A person might deserve a medal for an act of bravery or punishment for a criminal offense. Desert is connected to evaluative attitudes, such as praise and blame. (Feinberg 1999/1963; Olsaretti, Reference Olsaretti2004). Certain evaluate attitudes are appropriate for, or fit, certain valuable performances (e.g., heroism or law-breaking). The treatments that people deserve (e.g., medals or punishment) can be understood as the concrete expressions of those attitudes. To express those attitudes in these ways is to treat people as they deserve.

We have arrived at a substantive conclusion: if wages are understood as rewards for work, then they are appropriately distributed on the basis of desert. That is, a person’s pay is justified just in case she deserves it, and this in turn is based on the value of what the person has done (cf. Feldman, Reference Feldman1995; Schmidtz, Reference Schmidtz2006). But while this principle provides some direction, it leaves other questions unanswered.

Consider Jelinek’s pay. Did he deserve $6.6 million in 2017? To answer this question, we must consider the value of what Jelinek did for Costco. This is not a straightforward task. Jelinek did many things, many of which were valuable. He attended meetings, visited stores, developed ideas, scrutinized plans, approved budgets, hired subordinates, communicated messages, and more. Which of these things matter for desert?

This is the question of what the “desert-base” for wages is, and three main answers to it can be found in the literature. According to one, the desert-base is effort (Sadurski, Reference Sadurski1985), understood as the physical and mental exertion required for the worker to perform his job.^{Footnote 6} According to another, it is contribution, understood as the worker’s economic contribution to the firm’s product (Miller, Reference Miller1999). According to a third, both effort and contribution count, in a multiplicative fashion (Hurka, Reference Hurka and Olsaretti2003). On this view, neither contribution that requires no effort nor effort that yields no contribution is a basis of desert. There is a lively debate about which of these views is correct (see, e.g., McLeod, 1996; Miller, Reference Miller1999; Olsaretti, Reference Olsaretti2004).

Disagreement does not end once we specify the desert-base. The desert-base needs to be measured and mapped to a deserved treatment. For a person to receive what he deserves, the value of what he has done must match or fit the value of what he receives. So we need to be able to say, e.g., how much effort Jelinek has put forth, and how much pay he deserves because of that effort. This may be hard to do; people will disagree about how to quantify effort. Contribution might seem easier to measure and map to a wage. You might think that we simply need to assess the monetary value of what Jelinek has produced, and that is the wage he deserves. But there are challenges here, too. Jelinek is part of an executive team, which is itself part of a large organization, and it is difficult or impossible to tell which part of Costco’s revenue is due to any one individual.^{Footnote 7}

I say all this not to suggest that it is impossible to determine the pay that Jelinek or anyone else deserves. I say it only to mention the kinds of things we will be thinking about when we see wages as rewards. To justify a person’s wage considered as a reward, we will be assessing the value of what he has done; we will be trying to measure it; and we will be mapping that value to a wage.

Comparisons matter when we think of wages as rewards. There are two reasons for this. The first is that desert is noncomparative as well as comparative (Kagan, Reference Kagan2012). We can talk about the wage that a person deserves based on what she has done simpliciter (noncomparative desert), and we can talk about the wage that a person deserves based on what she has done in comparison to what others have done and the wages they have received (comparative desert). The second is that claims of comparative desert are easier to justify than claims of noncomparative desert (Miller, Reference Miller1999). It is hard to determine in an absolute sense how valuable Jelinek’s (e.g.) contribution is, and how much pay he deserves for that contribution. It is easier to determine that Jelinek’s contribution is more valuable than the contribution of someone else at Costco—e.g., its chief financial officer—so if that person is paid a certain amount, Jelinek should be paid more than that amount.

Many people will immediately recognize the salience of the reward conception of wages—especially in connection with comparative desert—in their own lives. Perhaps you think that your own pay is too low. You might arrive at this judgment by thinking about what others in your organization are paid and what they have accomplished in comparison to what you are paid and what you have accomplished. You might say: “What I’ve done is just as valuable as what they have done, and yet I receive less pay.” If you think this way, then you are thinking of wages as rewards, and you are insisting that considerations of comparative desert are relevant to wage determination (Moriarty, Reference Moriarty2016).

To sum up: we can understand wages as rewards, and if we do, then it is appropriate for people to be paid in accordance with their deserts. Desert is the normative logic of reward. To justify a wage on this conception, we must assess the value of what the worker has done, and we must map that value to a wage; neither task will be uncontroversial. Finally, comparisons will be important, because it is often easier to say what people deserve compared to each other than what they deserve in an absolute sense.

INCENTIVE

Another way of thinking about a wage is as an incentive. An incentive is a benefit that is offered to someone for achieving a certain goal, or more generally, for acting in a certain way (Grant, Reference Grant2012). States incentivize their citizens to donate to charity by offering them tax breaks. Parents incentivize their children to clean their rooms by offering them screen time. The receipt of a benefit offered as an incentive is contingent upon the person’s acting in a certain way. Citizens will receive tax breaks only if they donate to charity, and not otherwise. Children will receive screen time only if they clean their rooms.

Incentives are forward-looking. Their function is to get someone to do something in the future. By contrast, rewards are backward-looking. Their function is to recognize the value of what someone did in the past. Of course, rewards can have an incentive effect. If the child is given screen time when he cleans his room, he may clean his room on a future occasion, in anticipation of receiving more screen time. And incentives can feel like rewards when they are received, since they can feel like recognition of what one did.

Wages can be understood as incentives because wages have an incentive effect. In particular, employers offer employees pay in order to get them to show up for work, work hard, and work in the right way (i.e., take actions that benefit the firm as opposed to themselves). When justifying pay in public statements, especially of top executives, firms often speak about the need to “attract, retain, and motivate” their employees (Conyon, Reference Conyon2006; Zajac & Westphal, Reference Zajac and Westphal1995). When firms speak this way, they are speaking the language of incentives.^{Footnote 8}

I claimed that the normative logic of reward is desert. If wages are understood as rewards, then workers should be paid in accordance with their deserts. I now claim that the normative logic of incentive is effectiveness. The point of incentives, we said, is to get people to do certain things. An incentive is justified insofar as it gets people to do those things.

To see whether Jelinek’s pay is justified on the incentive view, we must first consider what Jelinek’s pay is supposed to get him to do. The standard answer—but not the only possible answer—is: maximize shareholder wealth (Bainbridge, Reference Bainbridge2008; Hansmann & Kraakman, Reference Hansmann and Kraakman2001). So the question is whether paying Jelinek $6.6 million accomplishes this, all other things being equal. To answer this question, we have to consider not just how much Jelinek is paid but how he is paid, i.e., what the structure of his compensation package is (Jensen & Murphy, Reference Jensen and Murphy1990). As with most CEOs, Jelinek receives pay in different forms, and different forms of pay serve different functions. Salary may be what attracts Jelinek to the job. Bonuses and stock grants might be what keeps him motivated to work hard and in a way that benefits shareholders.

There is a complication here. Jelinek may not be the only employee at Costco who is incentivized by his pay. People lower than Jelinek in Costco’s organizational hierarchy may be working hard so that one day they may become CEO and enjoy similarly high pay (Lazear & Rosen, Reference Lazear and Rosen1981). But it is also possible that some employees may be disincentivized by Jelinek’s pay, if it gets too high compared to their own. There is evidence that steep compensation structures inhibit collaboration and teamwork and thereby lead to poor performance in organizations in which these behaviors are important (Shaw, Gupta, & Delery, Reference Shaw, Gupta and Delery2002). There are two lessons to be learned. First, when considering whether Jelinek’s pay is justified on the incentive view, we must consider the full range of its incentive effects. Second, these effects will not always be easy to discern.

If we see pay as an incentive, we will naturally tend to ask not only whether it achieves the desired result, but whether it achieves this result at the lowest cost. This means thinking about whether the same result could be achieved with less money. We might think in terms of necessary and sufficient conditions. When we ask about the effectiveness of Jelinek’s pay, we are asking whether $6.6 million is sufficient to attract, retain, and motivate him. When we ask about cost, we are asking whether $6.6 million is necessary to do so.^{Footnote 9} In fact, since incentives can be a matter of degree, we can be more precise than this. We might say that, according to the incentive view, Jelinek should be paid up to the point at which one more dollar of pay produces less than one dollar of shareholder wealth.

I do not think that adopting the incentive view requires us to think that people should be paid as little as possible. But this seems like a natural pairing, especially if we think that what employees are being incentivized to do is promote value for other people. Pay is a cost, so the more the firm pays its employees, the less there is left over for others. If this is correct, then the complete normative logic of incentive is cost-effectiveness.

To sum up this section: wages can be understood as incentives, and if we understand them this way, then it is appropriate to distribute them, in the first place, on the basis of effectiveness and, in the second place, on the basis of cost. Understood this way, a wage is justified just in case it produces the desired effect at the lowest cost. Justifying a wage understood as a reward requires looking back, to see what a worker has done. By contrast, justifying a wage understood as an incentive requires looking forward, to discern what the worker will do. Indeed, we may need to look beyond the worker who receives the wage, since one person’s wage may have effects on other people.

PRICE

In addition to rewards and incentives, wages can also be understood as prices. The price of a good or service is the amount of money, or other valuable consideration (hereafter I will simply say “money”), that is paid by the buyer to the seller for that good or service.^{Footnote 10} In our case, the good in question is a person’s labor.

There is an overlap between the conception of a wage as a price and the conception of a wage as an incentive. Understood as a price, a wage is what the employer pays the employee in order to purchase an amount of her labor time. Assuming the transaction is completed, the wage is sufficient to attract the worker to the job. The wage is “effective” in this sense. But the incentive conception of wages differs from this in two ways. First, to understand wages as incentives is to emphasize motivation. Wages incentivize not just by getting people to show up and stay at a job (attraction and retention) but by inducing them to do good work (motivation). Second, the incentive conception of wages is associated not just with effectiveness but with cost. To fully justify a wage on the incentive view, it must be shown that it is sufficient and necessary to get the person to act in the desired way.

The most important difference between understanding wages as incentives and understanding them as prices—and more generally, the most important thing about understanding wages as prices—is seeing labor as just one of many things for sale in a market. You can buy all kinds of things in markets: houses, cars, dental services, education, admission to academic conferences, and more. All of these things have prices. You can also buy labor. This, too, has a price, but we give this price a special name, viz., a wage. Seeing wages as prices is important because our views about how prices in general should be determined will inform our views about how wages should be determined.

What is the normative logic of price? I don’t think that we can infer from the concept of a price how the price of a certain good or service should be determined. A price is simply the money that is exchanged between the buyer and the seller of the thing being sold. But I suggest that we can infer from the role that prices play in the economy how they should be determined. We might say that prices don’t have an essential logic but they do have a functional logic. The function of prices is familiar but bears repeating.

Most of the world’s economies are market economies. This means that, for the most part, decisions about what to make, how much of it to make, where to distribute it, and what to sell it for are made by private actors.^{Footnote 11} You can make pencils if you want, as many as you can, and sell them wherever you want. How will you make these decisions? Prices help. They have a signaling function, telling us about shortages and surpluses. The price system is, as Hayek says, “a mechanism for communicating information” (1945: 526). When prices rise, this tells us that more of the good is wanted. When prices fall, this tells us that less of it is wanted. In this way, prices tell producers to make more of what people want and less of what they don’t want. In doing so, they direct society’s limited resources to their most productive uses.

There is a crucial qualification to this story. That is, prices only serve this function if they are set through the informed and voluntary choices of buyers and sellers. People cannot be ignorant of what they are buying and selling and what options are available to them, and they cannot be forced to exchange. When prices are determined by informed and voluntary choices, they reflect facts about relative scarcity and abundance, as determined by people’s wants. If prices are set in another way—say, by an independent authority—then they will not perform this signaling function well, or at all.

The story I have just rehearsed goes not just for goods and services but for labor. If the price for finance professors is high and the price for philosophy professors is low, this is a signal that society wants more finance professors than philosophy professors, relative to their supply. More precisely, society wants more of the knowledge and skills that finance professors have than the knowledge and skills that philosophy professors have. You may still decide to study philosophy. You might like it more, or maybe you don’t have the aptitude for finance. But this price signal will make a difference for some. Insofar as it encourages more people to study finance, it gives society more of what it wants.

I stress that this is the role that prices actually play in the economy. Prices need not have played this role. We could have had a planned economy, and in that economy, prices would have played a different role. In a planned economy, decisions about what to make, how much of it to make, and where to distribute it are made according to economic plans. What role do prices play in this system? The answer is: any role the planners want. They can decide that prices should correspond to the economic cost of producing the good, the value of the good itself, or the value of the labor that went into producing it.^{Footnote 12}

Let us apply these observations to Jelinek and his pay. If wages are understood as prices, then Jelinek’s pay is justified insofar as it is the result of an informed and voluntary agreement between Jelinek and Costco.^{Footnote 13} To see whether Jelinek’s pay is justified, we would ask questions like: Did Costco voluntarily make him the offer of $6.6 million? Did Jelinek voluntarily accept that offer? Did Costco have an adequate understanding of Jelinek’s skills and experience, and did Jelinek know what it would be like to be the CEO of Costco? To be sure, the salary that Jelinek demanded, and that Costco offered, would be informed by each side’s estimation of the relative value of Jelinek’s labor, or what a certain compensation package would incentivize him to do. But as far as the justification of that package is concerned, all that matters on the price conception of wages is whether it was the subject of an informed and voluntary agreement. This is because prices in general, including the price of labor, should be determined this way. When prices are determined this way, resources are directed to their most productive uses and satisfy people’s wants to the greatest extent.

Above we observed that distributing wages according to the normative logics appropriate to the reward and incentive conceptions is not necessarily a simple task. We might disagree about what makes work valuable or what optimally incentivizes employees. The same goes for distributing wages according to the normative logic appropriate to the price conception. On this conception, wages should be determined by the informed and voluntary choices of buyers and sellers. But there will be disagreement about what counts as an informed agreement and what factors undermine its voluntariness. Disagreement about what information is required for transactions to be fair can be found in debates about nondisclosure in sales (Carson, Reference Carson2010; Strudler, Reference Strudler1997), and disagreement about the nature of voluntariness can be found in debates about exploitation in sweatshops (Kates, Reference Kates2019; Zwolinski, Reference Zwolinski2007).

To sum up: a wage can be understood as a price, or the amount of money that is paid by the buyer to the seller to acquire or use what the seller has. Understood in this way, it seems appropriate for wages, like all prices, to be determined by the informed and voluntary choices of buyers and sellers. This is not derived from the concept of a price itself but by the role that prices play in a market economy.

JUSTIFICATIONS IN CONFLICT

I have argued that wages can be understood in different ways, and depending on how they are understood, different normative logics are appropriate. If wages are understood as rewards, then they should be distributed on the basis of desert. If understood as incentives, then they should be distributed on the basis of (cost-)effectiveness. If wages are understood as prices, then they should be determined by informed and voluntary exchanges between employers and employees. In this section, I will argue that these justifications can come apart: different conceptions justify different wages. The way I will do this is by considering an argument where this is not the case—that the wage a person receives will always be simultaneously justifiable as a reward, an incentive, and a price—and showing that it fails.

Here’s why you might think that the three normative logics always coincide. Let us again use Jelinek as an example. It seems likely that Jelinek’s pay was the subject of an informed and voluntary agreement between him and Costco. Costco and Jelinek are both sophisticated parties who know what they are doing. And, as a general matter, employers are not forced to hire particular people, and people are not forced to work for particular employers. If so, then Jelinek’s pay is justified on the price conception of wages. But why would Costco have agreed to pay Jelinek this amount of money? It might be said that Costco would only do this if it were necessary to incentivize Jelinek to take the job and optimally motivate him. Costco operates in a competitive environment and if they waste money on excessive pay, then they will put themselves at a competitive disadvantage. On the basis of this reasoning, we know that Jelinek’s pay is sufficient to incentivize him, because he is actually working at Costco, and necessary to incentivize him, because this is what market competition requires. If this is right, then Jelinek’s compensation is justified based on the incentive conception of wages. But what is so important about Jelinek’s labor? Why did Costco extend an employment offer to him? The answer to this question might seem to be that Jelinek’s labor is that valuable. If it were not, then (again) Costco would put itself at a competitive disadvantage by hiring him. If this is right, then Jelinek’s compensation is justified based on the reward conception of wages.

A similar story can be told, it might be said, about every other person in the labor market. If a worker’s labor is worth a certain amount of money (reward), then an employer will have to offer her this amount to get and keep her labor (incentive), and this will be the amount that they voluntarily agree to (price). In this way, the story concludes, the normative logic of reward, incentive, and price always coincide.

In response: this story may accurately characterize the pay of all workers in the simplest model of the labor market. It may also accurately characterize the pay of some actual workers. But it is unlikely to characterize the pay of most, or even many, actual workers.

There are a variety of reasons why the wages that are appropriate as rewards, incentives, and prices may all differ.^{Footnote 14} One is lack of knowledge. An employer and an employee might agree to a certain wage X. But the employee’s work may be worth X + N. The employee may not demand, or get, X + N in negotiations because neither she nor her employer knows that her labor is worth that much. This is a case in which the wage justified by the price conception of wages differs from the wage justified by the reward conception of wages. Or, an employer may think that, if an employee receives a compensation package worth X, that employee will be optimally incentivized. And so the employer may offer X and the employee may accept this offer. But the employer’s belief may be false. The employee may enjoy his work and be willing to work just as hard for less. In this case, the wage justified by the price conception of wages differs from the wage justified by the incentive conception of wages.

Another reason that the three conceptions may justify different wages is that people are different. Suppose that employee A loves her coworkers, but employee B, who performs the same job for the same firm equally well, hates them. As a result of their different preferences, A is willing to work for less than B. And suppose the firm takes advantage of this fact to offer A less pay than B. This is a case in which the wage justified by the price conception of wages differs from the wage justified by the reward conception of wages.

The evidence provided so far for why the different normative logics do not coincide derives from familiar facts about people. Additional evidence comes from organizations’ pay practices. Some firms choose unusually “steep” or unequal compensation structures. These structures pay people at the top more than their work is worth and those at the bottom less than their work is worth. A firm might do this because individual performance is vital to its success, and it wants to incentivize its employees to climb the organizational ladder. By contrast, some firms choose unusually “flat” or equal compensation structures. These structures pay those at the top less than their work is worth and those at the bottom more than their work is worth. A firm might do this because it emphasizes teamwork, and it doesn’t want to create jealousies among employees (Gerhart & Rynes, Reference Gerhart and Rynes2003). Firms that adopt unusually steep or flat compensation schemes, however, still find people to work for them, i.e., people willing to accept the wage offers they make. This suggests that, in many organizations, people’s wages are justified on the price conception of wages but not on the reward conception of wages.

The skeptic will have noticed a shortcoming of my argument. I have claimed that it is difficult to measure the value of a person’s work. It is equally hard to assess whether a certain compensation package is an optimal incentive. So it might be said that, for all we know, the three normative logics—of reward, incentive, and price—do always coincide. It might seem that flat compensation structures pay workers at the top of the hierarchy less than their work is worth and workers at the bottom of the hierarchy more than their work is worth, but this may be an illusion. On this objection, we should trust the story I told at the beginning of this section as opposed to any countervailing evidence we have since uncovered.

In response: while this argument cannot be decisively refuted, only a devotee of a rather simplified economic outlook would accept it. Common sense and empirical evidence tell against it. There is good evidence that the three normative logics come apart in the real world—that a wage that is appropriate based on one conception will be different than a wage that is appropriate based on the other two conceptions. The result is that, in the usual case, there is no single wage for a worker that is subject to multiple justifications. Instead, it will be possible to justify, using different logics, multiple wages for a single worker.

WHAT CAN WE LEARN?

I described three conceptions of wages and identified the normative logic appropriate for each. I then explained how these logics can come apart. Now what? In this section, I offer three suggestions based on my conclusions thus far. These suggestions are not meant to resolve tensions or bring debates to a close. No grand Hegelian synthesis is in the offing. Rather, my goal is to help us make sense of the jumble of intuitions we have about wages. It is only by clarifying what is at issue in debates about wages that we can hope to resolve them. In the final subsection, I come out in favor of determining wages according to the normative logic of the price conception of wages, i.e., through informed and voluntary agreements. But I insist that the price conception is not the only correct one, and I explain why, even if we ultimately favor its logic, we should be sympathetic to justifications based on alternative logics.