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Because Twitter Isn't a Bank, Big Pay Packages Are OK

All equal pay fights are created equal, but some are more equal than others.
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If Twitter were a bank, would there be outrage over its pay policies?

Twitter, in its regulatory filings for its initial public offering, disclosed that it is paying engineer Christopher Fry $10.3 million a year. That's just short of CEO Dick Costolo's $11.5 million.

It is a large salary, of a size that usually draws complaints from corners that think that pay is too outsized, too far above what the average American earns. One might imagine a renewed Occupy movement picketing a park near Twitter's Market Street headquarters in San Francisco, calling for equal pay for equal work, or demanding that all executive pay be set by how much the company pays its typical worker.

Of course, that won't happen. Twitter, after all, is not a bank, and it would never be likened to a vampire squid, or anything so childish as that. It is cool, it is hip, and it is the manner in which the Occupy crowd communicated with one another during that brief and unhygienic protest. It is beyond the opprobrium directed at our financial system. All equal pay fights are created equal, but some are more equal than others.

Some may call this hypocrisy – mostly because it is. But it may also be a great leap forward in thinking about compensation in general. Here is a radical thought: People should be paid whatever an enterprise and its owners thinks they are worth.

Twitter is paying Fry because of that tried-and-true economic concept of supply and demand. Getting engineers is hard. Getting the top engineering talent in Silicon Valley is even harder. To lure top talent, you need top pay. And, for that pay, you get productivity from that employee. In short, you get what you pay for.

There is an economic theory behind this called the efficiency-wage hypothesis. Put simply, the productivity of a worker is related to how much she is paid. It is why, during times of high unemployment, companies will not cut wages to bring on new workers. They need higher pay to maintain productivity, even though they have more potential workers from which to choose.

Socialists want more equilibrium in pay, arguing that increases in pay and productivity only lead to higher unemployment of proletariat. Unions love set pay for certain positions, irrespective of the output of the worker. But, in the free market – and, for that matter, the real entrepreneurial world – wage tables just don't work. Particularly with startups, there is such competition for good people, the kind who can help you turn an innovation into an enterprise, that a business owner has to dig deep and pay high to build a team. Christopher Fry is just a high-profile exemplar of what happens in emerging businesses each day.

But should there be some kind of checks on pay, perhaps akin to where the Securities and Exchange Commission is leaning in showing the disparity of CEO-to-worker pay ? Well, there is already a check, thanks, as ever, to the free markets. Company owners can decide what is fair pay and what is not. Every company has an owner, whether it is a group of shareholders represented by a board of directors or the single-operator S Corporation. Owners cannot afford to throw compensation at people willy-nilly. They have to make judgments for employees based on budget, strategy and worth. That is the ultimate regulation of compensation.

So, is Christopher Fry worth more than $10 million a year? It is a question no one can honestly answer now. If Twitter remains successful and innovative, then yes. If it becomes stale because his pay gets in the way of hiring even better engineers, then no.

But the market, not the rabble, which will ultimately decide. You can take that to the bank.