Sunday, March 22, 2009

Unfair compensation

Is your feeling that the bonuses received by the AIG executives whose actions helped put their company at risk of bankruptcy are unfair and wrong just an emotional reaction or is it a reasonable position grounded in your moral principles? Can you define fair and unfair compensation? Without a definition of unfair compensation you are left expressing anger without a justification, like the lynch mob some people in Washington and the Main-Stream Media accuse those opposing the bonuses of being.

Of course, unfettered free-enterprise (capitalism) does not provide any definition of fair compensation -- the income someone receives entirely depends on market forces of supply and demand . Fairness has nothing to do with it. If you believe that the bonuses were unfair then you must look somewhere else for justification for those feelings.

My brother Dan suggested to me yesterday that the old Quaker idea that a businessperson should set a fair price for his/her merchandise or service and always sell it for that price, rather than haggling to establish the price for each transaction suggests a refinement to capitalism that could give us a definition of unfair compensation. Up until the late 18th Century there were no set prices in American stores. As is still the case in the developing world store-owners would haggle with the customer for each sale. If, through ignorance or desperation, the customer was in a poor bargaining position the store-owner would be able to coerce a high price and make more profit. Some Quaker shop-owners began feeling uneasy about charging some customers more than others, especially because it often worked out that the highest prices were charged to those least able to pay. They decided to determine a fair price for everything they sold, post those prices and always sell at the set price without haggling. Customers much preferred set prices to haggling and as a result stores offering set prices became popular, business increased and the Quaker store-owners ended up making more money than ever. Soon all stores were forced by competitive pressures to also adopt set prices and it became the standard way of doing business in this country and the developed world.

On September 11, 2001 in New York City the subways were closed down and tens of thousands of people who normally took public transportation were forced to walk to get home in Manhattan. It was a hot day and a lot of the walking people started ducking into stores to buy bottled water. Some store owners, in order to cash in on the situation, suddenly raised the price for their bottled water. If you think it was wrong to raise the price of water for desperate, thirsty people just because they were thirsty and desperate then that suggests a definition of unfair compensation. It is wrong to charge more for your product or service just because, through circumstance, you are in a position to do so. It is wrong for AIG to reward executives who made bad decisions just because the government has been forced to bail out AIG because it is too big to fail.

Not only is it wrong to try to profit from someone else's misfortune, as the experience of those late 18th Century Quaker shop-owners shows, it might turn out in the long-run to be a bad business decision. At least it would if people today react as those 18th Century customers did. We seem to be on a retreat from set prices made possible by shopper's desire to get a "bargain." Today a lot of items have set prices, called the list or retail price, but most people most of the time don’t pay that price, they pay a discounted, sale or coupon price, sometimes arrived at through haggling. For those items the retail price becomes the unfair price paid by those unable, through circumstance, ignorance or desperation, to negotiate a better price. Once again those least able to pay, pay the most.

The 18th Century Quakers had other ideas that were just as radical and new at the time as set prices. They opposed slavery and believed that women had the same rights to education as men. They were declaring wrong activities and behaviors that were almost universally practiced. All three ideas were eventually adopted by the developed world and now seem like conventional wisdom. But we seem to be on a retreat from the idea of the same price for everyone. Why would unfair prices be a harder problem to solve than slavery or women's rights?


lyrl said...

When a tree fell on my house last summer and I needed it removed immediately, I paid much more than I would have paid for a regularly scheduled tree removal. Because many people in our community had trees on their houses, I paid more than I would have if my house had been an isolated case.

The tree service had canceled all of their regularly scheduled business and was working 12-hour days. The risk to their regular customer base by canceling appointments that had been scheduled for months was something I didn't mind compensating them for. Similarly for the overtime they were putting in.

But I was in a desperate situation. Was it fair to charge me more? I think so. While I agree with most of the logic in your post, I think many situations are more complicated than "fair is when everyone pays the same price".

Dave Barrett said...

Tree removal will always be the type of job where the customer is given a bid. Even with that type of business the businessman can create a reputation for fair and honest dealing with his customers by writing bids in which he never gouges a customer simply because he can. Rush jobs can always be bid with a rush job premium included in the bid and still be fair if the businessman always bids rush jobs the same way.

Stella and Connie said...

Quakers were not competing against Walmart and products made at at the ezpense of child labor in an underdeveloped country. What is "fair" and "reasonable profit"? How much of a mark up makes the seller a "greedy" person?
I'm not in business, so I don't know. Should we always look for the "sales" and the cheapest prices? Is Walmart more "Quakerly" than other stores because they keep their prices low?

Daniel said...

After some thought about lyri‘s comment, I’ve decided he/she must have responded to simply protest that business should even be asked to consider morality. The offered counter-example is no example at all. “Fairness” would demand that a tree company have a separate and higher rate for lyri‘s stated added factors (priority, overtime, and the displacement of other scheduled customers).

Fair pricing is simply honesty toward the customer: not using false reasons to charge a higher rate, not have competitive prices on items the customer will notice and then inflating prices where it won’t be noticed, not have one price for whites and a higher one for people of color, not having one price for “insiders” and a high price for “outsiders.”

Daniel from Rockford