Here’s a radical thought that I’ve had. There are a lot of individual cases of people auctioning off percentages of their income in exchange for immediate payments, which they use to invest in education or career-improving but costly life changes like geographical moves. Someone might trade 10% of her lifetime income in exchange for $200,000 to attend college. This has a “gimmicky” feel to it as it’s set up now, and it’s something I’d be reluctant to do anything like that for the obvious reputation reasons (it seems desperate) but there’s a gem there. There’s a potential for true synergy, not only gambling or risk transfer. If a cash infusion leads a person to have better opportunities and a more successful career, then both sides win. There should be a way for individual people to engage in this sort of payment-out-of-future-prosperity that companies can easily use (it’s called finance). However, a percentage of income is too easy to scam. We need to index it to the value of that person’s time, and the best way to do that is to have the offered security represent a call option on that person’s time.
With the cash-for-percentage-of-income trade, the “Laffer curve” effect is a problem. There’s scam potential here. What if someone sells 10% of his lifetime work income for, say, $250,000, but actually finds ten buyers? Then he gets a $2.5 million infusion right away, which is enough money not to work. He also has zero incentive to work, so he won’t, and his counterparties get screwed because he has no work income. So this idea, on its own, isn’t going to go very far. The securities (shares in someone’s income) aren’t fungible, because the number of them that are outstanding has a major effect on their value.
Let’s take a different approach altogether. This one doesn’t involve a draw against someone’s income. It’s a call option on a person’s future work time. I intend it mainly for consultants and freelancers, but as the realities of the new economy push us all toward being more individualistic and entrepreneurial, it could be extended to something that applies to everyone. It’s not this gimmicky “X percent of future income” trade that doesn’t scale up to a real market (because once the trade stops novel, we can’t trust people not to sell incentive-affecting percentages of their income, and that problem naturally limits it). How does it work? Here’s a template for what such an agreement would look like.
- Option entitles holder to T hours (typically 100; with blocks as small as 25 or as large as 2000) of seller’s time (on work that is legal) to be performed between dates S and E at a strike price of $K per hour. For a college student, typical values would be S = date of graduation and E = five years after graduation. For someone out of school, S might be set to the time of signing, and E to five years from that date.
- Seller must publish how many such options have been sold so buyers can properly evaluate the load (e.g. no one is allowed to sell 50,000 hours of time in the next 5 years, because that much work cannot be performed.) I would, in general, agree on a 2000-hour-per-year limit. Outstanding load is publicly available information and loads exceeding 1000 hours per year should be disclosed to future employers.
- If the option is not exercised, then the no work is performed (but the writer still retains the value earned by selling it). If it is, seller receives an additional $K per hour. The option is exercised as a block (either all T hours or none) and buyer is responsible for travel and working costs.
- These options are transferrable on the market. This is essential. Few people can assess their specific needs for consulting work, but it’s much easier to determine that a bright college students’ time will be worth $100/hour to someone in five years.
One thing I haven’t figured out yet is the specific scheduling policy beyond a “act in good faith” principle. If two option-holders exercise at the same time, who gets priority? How much commitment must the consultant deliver when exercise occurs (40 hours per week, making full-time employment impossible; or 10 as an upper limit, with the work then furnished over more calendar time)? Obviously, this needs to be something that the option-writer can control; buyers simply need to know what the terms are. The other issue is the ethics factor, which doesn’t apply to most of technology but would be an issue for a small class of companies. Most people would have no problem working for a meat distributor, but we’d want an escape hatch that prevents a vegan’s time from being sold to one, for example. There has to be some right to refuse work, but only based on a genuine ethical disagreement; not because a person has suddenly decided her time is worth 10x the strike price (which will almost always be lower than the predicted value of her time). The latter would defeat the point of the whole arrangement.
In spite of those problems, I think this idea can work. Why? Well, the truth is that this sort of call-option arrangement is already in place, although with an inefficient and unfair structure that leaves both sides unhappy. It’s employment.
How much is an employee’s time actually worth to the operation? Dirty secret: no one really knows. There are so many variables on each individual, each company, and each project that it’s really hard to tell. The market is opaque and extremely inefficient. For example, I’d guess that a programmer at my level (1.7-1.9) is worth about $1000/hour as a short-term (< 20 hours) “take a look and share ideas” consultant, $250/hour as a freelance programmer, and perhaps $750,000 per year in the context of best-case full-time employment (wherein the package includes not only 2000 hours of work, but also responsibility and commitment) but well under the market salary ($100-250k, depending on location and industry) in a worst-case employment context. Almost no employer can predict where on the spectrum an employee will land between the “best-case” and “worse-case” levels of value delivery.
Employers know that for sociological reasons, a full-time employee’s observed value delivery is going to be closer to the worst-case than best-case employment potential. If you have interesting problems and a supportive environment, then a 1.5-level programmer is easily worth $300,000 per year, and a 1.8+ is worth almost a million. Most companies, though, can’t guarantee those conditions. Hostile managers and co-workers, or inappropriate projects, or just plain bad fit, all can easily shave an order of magnitude off of someone’s potential value. In fact, since doing that involves interacting with people and controlling how they treat each other, that’s seen as boundlessly expensive. If a manager has a long-standing reputation for “delivering” but is a hard-core asshole, is it worth it to unlock the $5 million per year released when he’s forced to treat his reports better, given that there is a chance of upsetting and losing him (and the “delivery” he brings, which he’s spent years making as opaque as possible)? The answer is probably yes, but the reason why he’s a manager is that he’s convinced high-level people not to take that risk. That’s how the guy got that job in the first place.
So what is employment, then? When people join a company, they’re selling their own personal financial risk. That stuff is toxic; no one wants it, so typically people offload it to the first buyer (employer) that comes along, until they’re comfortable enough to be selective (which, for most, doesn’t happen until middle age). When it comes to personal financial risk, corporations have the magic power to dissolve dogshit. They know it, and they demand favorable terms from an expected-value perspective. The employee would rather have a reliable mediocre income than a more volatile payment structure closer (in the long run) to their actual market value. So the company offers a salary somewhere around the 10th-percentile level of that person’s long-term value delivery. If the person works out well, it’s mutually beneficial. She enjoys her work, and renders to the company several times her salary in value. Since she’s happy, and since good work environments are goddamn rare and she’s not going to roll the dice and move to another (probably bad, since most are) corporate culture; a small annual raise and a bonus are enough to keep her where she is. What if she doesn’t work out? Well, she’s fired. Ultimately, then, corporate employment is a call option on the employee’s long-term ability to render value. The problem? Employee can opt out at any time. The option is contingent not merely on personal happiness, but on fulfillment. I’ll get back to that.
Why is my call-option structure better? There are a couple reasons. Obviously, everyone should have the fundamental right to opt-out of work they find objectionable. What I do want to discourage (because it would ruin the option market) is the person who refuses to work at a $75 strike because she becomes “a rockstar” and she’s now worth $1000/hour. That’s not fair to the option-holder; it’s not ethical. However, I feel like these opt-outs will be a lot rarer than job-hopping is. Why? First, everyone knows that job-hopping is a necessity in the modern economy. Almost no one gets respect, fair pay, or interesting work without creating an implicit bidding war between employers and prospective future opportunities. Sure, some manageosaurs who mistake their companies for nursing homes still enforce the stigma against job applicants with “too many jobs”, but people who weren’t born before the Fillmore administration have generally agreed that job hopping for economic reasons is an ethically OK thing to do. Two thousand hours of work per year is a gigantic commitment and exclusive of other opportunities, and almost no one would call it a career-long ethical commitment. The ethical framework (no job hopping, ever!) that enforces the call-option value (to employer) of employment is decades out of mode. It never made sense, and now it’s laughably obsolete. I would, however, say that a person who writes a call option on 100 hours of future work has an ethical responsibility to attend to it in good faith.
An equally important thought is that consulting is a generally superior arrangement to office-holding employment, except for its inability to deliver reliable income (which a robust options market could fix). Why? Well, people quit these monolithic 2000-hour-per-year office jobs all the time (often not by actually changing jobs, but by underperforming or even acting out, until they’re fired, and that takes a long time) because they don’t feel fulfilled. That’s different from being happy. A person can be happy (in the moment) doing 100 hours of boring work if he’s getting $20,000 for it. It’s not the work of “grunt work” that makes it intolerable for most people, but the social message. That’s why true consultants (not full-time contractors called such) are less likely to underperform or silently sabotage an effort when “assigned” grunt work; employees expect their careers to be nurtured in exchange for their poor conditions, while consultants get better conditions but harbor no such expectation.
On that psychology of work, I know people who can’t clean their own houses, not because the work is intolerable (it’s just mundane) but because they can’t stand the way they feel about themselves when doing such chores. However, a sufficient hourly rate will override that social message for almost anyone. How many people wouldn’t clean someone’s house, 100 hours per year, for 10 times their hourly wage? He won’t be fulfilled at such work at any price, but that’s different. It’s not hard to find someone who will be happy to perform work that most people find unpleasant. Consulting arrangements allow a price to be found. But with full-time position-holding employment, the zero/one fulfillment distinction is much harder to bring into being. People will clean, if paid to do it, but no one wants to be a cleaner forever.
The nice thing about consulting is that the middle ground between fulfillment and misery exists. You can go and do work for someone but you don’t have to be that person’s subordinate, which means that work that is neither miserable nor fulfilling (i.e. almost all of it) can be performed without severe hedonic penalty (i.e. you don’t hate that you do it). Because of modularity and the potential for multiple employment, you can refuse an undesirable project without threatening your reputation or unrelated income streams– something that doesn’t apply in regular employment, where refusing the paint that bike-shed that hideous green-brown color will have you judged as a uniform failure by your manager, even if you’re stellar on every other project. A consultant is a mercenary who does for pay, and only identifies with work if he chooses to. He sells some of his time, but not his identity. An employee, on the other hand, is forced into a monolithic, immodular 2000-hour-per-week commitment and forces identification with the work, if only because the obligation is such a massive block (yes, the image of intestinal exertion is intentional) that it dominates the person’s life, forcing identification either in submission (Stockholm Syndrome, corporate paternalism, and the long-term seething anger of dashed expectations in those for whom management doesn’t take the promised long-term interest in their careers) or in rebellion (yours truly).
So let me tie this all together rather than continuing what threatens to become a divergent rant on employment and alienation. An employee‘s main selling point is a call option written to her employer. If she matches well with the employer’s needs and its people, and if the employer continues to fulfill her desires for industrial fulfillment (which change more radically than the matter of what someone will be merely happy to do at a fair rate; the “good enough to be happy” set of work becoming broader with age, while fulfillment requirements go the other way and get steeper), and if the salary paid to her is kept within an acceptable margin (usually 20 to 40%) of her market value, she’ll deliver labor worth several times the strike price (her agreed-upon salary, plus marginal annual wage increases). Since there are a lot of ifs involved, the salary at which a company can justify employing her is several times less than her potential to render value: a mediocre salary that forces her into long-term wage-earning employment, when the value of her work at maximum potential would justify retirement after five to six years. That’s not unfair. In fact, it’s extremely fair, but an artifact of opacity and low information quality.
Why is it like this? The truth is that the employer doesn’t participate in her long-tail upside, as it would with a genuine call option. In the worst cases, they do not exercise the option and stop employing her, but they pay transactional fees (warning time, severance, lawsuit risk, morale issues) associated with ending an employment relationship. In the mediocre cases (middling 80%) they collect some multiplier on her salary: the call option is exercised, and the company wins enough to generate a modest but uninspiring profit. In the very-good cases, she performs so well that it’s impossible to keep this from translating into macroscopic visibility and popping her market value. Since it’s not a real call option (she has no obligation at all to continue furnishing work) there is no way for the company to collect. An actual call option on some slice of her time would be superior, from the corporate perspective, because it insures them against the risk that her overperformance leads to total departure (i.e. finding another job).
How would we value such a call option? Let’s work with three model cases. One is Zach, an 18-year-old recently admitted to Stanford intending to major in computer science, with the obvious ability to complete such a course. He needs $200,000 to go to school. Let’s say that he puts the start date of the option at his rising-sophomore summer (internship) and the end date at 5 years past graduation. What’s a fair strike price? I would say that the strike price should be, in general, somewhere around 1/1500 of the person’s expected annual salary (under normal corporate employment) at the end of the exercise window. For Zach, that might be $80 per hour. The actual productive value of this time, at that point? (We can’t use a “stock price” for a Black-Scholes model, because the value of the underlying is affected by conditions including the cash infusion attendant to the sale; that’s why it’s synergistic.) I’d guess that it’s around $120, with a (multiplicative) standard deviation of 50%, which over 9 years equates to an annualized volatility of 16.7%. Using a risk-free rate of 2%, that gives the call option a Black-Scholes value of about $56. This means Zach needs to sell about 3570 hours worth of options to finance going to college. Assuming he can commit no more than 0.3 of a year for his four years of college, that’s 576 hours per year– not of free work, but of commitment to work at a potentially below-market “strike” price of $80 per hour. I think that’s a damn good deal for Zach, especially in comparison to student debt.
Alice is a 30-year-old programmer. She lives in Iowa City and has maxed out at an annual salary of $90,000 per year doing very senior-level work. The only way to move up is into management, which doesn’t appeal to her. She suspects that she could do a lot better in New York or San Francisco, but she can’t get jobs there because she doesn’t know anyone and resume-walls are broken– besides, how many VC-funded startups will hire a 30-year-old female making $90,000?– and consulting (until this options market is built) is even more word-of-mouth/broken than regular employment. She knows that she’s good. She’d like to sell 7500 hours of work to the market over the next five years. Assume the option sale is enough to kick-start her career; then, her market value after five years is $250 per hour, but she sets her strike at $90. Since she’s older and her “volatility” (uncertainty in market value) is lower, let’s put her at 13% rather than Zach’s 16.7%. The fair value of her call options is $168 per hour, so she’s able to raise $1.26 million immediately: more than enough to finance her move to a new city.
Barbara is a 43-year-old stay-at-home mother whose youngest child (of five) reached six years of age. She’s no longer needed around the house, but has enough complexity in her life that full-time employment isn’t very tenable. However, she’s been intellectually active, designing websites for various local charities and organizations for a cut rate. She’s learned Python, taken a few courses on Coursera, and excelled. She wants to work on some hard programming problems, but no one will hire her because of her age and lack of “professional” experience. She decides to look for consulting work. She’s still green as a programmer, but could justify $100 per hour with access to the full market. She’s committing 1000 hours over one year, and she decides that $30/hour is the minimum hourly rate to motivate her, so she offers that as the strike. With volatility at 15% (although that’s almost irrelevant, given the low strike) she raises $71 on each option, and gets $71,000 immediately, with 1000 hours of work practically “locked in” due to the low strike price (at which anyone would retain her).
Cedar City High is a top suburban public high school in eastern Massachusetts. They’d like to have an elective course on technology entrepreneurship, and student demand is sufficient to justify two periods per day. Teaching time, including grading and preparation, will be 16 hours per week, times 40 weeks per year, for 640 hours. That’s not enough to justify a full-time teaching position, and it’d preferably be taught by someone with experience in the field. Dave is coming off yet-another startup, and has had some successes and failures but, right now, he’s decide that he wants to do something useful. He’s sick of this VC-funded, social-media nonsense. He’s not looking to get rich, but he needs to deliver some value to the community, and get paid enough for it to survive. He sets a minimum strike at $70 per hour, and he’s looking for about that 640 hours of work. Based on their assessments, Cedar City agrees to pay $15 for the options and exercise them, meaning they pay $85 per hour (or $54,400 per year, less than the cost of a full-time teacher) for the work.
Emily’s a 27-year-old investment banker who has decided that she hates the hours demanded by the industry and wants out. Her last performance review was mediocre, because the monotony of the work and the hours are starting to drain her. With her knowledge of finance and technology, she knows that she’ll be killing it in the future– if she can get out of her current career trap. However, five years of 80-hour work weeks have left her stressed-out and without a network. She’ll need a six-month break to travel, but FiDi rent (she can’t live elsewhere, given her demanding work schedule) has bled her dry and she has no savings. She realizes that the long-term five-years-out hourly value of her work– if she can get out of where she is now– is $300 per hour at median, with an annualized volatility of about 30% (she is stressed out). Unsure about her long-term career path, she offers a mere 500 hours (100 per year) with a five-year window. She sells the options at a $200/hour strike. The Black-Scholes value of them is $146 per hour, or $73,000 for the block. That gives her more than enough to finance her six months of travel, regain her normal emotional state, and find her next job.
So this is a good idea. That’s clear. What, pray tell, are we waiting for? As a generation, we need to build this damn thing.
