After the Ladder

August 2005

Thirty years ago, one was supposed to work one's way up the corporate ladder. That's less the rule now. Our generation wants to get paid up front. Instead of developing a product for some big company in the expectation of getting job security in return, we develop the product ourselves, in a startup, and sell it to the big company. At the very least we want options.

Among other things, this shift has created the appearance of a rapid increase in economic inequality. But really the two cases are not as different as they look in economic statistics.

Economic statistics are misleading because they ignore the value of safe jobs. An easy job from which one can't be fired is worth money; exchanging the two is one of the commonest forms of corruption. A sinecure is, in effect, an annuity. Except sinecures don't appear in economic statistics. If they did, it would be clear that in practice socialist countries have nontrivial disparities of wealth, because they usually have a class of powerful bureaucrats who are paid mostly by seniority and can never be fired.

While not a sinecure, a position on the corporate ladder was genuinely valuable, because big companies tried not to fire people, and promoted from within based largely on seniority. A position on the corporate ladder had a value analogous to the "goodwill" that is a very real element in the valuation of companies. It meant one could expect future high paying jobs.

One of main causes of the decay of the corporate ladder is the trend for takeovers that began in the 1980s. Why waste your time climbing a ladder that might disappear before you reach the top?

And, by no coincidence, the corporate ladder was one of the reasons the early corporate raiders were so successful. It's not only economic statistics that ignore the value of safe jobs. Corporate balance sheets do too. One reason it was profitable to carve up 1980s companies and sell them for parts was that they hadn't formally acknowledged their implicit debt to employees who had done good work and expected to be rewarded with high-paying executive jobs when their time came.

In the movie Wall Street, Gordon Gekko ridicules a company overloaded with vice presidents. But the company may not be as corrupt as it seems; those VPs' cushy jobs were probably payment for work done earlier.

I like the new model better. For one thing, it seems a bad plan to treat jobs as rewards. Plenty of good engineers got made into bad managers that way. And the old system meant people had to deal with a lot more corporate politics, in order to protect the work they'd invested in a position on the ladder.

The big disadvantage of the new system is that it involves more risk. If you develop ideas in a startup instead of within a big company, any number of random factors could sink you before you can finish. But maybe the older generation would laugh at me for saying that the way we do things is riskier. After all, projects within big companies were always getting cancelled as a result of arbitrary decisions from higher up. My father's entire industry (breeder reactors) disappeared that way.

For better or worse, the idea of the corporate ladder is probably gone for good. The new model seems more liquid, and more efficient. But it is less of a change, financially, than one might think. Our fathers weren't that stupid.