CRACKED GLASSESThe idea occurred to me after a hit on the head.

As I was walking back to my suite at my budget beachfront Mindoro, Philippines hotel (on the last phase of my latest long “road trip”), a big leafy branch from a very tall, massive tree being pruned way at the top and next to the bar plummeted onto my head, broke my cheap sunglasses (shown here)—which play a pivotal role in this story—and scattered skittering, but harmless ants onto my neck.

About thirty minutes later, I found myself toying with the idea of a salary and wage scheme that takes the concept of “per diem” to a free-market extreme: Daily variable rates of pay for every worker—full-time, contract, permanent or not.

The Daily Haggle Framework

Under this scheme, long-term, short-term and part-time employment would be subject to a daily renegotiation of salary—a euphemism for daily haggling, with unforeseeable wage increases and decreases for the negotiating parties. From a free-market economic standpoint that would make sense, just as would haggling over how many hours one would be willing to work upon arriving there.

It makes sense on the interpretation of the market as a free and open bidders’ bin in which new information and motivations are constantly being dumped. Although never perfectly the game of “perfect information” that is the laissez-faire ideal, i.e., everyone knows what everyone else knows and wants and just as fast, the new-knowledge factor, e.g., of changing market or workplace conditions, can be cited as a factor legitimizing daily renegotiation.

Yes, practical realities, such as the absence of eager potential replacement workers standing outside the factory or office, or the requirement for their training that cannot be met on the spot, may confer a virtual monopoly on the entrenched worker, just as having the only factory in town can on the employer. But such monopoly considerations will merely factor into the negotiations as accelerants, not as impediments, from the perspective of the model.

A Recipe for Chaos​​​?

Of course, the predictable kneejerk response to this is that it would cause chaos. Imagine air controllers negotiating under a sky full of airliners. More than branches would be falling from the skies and with much more dire consequences. On the other hand, the variable-wage per diem model is a time-tested, indeed venerable model of worker compensation that has endured for centuries, nay, millennia, in the form of a street-vendor employment model, in which the worker lives to haggle and haggles to live on a daily basis, with no assurance that he will get more or less on his next sale than on his last one.

The only assurance required is that the job is secure, even if the pay varies. (This means employment agreements or formal contracts, analogous to those between ourselves and our banks, specifying a 5-year term of a variable interest-rate mortgage.)

Moreover, in cases such as that of the air controllers, awareness of countless dire consequences for all could work for the variable salary scheme rather than against it as a form of duress under which both parties—management and employee—would have to negotiate. The greater the chaos likely to be induced by protracted daily negotiations, the greater the likelihood that those negotiations would take only seconds, just before the start of a shift, especially when the chaos takes as much of a toll on the employee as on the employer.

Exactly in which situations uncontrolled chaos will, in fact, prevail is an important issue, to be explored further, below. A close examination of the street-vendor variable wage model—in which the variable price at which items are sold is equivalent to the variable wage for an item as “piecework”, if the vendor is self-employed, may reveal the potential scope and limitations of a free-market variable-pay model, while, at the same time, test the free-market ideological underpinnings of market dynamics.

Faisal—Variable-Pay Scheme Poster Boy

Meet Faisal (shown here), the young Filipino beach vendor who sold me my replacement glasses, after I, broken glasses in hand and in a role reversal, sought him out to do a deal, having declined earlier in the day.

Like you and everyone else who has a job, what he does is pretty structured in terms of the when, where, how, why and with what and whom his job is performed (the latter being, in his case, 80% tourists, by his reckoning).FAISAL

The biggest difference between him and you, if you are a salaried employee, however, is that he’s never really sure what his pay per unit and per day will be, since he has to haggle over every sale. Some negotiations result in big scores; the rest of his efforts result in no sale after haggling, a meager reward or no chance to haggle whatsoever.

Unlike Faisal, even if you are in sales and are not sure whether you’ll close in any given instance, generally you know what you’ll be paid for the “piecework”, despite not knowing how many items or service units (e.g., billable hours or condo time shares) you’ll be selling—unless your job is something like selling used cars.

(Note that the job of a used-car salesman is only a rough approximation to the free-market ideal since it lacks a key feature of the model: “perfect information”, i.e., fully-informed buyers and sellers. In general, used clunkers get sold only because the information the buyer gets, like the car itself, is far from perfect.)

Haggling with a Twist

Faisal quoted me a price, I countered—but with a twist: I told him that I wanted a “Filipino price”, i.e., the price locals would pay, since the Filipina manager (presumably in turn billing the hotel), not I, a tourist, would be paying for them, having agreed to replace my $8 glasses (which, despite the low price, were great glasses). Faisal and I haggled some more and reached an agreement. But since neither of us had a pen, he couldn’t write out a receipt; so, we embarked on the short walk to the hotel, to conclude the deal directly with the manager, a very pleasant woman with a sense of humor not unlike mine.

It was clearly a low-season slow day for Faisal, so, far from minding the five-minute walk, he seemed to take it as a kind of routine-buster, knowing that he had pretty much clinched a sale.

When the manager told him that his price was too high, I threw both of them a curve: I said that if the price that the manager thought was too high held, the hotel would pay for the glasses; but if he offered the price she thought was fair, I would pay—valuing fairness more than being spared any personal expense whatsoever.GLASS CRACKERS

That took both of them aback for a second or two, before the manager insisted on paying the lower price on my behalf. Perhaps out of empathy for another local or negotiation fatigue, Faisal accepted the lower price.

(I shall refrain from disclosing that price out of consideration for Faisal’s future haggling. Later in the day, to further compensate Faisal for his labors and to offset any disappointment he had with the deal, I paid him something for this photo.)

Benefits of a Variable-Rate Per Diem Pay System

Now, fly your mind back home, to your job: Why shouldn’t you have to or be allowed to haggle over your daily wages? Let me rephrase that more positively: What would be the possible benefits to all concerned if pay is re-negotiated daily?

—Flexibility: Variable daily pay allows adapting to and taking advantage of changes in circumstances, motivation, skill, experience, markets, etc. Such flexibility makes waiting for a quarterly or an overdue pay hike or cut unnecessary.

Higher employee retention rates: In some conceivable situations, having a variable per diem pay scheme may contribute to better employee retention—especially with those who have wage or salary grievances, that otherwise would be addressed only later or too late, if at all.

Better-honed negotiating skills: Practice makes perfect, or at least helps—including with negotiation. Having to negotiate daily hones that skill set.

Improved talent-assessment skills: Informed negotiation can work for and against you. If you are the employee, taking stock of your skills, including reviewing them, and then accentuating the positive will develop your talent-assessment skills, if you aren’t delusional or dishonest.

As for the negatives of such honing, the employer hoping to low-ball your wage bid will zero in on your weaknesses and possibly his company’s strengths. In response, you will do the same regarding the company and the job, after he accentuates his carefully reviewed, assessed and itemized pluses. Net result: a comprehensive and balanced review and assessment of your talents vis-a-vis the job and company.

Deeper understanding of the market: Knowing your market—the market for your employee talents and for your company’s goods and services—equips you with critical information to reveal or conceal in your negotiations and tools for making reasonable wage demands or to bluff.

Greater sensitivity to. engagement with and awareness of germane employer and worker circumstances and developments: Information critical to negotiating a wage includes employer and company circumstances and developments. If the employer claims increased operating or litigation expenses, the employee will have to engage that claim and the employer—through verification, evaluation and weighing of it.

A potential bonus of this process—for both sides—is greater appreciation of the constraints each is operating under.

Keener awareness of employment opportunity costs: Daily haggling provides an incentive to consider the alternatives to a given employee or job. Generally, with a fixed salary or wage, an incentive to keep abreast of opportunities is removed, if only because we tend to go on automatic pilot or robotic amid the comfort of job assurances or acclimatization to the terms of employment.

So, taking into consideration all the benefits of daily performance, market, organizational, talent, opportunity reviews and of the flexibility, talents and awareness variable per diem pay schemes foster, why would anyone resist the idea? More precisely, when would “VPDP” be a bad idea?

Costs of a VPPD Scheme

Of course, having associated costs is not a disqualification for any decision or scheme. What matters is whether any or the total of the costs are unacceptable and (therefore) outweigh the benefits or, more broadly, whether the probabilities and payoffs are worth it. Focusing on the unacceptable costs, the following list should serve as a guide to whether to implement a VPPD scheme:

Destabilizing chaos: Haggling does not cause chaos in the beachfront sunglasses market. It may also not cause chaos in employment situations in which both sides to the negotiations appreciate that protracted negotiations are not feasible and would pose grave operational risks with dire consequences for both parties.

The key to beachfront haggling’s being immune to chaos is that the interactions and the only immediately affected parties are 2-person (vendor and customer)—with no third party, capital (such as machinery), etc., at immediate risk because of negotiation, that time is not a critical factor, and that the agreed-upon price will not, in the long run, cause chaos in the distribution, production and marketing streams (especially when the manufacturer has set a fixed unit price that the vendor has to pay).

An example of when a VPPD system is virtually guaranteed to cause chaos is not hard to imagine: Any situation in which failure to quickly reach agreement will compromise if not shut down or damage operations with or without 3rd-party or capital risk. Imagine weary firefighters battling a raging forest fire, showing up for work on the second day of the conflagration and demanding triple pay (without risk of being fired and replaced on the spot) and being refused.

Here, the chaos takes the form of destabilized and disorganized firefighting efforts and of the very rapid increase in the “entropy” of the complex and intricate ecosystem being reduced to ash, irrespective of whether those balking firefighters are replaced later.

So, before experimenting with a VPPD scheme, consider the chaos risk factor.

Corrective delays and failures: In a free-market model of a VPPD, unreasonable demands by employee or employer would eventually be “corrected” by the market. The problem is, as the firefighter example illustrates, that “eventually” may be too late.

This vulnerability of the free-market VPPD model is virtually identical with the Achilles’ heel of broader libertarianism, which needs to be tweaked to address it: The sanctions applied by the free market (e.g., for the illegitimate, i.e., first-use of force or fraud) are, in any specific instance, always administered after, not before the fact—despite whatever deterrent effect they may have on others, much as capital punishment obviously has never prevented any capital crime that has been punished that way.

Hence, if failure to reach agreement carries a substantial risk of such corrective delays or failures to maintain orderly operations, it should be clear that a VPPD system will not be the route to tread…

….even if you’ve not recently been whacked on the head.

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