In the last article, we concluded that the only way to pay a PM is to use market-determined pay rather than trying to use the intrinsic value created by the role.
Would it not be nice to define a neutral benchmark (or an anchor pay) that reflects value addition rather than market-driven prices that are relative and can be crazy given the hyper-competition for PM talent?
This post explores what that anchor benchmark could be.
Warning: The post is more of Economics 101 than product management 🙂
An analogy to this problem is the foreign exchange (FX) market.
Guess the % of speculation in FX markets.
At least 90% (can be as high as 97%).
If there is so much speculation in this market, what determines the intrinsic value of currencies i.e. true exchange rates?
It is the real trade of goods and services (i.e. exports and imports) between two countries that determine the exchange rates. [Investment is another factor that we will park for now.]
How much ever speculation happens in the forex market, the exchange rates will finally have to normalize to the trade factor between the countries.
So *trade* is the anchor for FX markets despite huge speculation.
Similarly, we can look at market-determined pay for product managers.
The anchor pay comes from profitable & mature companies.
Mature and profitable organizations find it easier to measure the net dollar value of the PM organization. Based on the value created (the equivalent of trade in the FX market) and adjusting for the supply of talent, they fix certain compensation ranges.
Other companies have to follow these benchmarks and pay around these numbers.
However, when the venture funding cycles are in the boom phase, there is a lot of hiring activity (the equivalent of speculation in FX markets) with hopes of value creation in the future.
These can drive pay structure to crazy levels.
If collectively these hyper-funded startup investments don’t create enough value (in terms of profits) over the longer term, the wage inflation bubble bursts and the pay scales fall back to the anchor pay set by mature companies mentioned earlier.
All these happen just automatically just based on supply & demand for talent.
