Why does potential for costly mistakes result in greater perceived value and higher pay?
The relationship between contribution and compensation is obvious. If you bring more value to the company, the company compensates you directly with a portion of that value.
But why does a position with greater risk necessitate greater compensation?
EDIT: Everything below here was in the original post. However, I re-read it and realized it had little to do with the relationship between risk and compensation.
I don't buy the idea that managers are liable for the mistakes of their reports. That would cause a snowball effect in large organizations, resulting in extremely high turnover for leadership positions.
Managers share some liability for their reports' mistakes, but they also share some reward for their reports' successes. Those liabilities and rewards are split across all of their reports, resulting in what are usually relatively stable positions within a company. A lazy manager can get along by just regularly pruning reports who produce more liability than reward.
There are various methods to address risk:
1. Avoid the risk
2. Reduce the risk
3. Transfer the risk
4. Accept the risk
When you buy insurance, you're doing #3. If you self-insure, you're doing #4. Either strategy requires putting some money towards premiums, the expected possible cost of the risk.
It's much cheaper to pursue #1 or #2. You're then saving an amount exactly equal to the premiums don't have to pay under #3 or #4.
Thus, you can pay a person to do #1/#2 a fraction of the equivalent cost of #3/#4 and still come out ahead.
> A lazy manager can get along by just regularly pruning reports who produce more liability than reward.
Yup, and the books will balance.