A self-proclaimed barista and union member posted on X (formerly Twitter) a familiar complaint about their pay which received a lot of attention. She said:

Clearly the financial education in the United States is very poor, which is why this barista, like so many other laborers, doesn’t understand a fundamental principle in compensation: the pricing of risk.

What is risk? Simply, it’s the possibility of how much worse something could turn out than its expected outcome, plus how likely that adverse scenario is to happen.

When you think of taking a risk, you may think of something like jumping out of an airplane. You must evaluate the amount of risk in the action (you could end up disfigured or dead-a very stark outcome) as well as the likelihood of the unintended outcome (death happens in about 1 out of every 400,000 jumps). You evaluate that risk against the potential benefits you get from taking the risk (such as a thrill, bragging rights, or whatnot).

Risk impacts a broad array of financial decisions similarly.

Like most laborers, the barista takes on almost no financial risk in her job. Whether one customer, ten customers, or a million customers come into the café, she is guaranteed to get her agreed-upon wage. She is compensated for her time and expertise, but not for taking a financial risk.

If the café closes, the barista may lose her job, but she has nothing else financially at stake. This varies substantially from the investors in the café, who risk their financial investment and may lose it all. For taking on the risk that only a few customers may show up or that the business might otherwise be unprofitable, investors also retain the upside if many more show up and the café is a resounding success.

The barista gets paid the same either way, because her role is one that requires no financial risk.

Furthermore, it’s easy for her to compare her pay to sales (instead of profits), but that’s like comparing coffee to wine. The café owner must spend time and money planning the business and building out the physical café. They have to pay for all of the furniture, fixtures and equipment. They have to pay for the rent or mortgage. They have to pay for the cost of the product, including those items ancillary to the product — cups and lids, heat sleeves, various types of milk, sugars, napkins and more.

They have to pay the barista (which costs them more than the barista’s salary, as they have to cover additional taxes, insurance, and perhaps benefits). They have to do the same for other workers.

They have to pay for electricity, water, heat, and air conditioning, and to maintain those systems.

They have to invest in marketing and signage to get people to come to the café. They have to pay for a full technology suite, which may include a website, point of sale, and other communication software and more. They have to pay for a phone line and service fees on payments.

If nobody shows up for their shift, it is the responsibility of the owner, who may have to cover for their workers, or remain shut down and forgo any revenue that day, plus endure brand damage with customers turned away.

The list goes on and on.

Plus, in the foodservice industry, labor is often the most significant cost, and their profit margins are slim.

Whoever pays for all of the aforementioned costs takes a risk, not to mention the opportunity cost of directing capital and resources elsewhere. The business may or may not be successful (over 60 percent of coffee shops fail in the first year). Either way, the barista will get a paycheck for their time worked. The owners may end up with nothing, or they may end up doing well.

The barista has the choice to leave whenever they want and do something else. There is little downside for them to quit. The owner does not have that luxury.

The tweeting barista fails to understand that she is taking on almost no risk and is being compensated accordingly.

If she wants to earn the upside, she will need to be willing to risk the downside. She doesn’t get extra for just showing up.

Opening and running a successful business is fraught with risk (foodservice has among the highest business failure rates of all industries). If it were easy and reliably profitable to do so, then everyone would open their own café instead of being a barista in someone else’s.

But it isn’t easy, and it is risky, and that’s why the barista’s wage makes sense.

Risk-taking applies across everything we do, from our personal to professional to financial endeavors. 

Of course, those who seek to free-ride off of others’ risks want to pretend that risk pricing doesn’t matter. But it does.

Appropriately priced risk leads to positive outcomes and more educated risk-taking. Mispriced risk leads to unnecessary costs, inefficiencies, and sometimes chaos.

Pricing risk leads to a barista making $21 an hour and being able to go home at the end of their shift and do what they please.

I am all for employees being aligned with ownership and participating in wealth creation. If you want to make more wealth, ask for some stock as part of your compensation and take some risk. 

But if you don’t want to take the risk, then know that’s your choice. You don’t get to participate in the upside without some skin in the game.