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ChrisGraley (29.77)

Where our form of capitalism fails...

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22

December 02, 2010 – Comments (21) | RELATED TICKERS: AM.DL2 , CRIS

The US is a net importer of goods.

That being the case, we rely on strong domestic demand.

So taking that a step further, you also need strong domestic consumer spending.

If a domestic business doesn't share it's success with it's lowest level employees, it is literally cutting it's own throat over time. The lowest level employee spends a higher percentage of his income than any executive or investor that you have.

So this brings up a dilemma.  What you give to that low level employee, you have to take from somewhere else. Does the corporate executive take less or does the investor?

That's a tough question. If you pay less for corp execs, you get less talent and if you pay less to your investors, you get less money for growth.

So the answer is actually both and neither.

You have to make that lowest level employee a partner. You allow him to share the reward but he also shares the risk.

You give the lowest level employee the same compensation package as your highest paid executive. (obviously it's the same percentage on a much lower base). The base for the lowest level employee has to be competitive just like the highest level employee. It truly has to be performance based and that should be focused on the performance of the company and nothing else.

So what happens? You align the interests of all parties. For the investors, the highs aren't as high but the lows aren't as low. Bonuses only get paid when the company performs. The investor puts some of his risk on all the employees. For the executives, they trade some of their risk for less maximum compensation but they gain employees with the same goals as management and they have lower overall costs in tougher times. Their chances for success are higher. For the lowest level employee, they get a paycheck comparable to other company employees in the worst times, a much better paycheck than comparable employees in the best times and more job security since company costs go down in the worst times and investors are less likely to leave due to higher lows.

Companies that choose this method of compensation should see a flock of lower level employees and other companies will be forced to provide the same compensation. Once this occurs,  we should get macro-economically stronger. We'll see slower, steadier growth, but the growth will be more sustainable. 

I'd love to go into the importance of encouraging the lowest level employee to save and invest at this point, but I'm already getting long-winded in a post that I thought I could put into a nutshell. I'll leave it at the idea that prodding the lowest level employee to spend on credit until he can't pay anymore as something that isn't sustainable.

The point of the United States was to be united. Aligned goals will create sustainability and prosperity. You have to put money in the consumers hands for them to consume.

YOU MUST RESPECT WHERE THE MONEY IS MADE! The lowest level employee provides for the existence of your product and his spending provides for the consumption of it. 

The biggest hope for your company's prosperity is to make something you thought little about, something that you think a lot about.

21 Comments – Post Your Own

#1) On December 02, 2010 at 10:55 PM, alstry (35.36) wrote:

You dead right on the above....but what you still omit is that as a consumer economy based on government spending to consume.......how do we pay our employees or executives anything if government can't spend anymore?

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#2) On December 02, 2010 at 11:28 PM, ChrisGraley (29.77) wrote:

To avoid 3 hours of coming up with a reply alstry, the short answer is that involvement of the government never makes anything better. It just makes things worse.

What the government spends, it takes from someone else and reduces that person's ability to spend. The government plays favorites and is slow to adapt, while the consumer rewards the company that best satisfies a need in an expedient and affordable way.

An economy based on government spending is a fairy tale economy supported by politicians trying to change the perception of reality.

To quote you alstry, "people are sheep"

You have to change perception to change reality and that is a tough row to plow. Politicians make a living off of selling a different reality. People buy as long as they get something for free.

To give you an example, we have tons of liberals saying it was a good thing to bail out the banks and tons of conservatives thinking it's ok for the government to own everything.

When we get citizens that say that it's more important to stand on your own two feet again, we'll have a vibrant country. 

I have my doubts. 

 

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#3) On December 02, 2010 at 11:33 PM, NOTvuffett (< 20) wrote:

+10 Chris

We make a mistake to divorce merit from reward.  We make a bigger mistake by fostering an adversarial attitude between elements within a company when they should be working toward a common goal.

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#4) On December 02, 2010 at 11:40 PM, alstry (35.36) wrote:

In a normal world, you and I are aligned completely.  However, the following does not reflect the current environment.

What the government spends, it takes from someone else and reduces that person's ability to spend.

This statement is true when government taxes and spends....or one could argue when government borrows and spends.....

but when government counterfeits and spends......is it really taking from anyone?  Nobody is being taxed at the present....no interest is accumulating as with a loan......

Counterfeiting is simply debasing currency and artifically stimulating the economy making it dependent on the stimulation.....it is worse than taking from someone else....it is stealing from all and creating an artificial system.......and soon makes it impossible for nearly all to spend as few are willing to accept the currency.

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#5) On December 02, 2010 at 11:59 PM, ChrisGraley (29.77) wrote:

Counterfeiting is the most evil of government sins. They aren't stealing from you, they are stealing from your kids.

Every day that they print a dollar that didn't exist is a week that you are selling your child into slavery. That week of slavery comes with interest.

Your kids can't pay that debt any more than mine can. The government can sell debt all they want, but they are selling debt and not income. It can't and won't work in the long term. The government isn't supporting the future consumer any more than business is.

If you are only going to take and not give, you'll eventually exhaust supply. 

 

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#6) On December 03, 2010 at 6:51 AM, devoish (98.62) wrote:

Wow. +1 rec.

You give the lowest level employee the same compensation package as your highest paid executive. (obviously it's the same percentage on a much lower base). The base for the lowest level employee has to be competitive just like the highest level employee. It truly has to be performance based and that should be focused on the performance of the company and nothing else.

Put some example numbers on this for me - please. Give me a reason to hate (or possibly love) this idea. Use the imaginary restaurant as an example.

Regards,

Steven

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#7) On December 03, 2010 at 8:14 AM, ChrisGraley (29.77) wrote:

Personally devoish, I'd like to see about 20 times the lowest wage for the highest paid employeee, but that is never going to happen. Realistically, if we could get to about 40 times the lowest level employee, it would be a big improvement.

Investors should be demanding lower executive pay, but for some reason we don't. The board members that are supposed to be hired to protect shareholder interests are picked by the CEO and only think about his/her interest.

If your CEO's interests aren't aligned with the investor and the company's employee interests aren't aligned with the investor, how can we expect any company to perform?

It amazes me how quickly we accept stupid.

 

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#8) On December 03, 2010 at 8:27 AM, dbjella (< 20) wrote:

Instead of a restaurant how about an internet startup like..... kogoal?  

Sorry couldn't resit :) 

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#9) On December 03, 2010 at 1:06 PM, Entrepreneur58 (37.07) wrote:

The title of your post suggests that we have a capitalist system, which is absurd.  A capitalist system is one in which the people who own and run a prosperous business prosper and the people who own and run a failing business fail.  In our current system, the people who own and run failing businesses use the power and influence provided by financing political campaigns in order to prosper even when their businesses have failed.  Our government, rather than being run by and for the people is now run by and for the failed business leaders and owners.  Rewarding failure is hardly a recipe for success.

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#10) On December 03, 2010 at 1:12 PM, 4everlost (29.33) wrote:

I'm not an advocate of sky high executive pay.  Companies compete for managerial talent and the highest bidder usually wins.  I like the concept in your post but don't think it would make it in the real world.  What would happen to the comensation scheme if the highest level exec retired and the best candidates for the position were available for 20% more than the retiring guy? 

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#11) On December 03, 2010 at 1:20 PM, ChrisGraley (29.77) wrote:

They can only demand as much as the market will offer.

 

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#12) On December 03, 2010 at 1:30 PM, starbucks4ever (97.39) wrote:

Chris,

You are dead right, but this solution requires both competitive environment for businesses and some heavy regulation from government, and I mean the right kind of regulation (not some stupid obamacare, but something quite the opposite). We are not making any progress on either front, in fact, we are in full retreat on both. 

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#13) On December 03, 2010 at 4:11 PM, lemoneater (79.39) wrote:

Good discussion.

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#14) On December 03, 2010 at 4:40 PM, ChrisGraley (29.77) wrote:

I don't think it would take a ton of regulation. Just one law that the highest paid employee can only have a certain multiple of the lowest paid employee's compensation would be enough.

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#15) On December 04, 2010 at 7:39 AM, hanginout (71.92) wrote:

Three thoughts -

1)  Fantastic post and discussion - I would love to rec +100 (and that includes the commentors)

2)  I truly do believe that there are some jobs that are worth the much higher salaries that are paid.  It is not just because of the hours.  It has to do with the stress and the responsibility.  In some areas, when the "buck stops here,"  it stops with a 10-ton thud right on someone's head.  I never want to see the government institute wage ceilings for anyone.  That would set a precedent that is more dangerous than income tax..

3)  Home Depot tried your idea when the company first started.  Each employee was a share holder/owner in the company and part of the compensation was tied to the health of the company.  They got the cream of the crop as far as employees.  Chik-fil-a is closed on Sunday and has a scholarship program for its high school aged employees.  It is a greatly in demand job as well.  Word gets around.  If you want great employees, treat them as valuable and you can choose from the very best.

Great work, Chris - Mary

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#16) On December 04, 2010 at 11:41 PM, FleaBagger (29.53) wrote:

Many executives fail, get paid a huge severance, and then get a huge signing bonus to where they are going to fail next. That is clearly a problem. But it is better for a shareholder who voluntarily bought shares in a company (or who voluntarily handed his money over to a money manager) to have his money taken to pay for that failure than for people's money taken (or debased) by government to pay for that failure, as is the case with Goldman and JP et al.

But paying lowest level employees more is not going to make the economy better. The government getting out of their way and freeing them to be entrepreneurs or be hired by whomever they want, that would make the economy better. But a company cannot pay more than a laborer's marginal utility to employ him. That is an intractable law of economics. Companies choosing to pay their employees more would not change that, though it may change whether or not the company stays in business. In the millions of companies on the planet, finding one that started paying its employees more seemingly arbitrarily and nevertheless succeeding just means that you found one where the employees managed to increase their marginal utility coincidental with their raise.

Think about this: if an employee produces or protects $20 worth of value per hour, and the HR costs for complying with government regulation are $9/hr per employee, the company has no reason to pay that employee more than $11/hr. If it were paying him $12/hr, and it cost them an additional $9 to employ him, they would be better off without the $20 he produces.

Furthermore, if anyone can produce like he does, and there are plenty of young, inexperienced workers eager to do it for just a reference, as an internship, it only costs them $9/hr to employ one of them. They will do this even if they feel the risk they are taking with an inexperienced worker is like a cost of thousands of dollars over the course of a 3-month internship.

They will hire interns for this every year, not because they don't get how the macroeconomy works, but because they will produce in the most efficient way they know how, and interns produce more than a union worker with a sense of entitlement. The spending of overpaid union workers does not boost the overall economy.

The overall economy is lifted not by money, as you were so close to realizing with your attack on government counterfeiting, but by production. If low-level employees are paid more for the same production, the economy suffers, because someone has to have their resources confiscated to pay for the government-mandated raises (though a private sector attempt at cosmic justice through wage increases will end only with the failure of individual companies, not with any lasting distress of the economy). The only way to improve an economy is to increase or improve production.

That bears repeating: the only way to improve an economy is to increase or improve production. Any attempt to help an economy that focuses on money or wages or GDP will fail. Only greater worker productivity will increase wages in any sustainable way. 

The golden goose that keeps on giving is capital accumulation. Productive capital improves the productivity of the worker, and thereby increases his wage, or deflates prices in a stable currency environment. The only way an economy accumulates capital is through the untaxed savings of its middle and upper income classes. These savings laid by are invested (on some level) and become productivity-enhancing capital, such as a tractor. With this capital, productivity increases, wages increase, and no one has to sacrifice to benefit anyone else, because there's more to go around.

Even in the case of someone who is hoarding currency because there's no central bank inflating its value away, there's no loss of productivity in the economy: he is not laying claim to anyone else's labor, so they have more time to focus on other things. They produce in different ways, but do not stop producing. The cessation of production is a result of government policy that taxes production, or, perhaps worse still, dissuades savings and promotes consumption, preventing adequate capital accumulation (or maintenance) and decreasing productivity, thereby decreasing wage purchasing power and undermining everything that leads to recovery.

Without savings, there is no investment; without investment, there is no capital; without capital, we cannot feed our whole population, let alone live lives the kings of yesteryear could only dream of.

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#17) On December 05, 2010 at 8:53 AM, hanginout (71.92) wrote:

Bravo, Fleabagger!! (and that is not sarcastic - It is absolutely heart-felt, impressed with your argument, praise)

Would you consider copying that comment over to a separate blog?  It deserves its own discussion and also I would like to give it the rec that it so richly deserves.

I have a question that I would like answered.  It sounds simplistic after your essay, but it seems a likely sort of thing to me.  We have trillions in debt, in entitlement programs, and in new spending by our government.  We do have wealthy citizens who have millions or even billions in some cases.  However looking at the disparity in government spending and personal wealth, I do not understand the whole "Tax the Rich" idea.  Isn't that sort of like handing the light and water bills to your child and saying "Use your lunch money and allowance and pay these for me."?  Aren't we much better off to leave the money with the people who have earned it and shown an ability to create more wealth and more jobs with that money?

Obviouslly I am thinking more along the lines of Bill Gates, Warren Buffett, et al than the Paris Hiltons of the world.

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#18) On December 05, 2010 at 1:31 PM, devoish (98.62) wrote:

Flea, It has been my assertion on this board that the only economic law is supply and demand, and everything beyond that is politics.

I think you fell off a cliff from economics into polititcs with your last post. Here you tread close to the edge of the cliff.

Think about this: if an employee produces or protects $20 worth of value per hour, and the HR costs for complying with government regulation are $9/hr per employee, the company has no reason to pay that employee more than $11/hr. If it were paying him $12/hr, and it cost them an additional $9 to employ him, they would be better off without the $20 he produces.Furthermore, if anyone can produce like he does, and there are plenty of young, inexperienced workers eager to do it for just a reference, as an internship, it only costs them $9/hr to employ one of them. They will do this even if they feel the risk they are taking with an inexperienced worker is like a cost of thousands of dollars over the course of a 3-month internship.

You asked me to think about it:

In the example you give you do not really have an intern for the cost of Government regulation of $9/hour. The cost of feeding, clothing, housing, watering that intern is being borne by someone else. If you presume that interns are usually youngsters supported by their parents, then in the real world all you have done is pass your costs on to the parents employer. Effectively you have found a way to support a company that is not productive or efficient enough to support itself and are weakening a more productive company in favor of a less productive one. If that is done in a morally acceptable fashion - by the choice of a productive employee to support their childs internship, or a morally unacceptable fashion - by Government taxing every productive employee and employer enough to support every childs internship, is a political/emotional choice.

Here I suggest you fall over the political cliff.

They will hire interns for this every year, not because they don't get how the macroeconomy works, but because they will produce in the most efficient way they know how, and interns produce more than a union worker with a sense of entitlement.  

Negatively describing a "union worker with a sense of entitlement" vs. the positively described "intern producing in the most efficient way" is very far removed from economics. In my 50 years I have employed union workers, non-union, interns and worked with volunteers, and I can promise you that what you describe is not even close to accurate.On a "marginal cost" basis the volunteers and interns are the most productive to your business because you have passed their cost on to someone else. Rarely do they produce more in a day than either union or non-union employees.

Only greater worker productivity will increase wages in any sustainable way vs. They will hire interns for this every year… …because they will produce in the most efficient way they know how.

 It seems you are conflicted. It seems you are suggesting that only by achieving zero wage cost with interns will wages increase.

The spending of overpaid union workers does not boost the overall economy.

The spending of underpaid interns does not either. Neither does the spending of executives. Or it all does. Remove the politics from your sentence. "Spending does not boost the overall economy".

The overall economy is lifted not by money, as you were so close to realizing with your attack on government counterfeiting, but by production. If low-level employees are paid more for the same production, the economy suffers, because someone has to have their resources confiscated to pay for the government-mandated raises (though a private sector attempt at cosmic justice through wage increases will end only with the failure of individual companies, not with any lasting distress of the economy). The only way to improve an economy is to increase or improve production.

That bears repeating: the only way to improve an economy is to increase or improve production. Any attempt to help an economy that focuses on money or wages or GDP will fail.

the only way to improve an investment is to increase or improve production. And that is only because you have also made the political decision to measure increased productivity by what return investors get out of increased productivity. One could also make the political decision to measure increased productivity by what workers get out of increased productivity. For instance, if a team of one investor, one CEO, one engineer and 7 factory workers all worked eight hours to build eight cars on Monday and then again on Tuesday there is zero productivity increase or improvement. The CEO, the engineer and the factory workers were rewarded for their time and effort with a share in the profit from building eight cars, and the investor was rewarded for his investment with a share in the profit from building eight cars. On Wednesday if any one of them figures out a way to build eight cars in 6 hours, productivity has increased. Because the investor is being compensated for “risk” and the increased productivity reduces his “risk” he should have his dividend payment reduced. Because the 9 employees of that company are being rewarded for their time, they should have their time reduced, but not their income. The productivity increase should go to all ten of them, including the CEO in the form of reduced hours and the investor in the form of reduced risk. Because GDP did not increase it is revealed as a poor measure of productivity or an improved economy. Paid time off is a better measure.

The golden goose that keeps on giving is capital accumulation. Productive capital improves the productivity of the worker, and thereby increases his wage, or deflates prices in a stable currency environment. The only way an economy accumulates capital is through the untaxed savings of its middle and upper income classes. These savings laid by are invested (on some level) and become productivity-enhancing capital, such as a tractor. With this capital, productivity increases, wages increase, and no one has to sacrifice to benefit anyone else, because there's more to go around.

Evidence suggests otherwise. With a tractor, only time off increases, not wages. To increase wages you need to make the decision to use that tractor to produce more veggies than the workers it replaced did, while also continuing to pay the workers it replaced that increased wage. If you make the decision to keep one worker and the tractor, and to stop paying 4 workers you have reduced wages by 4 workers. To increase wages you must reward the one remaining worker with the wages of all 4 laid off workers, plus any additional amount to achieve that wage increase. To achieve that wage increase plus reward the investor, you also need additional land available to till, and additional customers for your veggies. For us – your readers- to blindly assume those things are available is a dreadful mistake in our thinking. For us to assume that those things are available to the laid off workers to get wages somewhere else is also a dreadful mistake in our thinking. You are also completely ignoring the option of investing into anything other than labor reducing products. In which case “investing” is no longer a tractor or a productivity increase.

Even in the case of someone who is hoarding currency because there's no central bank inflating its value away, there's no loss of productivity in the economy: he is not laying claim to anyone else's labor, so they have more time to focus on other things. They produce in different ways, but do not stop producing. The cessation of production is a result of government policy that taxes production, or, perhaps worse still, dissuades savings and promotes consumption, preventing adequate capital accumulation (or maintenance) and decreasing productivity, thereby decreasing wage purchasing power and undermining everything that leads to recovery.

Let’s think about this. There is no central bank inflating currency so there is $100 in circulation and will not be any more. Someone hoards some of the money. How does that increase the time laborers have to focus on other things?

Without savings, there is no investment; without investment, there is no capital; without capital, we cannot feed our whole population, let alone live lives the kings of yesteryear could only dream of.

With or without capital, investment, or anything else, we have never fed our whole population. The closest we ever got was when unions negotiated a larger share of productivity and government taxed 90% of the rest. 1950, 60 and 70.

Regards,

Steven

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#19) On December 07, 2010 at 2:59 PM, mtf00l (45.17) wrote:

@ChrisGraley

Well begun!

@FleaBagger

Well stated!

@devoish

Well responded!

CEO compensation has nothing to do with talent or performance. The CEO will never take a pay cut if the company flounders.  Their not going to sell their extra cars or houses or any of their other personal posessions.

Workers wages will never be rewarded on par with performance.  When I can as a business owner get a factory full of workers in another country friendly to US businesses, why would I bother with the hassle of US taxes and regulations from a government that in the attempt to protect it's workers makes them un competitive?  In other countries if the employees don't like the conditions their excused or executed.  No healtcare required.  As my cost decrease and my gross revenue increases my investotrs will invest more and tell all their investing friends about the great opportuninty my corporation affords them.

The fact or facts I find missing in the original article is the name of this awesome corporation that performs so benevolently. 

Here are examples of mine electronics, textiles and agribusiness.  Specifically, hydroponic tomatoes that used to come from domestic suppliers I now find from Mexico.

You can't legislate eutopia.  People are people, the human condition if you will, will reduce us to the least common denominator.   I'm sure you can figure out what that means.

Is this a pessimistic view? Perhaps, however does that make it inaccurate.  We have high unemployment coupled with record profits.  Profits that CEO's and to a much lesser degree investors, investing more than $250,000 which as I understand is the cheapest you can buy a seat on a small corporate board for, are rewarded for and from. 

More later...

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#20) On December 07, 2010 at 3:51 PM, mtf00l (45.17) wrote:

One solution is to devalue workers in every country to the lowest common denominator.  Clearly, this would be met with violence from those losing the most.  That would be many by the way.

The uterly impossible solution is to raise workers everywhere to equal status so that labor cost are equal no matter the country in which the labor is performed.  Those that have a status will not gain nor will they lose.  Those that gain the most will be the most elated.  This will never happen.

The final analysis?  It is what it is.

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#21) On December 08, 2010 at 9:27 PM, ChrisGraley (29.77) wrote:

Boy, I wished I would have revisited the post earlier!

Good posts by both sides!

The biggest thing I noticed was an openness for the other side's opinion.

That is pretty rare in most threads.

Fleabagger and Devoish both had great posts.

Maybe I'll revist this topic later. I'd revisit it again now, but I doubt anyone is reading this post anymore.

 

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