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Comment by thrownaway2424 | Hacker News Reader

What's particularly disturbing is the sheer greed being shown in pursuit of these profits. There was a recent article about an auto plant in Michigan that went through near-bankruptcy but is now making a $2bn/year profit. The profit was attributed in part to $50m/year in reduced wages that were extracted from the union in exchange for not closing the plant. Those concessions represented over one third of the wages but only 2.5% of the resulting profits. That's just disgusting. They should have kept the wages steady and enjoyed their more-than-sufficient 1.95bn/year in profits.

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Disturbing is that apparently some people would prefer to see this "one of last plants in Detroit" bankrupt a all employees and their jobless, rather then tripling workforce in what is now most distressed place in US with 16% unemployment.

http://www.nytimes.com/2013/07/16/business/last-car-plant-br...

Apparently these (pre tax) profits don't end up in somebody's pocket as you imagine but are reinvested in giving more people jobs and growing the plant.

The bigger plant is still in the investors' pockets. (No moral judgement implied.)

Depends on who are the investors. Fiat is publicly traded, the investor might be anyone with 401 or mutual fund investment.

Oh, and you mean these people are not on savvy enough, so the managers run the plant for their own benefit rather than the shareholders' benefit?

For their own benefit??? Do your only see what confirms your world view? No they hired 3 times more people for the money they made. If I had a family in Detroit I would be much happier to have a job that stay unemployed. They are doing the good thing.

Apparently managers are doing a good job - the company was bankrupt all of those people would risk ending up on streets - it's Detroit we're talking about. Instead they turned it over and gave jobs to 3 times more families.

And no not everyone is savvy enough to run a business, some people don't have necessary skills - we all have different talents and aspirations.

Oh, I agree that hiring people and giving them an honest job is a very good thing in general.

I was just highlighting the principal agent problems. Managers like to hire people---because they can build their empire. Influence and status in most companies go up the more people you have reporting to you.

In this case, hiring more people seems to be in the interest of employees, managers and shareholders alike. Remember, selfish does not necessarily mean bad.

This is entirely anecdotal, but I grew up in the Midwest and know many people who spent their lives working in automotive factories. I wish these people the best, and I'm glad that they are doing well, but many of them are making $25+ / hour installing doors and seat belts (and the '+' here has a high ceiling).

This is a job that any able bodied person can do, but they make that living, for better or worse, because of their unions. If I were funding these plants I wouldn't want to pay those wages either.

As a reasonable person I have to admit that this sort of work is simply is not worth that pay, regardless of what my personal feelings toward my friends and their families are. These are not skilled positions.

So what?

This is the thing I don't get, why shouldn't the employees of the company, no matter how skilled, share in the good times? They certainly pay in the bad times.

As companies have become ever more callous and unions ever weaker all the money has moved to the owner side. It's not simply just about "I won this factory, therefore I get all the money", as I think we're going to find out in the next 20 years, that kind of thinking leads to major civil unrest and we will probably see the replacement to unions forming in the next decade or so.

The way to do that is via profit sharing/bonuses - converting payroll from a fixed to a floating expense, essentially.

I disagree that "companies" have become more callous. The general public want their cheap stuff, and they don't really care. The press is full of horror stories about sweatshops every week and yet, everyone wants their new iPhone and their new trainers and their clothes to wear for a few months at most... What will it take to effect a change in the mind of the consumer?

But they don't generally share in the bad times. If a company has a bad year most people don't take a pay cut. And they definitely won't get paid nothing for a year while lending money to the company!!!

For example you own a local garage. On normal years to make $500,000. Your costs are $400,000. One year thing go bad and you only make $300,000. In most cases the owner will borrow the money to cover the difference. Maybe someone is let go but in most cases the owner tries to retain the staff hoping next year is back to normal. Maybe the owner will use his own money rather than borrow. In any case they will find the money somehow or close. And remember this is at the same time as having your salary reduced to $0!

Eventually the owner wants to recoup and protect themselves from any bad year. But at a $100,000 profit a year, and remember this is pre tax, and profits are double taxed for the owner, then how long will it take to save pay them back and save enough for the next bad year?

So if one year he make $600,000, or double the profits, he needs to keep those profits for the bad years.

Now big corporations are slightly different but at the same time they need to be absorb harder years. So right now they squeezing profits but at some point those profits will be needed for a bad year. Or perhaps it was to pay for the recent bad years in which they may have acquire debt...

Some corporations are greedy, but a lot aren't. You have to look at the multi year picture when it comes to profit sharing. And most employees are not willing to loan money to a corporation in a bad year like the owners will most likely have to ;)

> most cases the owner tries to retain the staff hoping next year is back to normal

Any evidence to support that claim? Especially during the crises (when there is not one, but several years), I think it's not very true.

> profits are double taxed for the owner

They are not double taxed if they are reinvested in the company (or saved as insurance for bad years).

> the owners will most likely have to [loan money to a corporation]

Really? Any recent examples?

You're assuming that both the company and that division of the company survives. If it goes under, if labor is outsourced, if a factory closes, the workers lose their jobs. Of course they share in the bad times, and far more than the owners of the company do, since the workers have more at stake.

You present a false choice here, regarding employees not "generally sharing in the bad times". The CEOs of these companies often don't share in the bad times either, while they most certainly are rewarded for the good times. Why should it be any different for all levels of employees?

Now, regarding the owner of a small business loaning their company money, while employees do not. Employees are not given the choice, likely because the loan is to high of risk for the average employee given their personal net worth and as important most owner's don't want their employees to be given the option (ie. as an owner of a garage I would not want my employees having that level of access to the company's finances).

The primary issue however is the treatment of labor, let's not get lost in details of risk/loans/etc. Given that technology is leading to a surplus of labor, a general multi-decade trend against labor. The question that society needs to address is how do we treat labor? Business can exploit labor pushing what's acceptable, which will lead to larger wins for industry as we can already see today, but is that right? I think you and I differ in opinion on the answer to that question.

It's a tightrope because when it becomes cheaper to automate whatever job they were doing manually, then they make $0 per hour.

That's the case in South Africa with farm workers and their unions driving up the minimum wage. There is 25% unemployment nationally and they are clamoring for more money. The farmers just go "well at this price point, I might as well just buy some more machines and get rid of these people".

Machines have no unions.

How is inflation is SA currently? Inflation tends to hypertrophyze unions, because there comes a need to a common agreement to adjust wages across the board to keep up with prices.

It varies, but for the past 2 years it's been around 6%. So yes increases are necessitated, but the unions generally start off with ridiculous demands like 15% increases and benefits and they have no problem with striking for days on end.

The problem really is that when you have 25% unemployment, where those 25% are almost all unskilled then you work to eat and not much more. You don't have much bargaining power there. So again, if you're unskilled, oversupplied and are replaceable by machines, you should be very careful about what sort of demands you throw around. I'm not sure if unions are really conscious of this fact or just trying to appease the workers demands.

Ok, so what exactly is a proper pay for installing seat belts and doors?

Is a job not being "skilled" mean the person doing it must live in poverty?

>Is a job not being "skilled" mean the person doing it must live in poverty?

"must" is a strong word. But I would be worried about the possibility and perhaps diversify my skill set.

Business income is volatile. The business made a $2B profit in one particular year, whereas in other years they made losses that nearly destroyed them. Somehow I suspect when the business took losses, the employees did not return their wages.

Unless you want employees to share the downside of business income volatility, it's unreasonable to expect them to share the upside.

> Business income is volatile.

Yet, a very few concentrates a bigger share every year.

"Unless you want employees to share the downside of business income volatility, it's unreasonable to expect them to share the upside."

Can you justify that? It seems like one of those statements that is designed to appear correct without provoking concious analysis. Kind of like "truithiness" [1]. Isn't there rather a lot of evidence that properly implemented profit sharing results in more motivated, productive employees?

[1] http://en.wikipedia.org/wiki/Truthiness

The justification is simple - a call option is worth more than a forward with the same strike price. If employees are to receive their market rate in cash (call it $X), they can receive $X worth of forward contracts, or $X worth of call options. If they choose call options, either the value of the contracts or the strike price will need to be lower.

So more precisely, the reasonable choices would be wages, profit sharing in upside and downside, or lower wages + profit sharing in upside only.

Profit sharing works great when employees have the ability to significantly affect profits. Traders/hedge fund managers are a great example of this. For manufacturing employees, a piece rate (rather than hourly rate) would be a similar way to create such incentives.

The employees do sell a put option in the form of "employee can be fired", though. And the shareholders are only liable up to their equity invested.

So more precisely, the reasonable choices would be wages, profit sharing in upside and downside, or lower wages + profit sharing in upside only.

In another comment, someone asked about the executives who get paid and then "only have upside", as if that somehow proved that employees should also get an upside. Not so: executives are the last option: lower wages + profit sharing in upside only. Employees are—literally—taking the first option. If they want the last option, they can become executives. We don't have a legally-mandated cast system in this country, anyone who is competent can become an executive and take option three.

And the wages really are lower for executives who only have upside potential. If you are an executive (not a manager, an executive) you can either run your own company, or run someone else's company. If you run your own company, you've got upside and downside risk. If you run someone else's company, you have (much) smaller upside potential, but that's compensated by: (a) lower, but guaranteed, wages + (b) no downside potential.

It's a reasonable trade for a lot of executives to make.

You are of course obviously correct.

Employees, at least those earning income from real labor, always share the downside of business income volatility. In fact, it's arguably an outsized share. One simply needs to observe the various employment metrics, and their rate of change. Particularly those tracking layoffs, discharges, and other involuntary separations initiated by employers.

What's perhaps even more illustrative are the comparisons of job requirements and starting salaries for positions with similar responsibilities; found in employment advertisements before, during, and after a "business cycle".

In fact I've read several studies showing that people who happen to graduate and enter the workforce during the nadir of financial crises earn, over the course of their entire career, substantially lower wages as compared to people who simply happen to enter the workforce at any other point of the business cycle.

They share some risk in the form of correlations to the actual risk to their employment contracts. But employees who are fired during downturns walk away with all of their human capital and most of their future earning potential (minus what the firing signals in their CV), while the downturn chips away at the firm's capital.

Let me put this another way: no one is really entitled to a job; not in the way their entitled to their properties, which have a _title to their name_. Capital, on the other hand, risks its very entitlement. Employees don't have any assets seized during a downturn. If they wanted to share in the risk and return, they could have bought stock.

I think the word you are looking for is "sophistry".

http://en.wikipedia.org/wiki/Sophistry#Modern_usage

Employees _do_ share the downside, when job cuts are made.

These people did share in the downside: They cut extremely substantial wage cuts. Now they are not sharing in the upside.

Guess why many of these unions play hardball?

Maybe they would have been better off buying stock instead of paying union dues?

Because doubling your exposure to the risks in a business by both working for it and tying up your savings in it as well is such a brilliant idea?

So they should get the rewards without the risk? By claiming it would be a poor investment for someone who can't afford the risk, you're implicitly arguing that the actual owners are taking a bigger risk than the employees, and thus it's unsurprising that they capture the rewards from growth.

Working for a company that could go bust at any moment isn't sharing in it's risks? Really?

Any company could go bust at any moment, and the only risk to you is the transactional costs of finding a new job. Those could be high, but it's not your current/prospective employer that's determining what that amount is, it's a function of the labor market and your own value.

Beyond that, it's not as if you're putting any of your own money on the table. Ownership (whether that be private management or shareholders) is putting their money on the table.

If you'd like a higher risk/reward level, negotiate for equity or other variable compensation.

By claiming that the owners are taking a bigger risk than the employees, you're implicitly arguing that employees are taking some risk. Thus, it's surprising that they capture none of the rewards from growth.

There is nothing stopping the union from re-negotiating the contract that exists today, the same way management wanted to re-negotiate the contract that previously existed.

Except for the fact that many unions don't exist now.

Of course, your suggestion also implies a labor market balance that simply does not exist. The article is actually about the fact that corporations are realizing record profits by employing fewer people and paying less to those whom they do employ. It's a buyer's market for labor. Not exactly a strong negotiating position for the worker.

Who said they had to buy stock in the company they work for?

Who said they had to buy stock in the company they work for?

This thread. Otherwise, you are changing the subject. We're not talking about personal finance here.

We're not talking about personal finance here.

I don't get it. If they have enough money to buy stock in their own company, they have enough money to buy stock in some other company as well. Even if the money comes from not having to pay union dues, which is what the post I was responding to hypothesized, there's still no reason why it has to go into the stock of the company they work for.

The broader thread is about the lack of parity between corporate shareholders/executives (i.e. those who "automatically" share in the upside) and workers (i.e. those who don't typically share in the upside).

To advocate that--rather than participate in the upside--employees should simply buy stock in other companies is irrelevant and does not address this lack of parity.

The added notion that employees should invest in stocks instead of participating in union advocacy (that, in part, attempts to provide them with some parity) is just plain cynical and suggests a total lack of respect for the worker.

I mostly responded to this in responding to your post in the other subthread we're having, but I do have one other comment about this. I think there's a key distinction to be made here between two reasons why corporate owners/executives get more upside: one is a good reason and one is not.

The good reason is that owners and executives have to deal with all the business risks that you talked about in the other subthread: finding product-market fit, raising capital, how to scale, etc. Workers don't; they come to work, do a job, and go home. Like it or not, it's easier to find people who will do the latter than it is to find people who will do the former; so, since the former type of person is scarce, they can demand more upside in exchange for the use of their talents.

The bad reason why corporate owners/executives get more upside is basically the one that's been given multiple times in this thread: corporate owners/executives are in a position to take more upside by abusing the corporate governance structure, whereas workers are not. (Unions were an attempt to stop this by giving workers more of a voice in the corporate governance structure; unfortunately, in many cases, the unions have ended up with exactly the same governance problems as the corporations they were supposedly fighting against. I saw this firsthand when I was working in the auto industry.) In fact, in many cases it's executives manipulating the structure for their own benefit at the expense of the owners, not just the workers. This is easier now that many "owners" are large mutual funds rather than individuals holding large blocks of stock, so the theoretical model of shareholders controlling the company by voting their shares bears little resemblance to reality in many cases.

One reason why I like the "why not start your own business?" response to this issue is that I think a larger percentage of people really are capable of dealing with the business risks themselves, instead of letting someone else (the owners/executives of the business they work for) do it. I think our society would work better, overall, if we had a larger number of smaller, more diverse businesses as opposed to a smaller number of large, monolithic corporations. The large, monolithic corporations are a historical artifact of the way the industrial revolution happened, and I think that in many ways they have outlived their usefulness.

Surely businesses and the people who run them (i.e. board level) should have a moral and fiscal responsibility to bank cash to cover for the lean years rather than splashing out their profits on shareholders and senior board members.

Most employees (other than trying to be more productive) have no control over what decisions business owners make (such that they roller coaster between profit and losses year by year) so why should they share the downside? It's not as if they get the same magnitudes of rewards as board level staff do to allow them to buffer themselves financially for downturns.

> moral and fiscal responsibility

Left to their own devices there are no morals in business. The only fiscal responsibility is to keep profits high.

> Most employees ... have no control over what decisions business owners make ... so why should they share the downside?

You mean the Human Resources. You don't complain when any other resource is sold or retired to save money, why should the business care specially about this resource type?

(I am having trouble figuring out whether you wrote what you did with tongue in cheek and deliberate cynicism. I'm taking it at face value, and apologize if I've misconstrued.)

> why should the business care specially about this resource type?

Because people are often hurt when they are "sold or retired to save money" whereas, so far at least, other "resources" don't have that capacity.

This is also the reason why, generally, people cannot be explicitly bought or sold as other resources can. This is widely considered a Good Thing, although indeed an idealized amoral business (or its owners) might well think it unfortunate.

> whether you wrote what you did with tongue in cheek and deliberate cynicism

No it was unfortunately serious.

> people are often hurt

If you still believe that any business still cares about this you haven't been paying attention. If you are not at the top, you are just a cog in a machine and will be treated as such. You are just a human resource, a resource that is one of the largest, if not the largest, singly money drain.

As I said, left to their own devices a business does not have any moral duty and the only fiscal duty they pursue is maximizing profits for themselves.

I wasn't claiming that any business does care about this (though in fact I bet some do, at least a bit). Only suggesting that they should.

Your question (which, I now take it, was intended to express businesses' attitudes rather than your own) was "why should the business care?". I agree that they commonly don't, and that there are structural reasons why they commonly don't. But I think most would say that they should.

>The only fiscal responsibility [for a business] is to keep profits high.

>You don't complain when any other resource [other than Human Resources] is sold or retired to save money

It's funny that you point this out. Our treatment of and relationship to corporations is interesting. On one hand, we want to treat them as faceless entities or machines that have only the fiscal responsibility of generating profits. In this view, their impact on "regular" employees is an unfortunate by-product of this responsibility and no-one's fault.

On the other hand, we grant them full person-hood, where convenient. Further, the profits they generate do frequently accrue to actual human beings.

So, the corporation seems to have become nothing but a tool (or weapon) for redistributing wealth in ways for which no-one should be held accountable.

You assume they don't. But often times the lean years go on longer than expected or are more severe than expected. Individuals should do this too; many don't, or don't save enough in their "rainy day" funds.

> Unless you want employees to share the downside of business income volatility, it's unreasonable to expect them to share the upside.

This is an incredibly dishonest statement. Employees DO indeed share the downside of business income volatility by being forced to take pay cuts when their company is going through a rough patch. I see it all the time and I've had it happen to me.

Why are we pretending this is not the case?

I'm confused. You signed on to be paid $X/month, you worked a month and were paid $X. Later you renegotiated the contract to be paid $Y < X/month, you worked a month and were paid $Y. If you want to work elsewhere for $X or $2X or whatever, you can.

Downside risk: you signed on to be paid S shares/month or P% of profits. You worked a month and the share price tanked. You already took the loss.

Employees are negotiating from a vulnerable position when the options are "take pay cut or good luck finding a new job".

Add to that the "American Dream" of owning a house and therefore being more likely to be stuck looking for work in only one area.

You left out an option: start your own business. What the Reuters article tells me is that there is a large pool of available labor for new businesses to use. Why aren't more people taking advantage of this opportunity?

Funny that you post that question on a forum full of people who know well from first-hand experience how difficult it is to start a successful business.

I didn't say it wasn't difficult. Of course if the choice is between having a steady, reliable job and starting your own business, it's a lot easier to choose the steady, reliable job. But the whole point of the article in Reuters is that the job is not steady and reliable any more; that changes the relative risks involved.

Also, to the extent that it's hard to start a business because of government regulation (which is a large extent), the obvious response is to remove the regulations that make it hard to start a business. That would mean more people starting businesses, hence more new jobs available for other people who are currently out of work. Funny how the Reuters article doesn't mention that.

>the whole point of the article in Reuters is that the job is not steady and reliable any more

That's circular reasoning where this thread is concerned. People are saying here that corporations should be sharing the upside with employees. You are saying that since they are not, people should start businesses. You're changing the subject and giving the corporations a pass.

>to the extent that it's hard to start a business because of government regulation (which is a large extent), the obvious response is to remove the regulations that make it hard to start a business.

Sorry about the delay. Took me a while to wipe the vomit from keyboard.

Seriously, while these regulatory complaints are something that we tend to hear from people with certain political affiliations, I challenge you to cite references to actual regulations that are to any "large extent" preventing actual small businesses from starting. In fact, the implication in the Reuter's article is that businesses are doing just fine in the current regulatory environment. They are more profitable than ever at the expense of the worker.

And, I think the HN populace exemplifies the actual difficulty in starting successful businesses. I doubt many here will cite regulations as a key challenge. Instead, it's actual business problems, such as product development, finding market-fit, competition, marketing, lack of capital, inability to scale, etc.

Hmm. Downvoted, but no one actually refuted my assertions. Nice.

>Sorry about the delay. Took me a while to wipe the vomit from keyboard

Not nice.

Ah. Style points. I get it.

People are saying here that corporations should be sharing the upside with employees. You are saying that since they are not, people should start businesses.

That's part of what I'm saying, but not all. Another part of what I'm saying is that, if the premise is that current corporations are not sharing enough upside with employees, then one obvious response is to start a business that does share upside with employees. If that's really as big a deal as people are claiming, employees should flock to such a business. Only some of those who are now dissatisfied would actually have to start such businesses; the rest could simply choose to work for them because they treat employees better.

I challenge you to cite references to actual regulations that are to any "large extent" preventing actual small businesses from starting.

First of all, it's not just starting but growing businesses that should be less impeded by regulation. Sure, start a business with only a few employees and the burden might not be too bad (depending on what kind of business it is--see below); but hit a fairly small threshold number of employees and all of a sudden you have regulations galore that you have to comply with or a dozen government agencies will come after you.

As for regulatory barriers to starting businesses, here are a few off the top of my head: professional licensing, even for professions like hairdressing where any putative benefit to the customer is far outweighed by the costs of the barrier to entry; zoning laws that clearly go way beyond any public benefit; government sweetheart deals for companies like cable providers, which prevent all kinds of competition in the ISP arena. That's just from a few minutes of brainstorming; I'm sure there are plenty more examples.

the implication in the Reuter's article is that businesses are doing just fine in the current regulatory environment.

That's because they (i.e., existing businesses) paid good money for the current regulatory environment. That does not at all imply that said environment is good for potential competitors of those existing businesses; if it were, they'd be complaining to their politicians that they weren't getting their money's worth.

I doubt many here will cite regulations as a key challenge. Instead, it's actual business problems, such as product development, finding market-fit, competition, marketing, lack of capital, inability to scale, etc.

But all of these business problems are also faced by existing businesses. Markets are not static; a product-market fit that worked fine yesterday might not work fine today, and businesses that serve their customers well often have to reinvent themselves. The response of many existing businesses (the music and movie industries being two outstanding examples), instead of reinventing themselves, is to try to outlaw their competition. The fact that those businesses continue to make profits even though there are obvious ways in which they are not serving their customers well (let alone their employees) indicates that their political efforts to get the playing field tilted in their favor have been successful.

>Another part of what I'm saying is that, if the premise is that current corporations are not sharing enough upside with employees, then one obvious response is to start a business...

That's fine. But, what I'm saying is that's where you're effectively changing the subject. That is, it still doesn't speak to the current treatment of employees at corporations that employ millions of workers right now, and will likely continue to do so for the foreseeable future. So, why let them off the hook? It just comes off as a disingenuous red herring to suggest that the remedy is for folks to go out and start new businesses. We know that it's extremely difficult for any individual business to succeed for a variety of reasons. Yet, what you're saying is that to remedy this problem, many, many new businesses must do so in significant numbers. I'm an idealist, but that's just not realistic--particularly in the near future.

And, I read at least a tinge of disdain for workers implied in your comments, especially given the current environment that has seen more than its share of Ayn Rand talk and hostility aimed at workers. The sentiment comes off as one of "be happy with what you get, and if you don't like the way you're treated, then start your own business".

>it's not just starting but growing businesses that should be less impeded by regulation

Yeah, I was simply responding to what you'd written re: starting a business, but agreed that regulations pose some hurdle at all phases. I run a business. You're not going to hear me cheer-leading in favor of the current regulatory environment. I don't like it either, but it's not my biggest problem by miles. I'm sure it varies by industry type, and I agree with those that you listed. But, the decrying of regulations has generally been overblown, political buzz-wording in an effort to promote a particular agenda.

So, here we have to distinguish between small businesses and major corporations. When you hear the political-speak decrying regulations it's generally a tactic to use small-businesess as cover for large corporations. "There's too much regulation and it's killing our small businesses", which is cover for "abolish environmental protections, consumer protections, financial market protections, etc. so corporations can realize even more profit".

So, the term "over-regulated" comes fully-loaded. And, that's what makes me wretch.

Where we do intersect is in acknowledgment of the tilted playing field and pay-to-play political environment/markets. Whether it's through manipulation of the regulatory environment, ridiculous subsidies, or any multitude of tools, this obviously hurts the market, workers, and everyone--except of course, those who have the deepest pockets.

Retch, not wretch. Sheesh.

it still doesn't speak to the current treatment of employees at corporations that employ millions of workers right now, and will likely continue to do so for the foreseeable future. So, why let them off the hook?

How does encouraging people to start competing businesses that treat employees better count as letting existing corporations off the hook?

Also, what alternative remedies would you propose? As far as I can tell from other comments in this thread (not yours), the main remedy appears to be to complain really loudly. If it's not realistic to expect lots of people to start new businesses, it's even less realistic, IMO, to expect complaining really loudly to make a significant difference.

I read at least a tinge of disdain for workers implied in your comment

Not disdain, just a reality check. I completely agree that workers at a lot of existing corporations should be dissatisfied with the way they are being treated. But I don't see much potential for change in just complaining about it. What these corporations need is competition.

here we have to distinguish between small businesses and major corporations.

Yes, this is a good point. However, I would offer a slightly different take on it. Small businesses, in my experience (a friend of mine runs one), just want to do business; they don't have the time or the resources or the inclination to expend effort in non-productive activities like playing political games. (That's one reason I think society as a whole would be better off if the average size of a business were considerably smaller than it is now.) The major corporations are the ones buying the regulations. But that means that much of the "protection" that we as consumers are supposedly getting from those regulations is illusory.

For example, lots of people claim that the financial crisis in 2008 was the result of lack of regulation of the financial markets. But if you look at what actually went on, there was plenty of regulation; it was just regulation that the major investment banks had written to favor themselves, rather than regulation that was written to actually protect the average person from having their retirement savings invested in junk securities that were made to look like AAA securities. As far as I can tell, that situation has not improved at all.

So when I say there should be less regulation, part of the reason is that the regulations we have are useless anyway. Small businesses are too busy doing business to engage in the kinds of shenanigans the regulations are supposed to protect us from; and major corporations can manipulate the regulations so someone else pays the price for the shenanigans anyway. If it were possible to have regulations that really did protect us as they're supposed to, I would be in favor of it; but I don't think we can, at least, not the way our political system currently does it.

"If you want to work elsewhere for $X or $2X or whatever, you can."

No, you can't. Government regulations and tax codes were purchased by the companies to eliminate competition and centralize capital, such that there is only one monopoly provider of car factory jobs in your area. The .com and .gov merger made the mess, they should have to clean it up.

If there was a competitive commodity free-ish market, then your plan makes sense. Sometimes that exists. Usually, very intentionally, it is prevented from existing.

There is nothing to be confused about, the scenario is pretty straightforward: you are presented with a (non)choice of either taking a pay cut or finding a box waiting for your on your desk. By being placed in this position, you have already been placed in a predicament where you have to accept the financial downside either in the form of taking a pay cut or having to find a new job. Again, the downside has already manifested and you are left dealing with the situation. So how exactly has being a salaried employee protected your from the said financial downside?

When you're a 20something techie living in the Valley, it really doesn't matter since you'll have 5 offers waiting in your inbox tomorrow. When you're a 50 year old blue collar worker with a family, a mortgage and maybe a medical condition, this kind of situation can ruin your life.

Most company owners don't readily share profits with their employees when their company is doing well but don't have a problem downsizing and cutting salaries across the board when they aren't doing so well. Since it's impossible to guarantee somebody income (even the best companies will go through rough patches), the only fair thing for managers to do is to share more wealth with the people who created that wealth when the times are good.

...you have already been placed in a predicament where you have to accept the financial downside either in the form of taking a pay cut or having to find a new job. Again, the downside has already manifested and you are left dealing with the situation.

You seem to be confusing your wages with a bond or perhaps a call option. Just because you sold something at a price $X does not mean you own some right to continue selling it at the same price.

And if someone chooses not to keep paying you an old price, you have lost nothing - you simply have not gained as much as you thought you might.

Being a salaried employee protects your 50 year old blue collar worker from downside because the 30 years worth of savings he piled up is completely safe even if the company goes insolvent.

> Being a salaried employee protects your 50 year old blue collar worker from downside because the 30 years worth of savings he piled up is completely safe even if the company goes insolvent

Except that a blue collar family with children don't exactly "pile" up savings... and most of those savings are tied up in his house, whose value is closely correlated to local employment.

It's obvious that you are neither a blue collar worker, 50, or with children, so try to see things from that point of view instead of simply projecting your personal political beliefs

I don't think anyone is arguing that an employer has a legal obligation to give employees a share in profits, or to continue employing them at their existing salary when times are difficult, or indeed to do anything beyond what they are contractually obliged to do.

What I'm hearing is a different argument, to which your analogies with bonds and call options and forward contracts and whatnot are (I think) completely nonresponsive.

The argument goes something like this:

1. The success of a company is due to the work of its "ordinary" employees at least as much as to the genius or hard work of its executives or the generosity of its shareholders.

2. Ordinary employees are not adequately compensated for the work they do and the risk they bear. (This is primarily a claim in the realm of ethics, not economics.)

3. In particular, they share in the downside (via the likelihood of losing their jobs or taking substantial paycuts, if times are difficult) without getting much of the upside (via any sort of profit-sharing, or substantial pay rises, if times are good).

4. Yes, in principle, any employee is free to go elsewhere in search of better compensation (or other improvements) but in practice other jobs are often in short enough supply that there is little prospect of this.

5. You might argue that this means that they can't possibly be being underpaid because they're getting what The Market gives them, and The Market is the sole arbiter of what constitutes fair compensation -- but (a) if that's meant to be some kind of moral axiom then it isn't very plausible as such, and (b) if it's meant to be some kind of consequence of market efficiency, economists' optimality theorems, etc., then there are a whole lot of missing steps that look like they make desperately overoptimistic assumptions about what markets do.

6. The fact that employees are treated in this way means that in difficult economic times they are liable to find themselves in desperate situations. This is a bad thing. If employers were more generous then their employees would be at less risk of (e.g.) losing their homes, and society as a whole would be more stable and happier. (This is one sense in which it is possible for someone to be underpaid despite getting the salary The Market gives them: it may be that a higher salary would still leave the employer with a substantial gain from employing them, while making society as a whole better off.)

Poverty and vulnerability seems to cloud the issue a bit.

If we take the example of a Hollywood movie where the actors are paid a fixed amount for their work, then I don't think many people would disagree with yummyfajitas' analysis. If the movie bombs, they still got their pay, meanwhile the producers actually lose their capital. So it's not unreasonable that if the movie turns into a smash hit, the producers capture all the upside and the actors just get their fixed pay.

When we change the scenario to workers who are not wealthy Hollywood actors, it seems no one agrees with the analysis any more. Even though it's essentially the same relationships and principles at work. Why is this? If a business employs non-wealthy people, do the owners also take on a whole package of social issues beyond the basic contract of employment? Does our judgement change due to pity?

1. It doesn't seem unreasonable for an employer's attitude to an employee's pay to depend on how desperately the employee needs that pay. This doesn't need to involve pity as such (though it might be indecent not to feel pity, in some cases). If I see you drowning in a lake, then arguably I am obliged to help you even if it takes some time and costs me money (e.g., to get my clothes cleaned afterwards) -- but if I see you in a less desperate situation I might owe you no help of any sort.

2. A movie actor is (I think) generally engaged on a limited-term contract to make a particular movie. That's quite a different situation from a (so-called) permanent employee who is (foolishly or not) hoping to go on being paid for an indefinite period.

3. The real complaint (as I understand it) is not simply "Employees should get a substantial fraction of the large upside if their company has a good year"; it's that it seems a lot of employees are getting neither that upside nor security and stability: they are in big danger in bad years but don't get the big gains in good years. Or, to put it differently, the primary complaint isn't that employees get exposed to a different pattern of risk from employers; it's simply that they are underpaid.

4. As it happens, I think there's a lot to be said for paying movie actors partly in proportion to the success of the movie. (Though I fear that in practice that would turn into a way to underpay them grotesquely, via "Hollywood accounting".) So I don't think I'm guilty of the inconsistency you allege. (Others might be; I don't know.)

I would say the diff between actor and salaryman are superficial: yes the expectations are different but their contracts have the same fundamental property (you do some work, then you get irreversibly paid for it).

However I think what's really happening in this debate is that one side is arguing about conditions for individual labourers, and the other about labor in aggregate.

The two can lead to very different conclusions. For instance high income tax is good for individuals who benefit from public spending, but it also consolidates the gap between those who already own the wealth and those whose only chance to acquire it was through higher income. So in a sense it's bad for 'the class'. Could probably think of a better example but hopefully you get what I mean.

The downside scenario you laid out also applies to executives who DO share the upside. Still confused?

This message thread calls for a graph to understand such income dynamics more carefully. :-)

When a corporation that has cut wages has recovered what benefit do employees receive in relation to the strength of recovery?

There's a graph out there, or several, showing annual real median income plotted against productivity gains. Income has lagged in the aggregate, significantly. It's also lagged when plotted against GDP. Both since the early 80s.

Volatility's a red herring. Look at the 3-decade trendline.

It's true that median income does not well correlated with mean productivity. What is the relevance to this topic?

You can slice it any way you want, the preponderance of evidence points to median and average wages both trailing productivity in the long run.

Arguments about short-run volatility that don't address this fact are hand-wavy.

Why would productivity be related to wages? To put it concretely, if I replace 4/5 workers with a small shell script, does that mean the 5'th worker deserves a pay raise?

(For the sake of argument, say his work and output has not changed at all.)

If you're working there, it would be a case of the 6th worker, you, replacing 4/5 of his peers with a shell script. Would you deserve a raise?

If you're being anecdotal, you can justify whatever you want. In the aggregate, wages have lagged productivity, corporate profits have skyrocketed while US wages have stagnated relative to inflation.

Employees routinely share in the downside risk by losing their jobs.

Those concessions represented over one third of the wages but only 2.5% of the resulting profits

This doesn't seem to make sense. It's a VERY rare industry that has labor costs as little as 7.5% of profits. Very few are even as low as 7.5% of revenues, and those are high automation businesses. (Think software, not automotives)

All that said, this article quotes "After tax" profits. Given how much tax avoidance is happening at big companies, I think it would be interesting to see pre-tax profits too. How much of this is coming from tax loopholes, in addition to squeezing workers?

I don't find this disgusting at all. Some years car companies make billions, some years they lose billions. How much money has this plant made, on average, over the last 20 years?

What is considered "sufficient" profit, anyway?

Suppose that no amount is sufficient. That means every business is a failure to fill an infinitely large stomach.

It's as good a hypothesis as any I've heard to explain the observed behavior, and better than most.

"On the gravestone of capitalism it will say: 'Too much was not enough'." – Volker Pispers, German Comedian

Should you wish to bring down capitalism, your plan should have the feature of being immensely profitable in the short term. Then the transnational investment arm of a major banking conglomerate will steal your idea and go off and do it for you and you can put your feet up.

Some say ...

By definition, the legal obligation of a business company is to maximize its profits, preferably while not getting caught breaking any laws.

That is not a hypothesis. That is the legally enforced and encoded definition of what capitalism must do.

The duty of the business is to the shareholders, yes. But the shareholders can vote on any goal they feel like (including making profit, of course).

> By definition, the legal obligation of a business company is to maximize its profits, preferably while not getting caught breaking any laws. That is the legally enforced and encoded definition of what capitalism must do. [citation needed].

There is no law that I can think of that forces me, as a business owner to maximize my profits nor does any law prescribe the golden path for achieving said maximum. Generally speaking my business can incur losses as long as I find people willing to pay the money - either through loans, donations, whatever other means. I'm free to run my company as I wish as long as I get the majority of shareholders to agree.

There is one caveats that applies: If I run out of money, my company goes bankrupt. If I willfully or negligently damage the company by e.g. performing illegal acts and thus damage the property of other shareholders I might be liable. Paying decent wages certainly does not fall into this category.

Capitalism does not require companies to become bad actors. It certainly provides a lot of incentives to do so, but it's still the actors decision. Blaming any "legally enforced and encoded definition" is blame shifting.

Generally speaking, most of the biggest and most profitable businesses don't have a single owner, but are instead traded on stock markets. People who own the shares are not people who run the company. The managers, people who run the company, have an obligation to maximize the profits (in US, and probably UK), otherwise the shareholders can sue them for loosing their money, even if they did the morally right thing. In Germany, however, profit maximization is not the only goal, but businesses can consider other stakeholders as well (employees, community, environment, ...)

> The managers, people who run the company, have an obligation to maximize the profits (in US, and probably UK), otherwise the shareholders can sue them for loosing their money, even if they did the morally right thing.

Nope. You certainly got it wrong. See the linked posts from https://news.ycombinator.com/item?id=7129788. One of the potential source for that confusion might be that directors decisions can be challenged on the presumption that they are wasteful, but you'd have to prove that paying a decent wage is wasteful which is a very hard hurdle to overcome. Bad faith may be another option - but that's a different story.

Being traded on the stock market provides a lot of incentive to maximize profits since more profitable companies trade better - but it's not a legal requirement.

Those who ignore history etc etc. go back to the 70's and 80's and you will find investor lawsuits over boards being financially negligent with investor money. That is one of the reasons we find ourselves in this mess today.

this is a total myth that is somehow oft-parroted on the internet.

directors/officers of a corporation have a fiduciary duty to its stockholders. this is three-pronged: good faith, loyalty, due care.

there is no such 'maximize profits' mandate in common law. See business judgment rule and Directors' duties.

if these don't clarify things, please ask questions.

1: http://en.wikipedia.org/wiki/Business_judgment_rule

2: http://en.wikipedia.org/wiki/Directors%27_duties

edit: another poster (netcan) gave a great explanation in a sibling thread- https://news.ycombinator.com/item?id=7129582

>>legally enforced and encoded definition of what capitalism must do.

Well then certainly you can point us to the law that legally encodes a definition of capitalism and provides a regulatory regime that provides relief when someone practices "unorthodox capitalism."

Please, please, please: can we retire this meme already?

There are two standards for a corporate executive to consider: 1) What the majority of the shareholders say 2) What a court would rule if a minority of the shareholders decided to sue the executive on the grounds that they (and presumably the majority stake) are depriving the minority shareholder of profits they have a legal fiduciary responsibility to provide.

What you are speaking about is #2. There is a high bar for such lawsuits, but there is a legal standard.

http://www.professorbainbridge.com/professorbainbridgecom/20...

The people in control of the company have a legal duty not to waste shareholder money. Giving everyone a raise without a good reason would get them in hot water.

There would need to be a fact-based reason to give that raise out to the entire workforce. For example, workers would need to be leaving for better jobs, or the workers would have to go on strike.

I hope this doesn't sound too harsh, but I think this comment is a case of "enough knowledge to be dangerous."

Companies certainly do have a duty to shareholders. That's absolutely true and breaches in duty should be taken seriously. A common issue where this responsibility needs to be better policed is lopsided risk decisions where in many cases executives can make large bonuses and on rare occasions they don't make a bonus while shareholders lose big - a complicated mess of scheming and tricky incentives that can in extreme cases amount to theft. This is the main type of abuse that these legal duties are meant to prevent. They do so imperfectly, but that's a different discussion.

"This company pays a fair wage and maintains a high standard of labour conditions. These are core values of this company and an important part of how we do business."

The above statement is completely legitimate position for a company to take and absolutely does not count as wasting shareholder money.* These are not new legal concepts. They have many years of legislation and litigation behind them.

I have frequently heard this statement, but just as frequently heard people say its a myth. Do you have any citations for it, such as a case where a board was sued for paying wages too high?

A union sued Goldman Sachs, "alleging the firm's notorious pay structure is grossly unfair to its shareholders".

http://www.law360.com/articles/154407/ibew-fund-sues-goldman...

They didn't win.

http://courts.delaware.gov/opinions/download.aspx?ID=161650

Thanks for that. Great example.

Delaware Chancery Court on Monday, alleging the firm's practice of allocating nearly 50 percent of revenue to management's compensation constitutes corporate waste.

Note first that this complaint/case is about financial asset managers, who have more specific duties to deal with specific conflicts of interest. IE, the managers can manipulate the risk the company is taking in a way that benefits them personally. In very simple terms, the boss giving himself a very fat bonus. This isn't even close to the boss paying ground floor employees a better wage.

The Plaintiffs’ problems with the compensation plan structure can be summarized as follows: Goldman’s compensation plan is a positive feedback loop where employees reap the benefits but the stockholders bear the losses. Goldman’s plan incentivizes employees to leverage Goldman’s assets and engage in risky behavior in order to maximize yearly net revenue and their yearly bonuses. At the end of the year, the remaining revenue that is not paid as compensation, with the exception of small dividend payments to stockholders, is funneled back into the company.

This increases the quantity of assets Goldman employees have available to leverage and invest. Goldman employees then start the process over with a greater asset base, increase net revenue again, receive even larger paychecks the next year, and the cycle continues. At the same time, stockholders are only receiving a small percentage of net revenue as dividends; therefore, the majority of the stockholders’ assets are simply being cycled back into Goldman for the Goldman employees to use*

Even in this case, the shareholders were not able to prove that this was anything other than poor business decisions which are not something the court can make decisions about.

The facts pled in support of these allegations, however, if true, support only a conclusion that the directors made poor business decisions. Through the business judgment rule, Delaware law encourages corporate fiduciaries to attempt to increase stockholder wealth by engaging in those risks that, in their business judgment, are in the best interest of the corporation “without the debilitating fear that they will be held personally liable if the company experiences losses.”

Saying that companies can't raise wages because of fiduciary duty is bollocks. It's just an untruth, from a practical perspective.

Companies have a legal obligation to maximize shareholder profits, but that doesn't directly translate into how they treat their employees. If company directors felt that hiring the 'best' employees at a premium was actually making them more efficient and thus in the best interests of shareholders, they could do exactly that.

You are speaking about company directors deliberately devaluing their company on purpose to serve some other end. Often this would be connected to fraud, or semi-fraudulent, hence the the case law behind your idea.

The goal of the business is to "grow," make more money than you did last year. That's a measure of "success."

Devil's advocate here... the higher than average profit margins have resulted at a time when the cost of capital is much higher. The market has seen a huge move away from risky assets, into dull stuff like bonds and non-productive assets like gold (and, go on, bitcoin).

Hence, the required return in order for companies to access funding has been much, much higher, forcing them to aim for higher than normal profit margins. So, really, they are justing paying back their higher costs of borrowing. (equity is a form of borrowing, in a sense)

Now, why is the cost of capital so bloody high with TARP and QE and all that quatsch? Answer: Because banks are cs and investors are short-termist r*ards.

Are private equity companies making a killing, then?

Isn't this case the exact opposite of what's being claimed in the article? I.e. you're saying wages don't really affect total profits one way or another.

That sounds like an abject failure of union leadership.

link?

I second this.

http://www.nytimes.com/2013/07/16/business/last-car-plant-br...

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