Thoughts for Thursday

Here are a few random thoughts on a rainy Thursday, with more rain to come in the days ahead.

A retired ambassador said recently, the US strength is more than its military, it is its relationships with allies. What concerns me is we are devaluing our allied relationships. This is echoed by the European Union Chairman Dean Tusk. Tusk said the EU must be more united than ever before to deal with what he called Trump’s “capricious assertiveness”. My question is this how we want to be viewed by our friends?

Another retired ambassador to Israel said while he agreed with the move of the US embassy to Jerusalem, the US administration made two mistakes. It should have been announced in the context of moving toward a two state solution. In essence, the US placed little obligation on Israel for this move. Also, celebrating the opening on the anniversary of Israel is an insult to Palestinians. This date is not viewed favorably, so the celebration rubbed salt in a wound.

Assuming the role of ambassador for the disenfranchised in the US, a huge opportunity missed occurred during the rushed tax bill which hugely favored companies and the wealthy. I favored some relief on the corporate tax rate, but we went way too far and are negatively impacting our huge and growing debt. The additional opportunity missed I am referencing is not imposing a requirement on companies to provide raises. One way of doing this would have been a concurrent increase in the US minimum wage moving it from $7.25 to a living wage of above $10 per hour. Token one-time bonuses are actually the barest minimum of what could be done with an annual tax break – how about a raise instead? More income to people in need is accretive to the economy.

Finally, I have seen footage of conservative news sources highlighting Venezuela’s problems as an indictment of socialism. While I am a capitalist, I also recognize our country is a mixture of both. Social Security, Medicare, Medicaid, unemployment benefits, and bankruptcy laws are all forms of socialism. We also have other restrictions to prevent unfettered capitalism. Venezuela’s problems are due to corruption and mismanagement that can be traced even back to the popular Chavez. His successor, Maduro, has shown a level of incompetence that is quite visible to all.

That is all for this Thursday. Please share your thoughts.

US CEO Pay has reached epic differential

As reported in The Guardian today, US CEOs now make in pay 339 times the pay of the average worker according to a Bloomberg study of 225 companies. In retail companies, the ratio is 977 to 1 on average. Let that sink in a little.

A quote from the article entitled “‘CEOs don’t want this released’: US study lays bare extreme pay-ratio problem” by Edward Helmore is very revealing:

“According to a recent Bloomberg analysis of 22 major world economies, the average CEO-worker pay gap in the US far outpaces that of other industrialized nations. The average US CEO makes more than four times his or her counterpart in the other countries analyzed.”

Some people may push back and opine that US CEOs may be worth 4X that of their non-US industrialized nation counterparts. If that were true, it would mean US company performance is 4X that of non-US companies and there would be a huge flight of capital to the US.

In my years as a consultant, I have seen CEO pay ratchet up over time, rewarding CEOs with stock grants and options. What happens is a competitive totem pole exercise, where the competitive pay analyses are upward elastic and downward inelastic (they go up more easily than they go down) over time.

I have also observed the 80/20 rule applies to CEOs as well, with 20% of the CEOs earning their keep. I have worked with egalitarian CEOs, benevolent dictator CEOs and some of the greediest SOBs you will ever meet. Seeing CEOs who realize the teamwork involved in the company making money is admirable. On the converse, seeing CEOs who are imperialistic is off putting. As I write this, I am thinking of the handfuls I worked with and some who were notorious over the years for their greed.

On the bottom end of this exercise are efforts to flatten pay for the average worker. Over time companies will use a variety of rationales and tactics to put lids on pay increases. The salary increase budget may be limited because of the uncertainty in the economy, the company is having some hardship or the company expects to have hardship. Sometimes concurrent with the salary budget, groups of people are laid off. Why is the timing an issue? By moving on lower performers, people whose salary increases would have kept the average percentage increase down are removed from the equation meaning better performers will now get lesser increases.

Coupling this with pressure on not increasing the minimum wage and to diminish the power of labor unions (that is another story), these ratios result. I respect greatly the need for incentives to help reward successful CEOs, but we must not forget who helped them earn those numbers.

We have a poverty problem in this country. We have a middle class where too many are living paycheck to paycheck. Yet, our leaders passed a tax law that benefits CEOs, their companies and the wealthy by a large margin. It would have been nice to have at least obligated the pass through of salary increases or an increase in the minimum wage to a living wage. So, do not expect this ratio to measurably decrease any time soon.

It is time to raise the minimum wage

The walkout this week by restaurant workers to protest poor wages is indicative of a major problem we have in this country. We have a poverty problem in this country with far too many people living in poverty or paycheck to paycheck. As I have noted in earlier posts, the disparity between the “haves” and “have-nots” has grown wider at the same time our socio-economic class mobility has greatly diminished. Where we are born and to whom we are born are now greater indicators of success than they used to be. To compound the problem, those who are in the upper income echelons are having a more difficult time appreciating the challenges faced by those who are not. More on this later.

In Barbara Ehrenreich’s book “Nickeled and Dimed in America,” she chronicled her efforts and those of her co-workers, in trying to live on minimum or near-minimum wage jobs. Her conclusion is these jobs perpetuate poverty. She notes a variety of factors which include not being able to afford healthcare, not being able to save, poor food habits as fast food was the cheapest and most convenient food, being a slave to the work schedulers, being tied to mass transportation schedules due to gas prices, and having to work more than one job. She also noted in the restaurant jobs, people having to work when they are sick, because they needed the pay. Getting by was the best you could hope for. Getting ahead was quite difficult as you were treated like a commodity. I would add this contention is supported by Dr. Cornel West and Tavis Smiley’s book “The Rich and the Rest of Us.” A summary of the key findings in the book can be gleaned from the attached post.  https://musingsofanoldfart.wordpress.com/2012/10/20/the-rich-and-the-rest-of-us-a-must-read/

Currently, the federal minimum wage is $7.25 per hour. In some places, the state or local minimum wage is higher (Illinois, California have $8.00; Arizona is $7.47 and the city of San Francisco is $9.79, e.g.). Yet, a living wage is higher in these locations. A living wage varies by geography and is based on the cost of living to provide shelter, food, healthcare and basic necessities. Attached is a link to a MIT website that will allow you to see the calculation of living wage by area. http://livingwage.mit.edu/.

Per this MIT website, in my home county in North Carolina, a living wage is now $10.02 for a single adult and $19.68 for a one parent, one child family. In other higher cost of living areas, the living wage can be a few dollars more. As of this writing, President Obama has proposed an increase in the federal minimum wage from $7.25 to $9.00. While not enough, the increase is a tangible step forward. Per a Gallup Poll in March 2013, this proposal is supported by 70% of Americans. The result is even higher for women, Democrats, moderates, non-whites, adults who earn less than $24,000 per annum, and young adults. 2/3 of Americans who are seniors, Independents, and earners between $24,000 and $60,000 support the change. It is only beneath 67% for men, Republicans conservatives,and upper middle class earners and above.

Those who decry this change cite that we will end up with fewer jobs as a result. I have seen data on both sides of this argument. To me, there is a huge cost of turnover in retail and restaurant jobs due to lost productivity of the staff, but also of the department and store manager. The manager has to spend more time back-filling a job or making sure people are on the floor, than focusing on customer service and selling merchandise. Any measure a retail company can do to reduce this churn shows up in better productivity. Per the attached link, Costco seems to believe this, as they pay their people far more than the minimum and are doing quite well. http://money.cnn.com/2013/08/06/news/economy/costco-fast-food-strikes/index.html.

We have a problem in this country, which will only get worse, if we do not remedy it. This is a key reason I have been a staunch supporter of Obamacare. While imperfect, it does speak to the healthcare insurance needs of those who are now uninsured. And, many of those who cannot afford insurance are working in retail and restaurants. Yet, we must pay people better. Will it cause the number of jobs to go down? My guess is for some employers it might, but for many it won’t. In my consulting work with retail and restaurant employers, I have observed the employers who treat their employees as commodities will never have the productivity and customer service of those who treat their employees as key in their ability to sell products and serve customers. These latter companies work back from how can we serve the customer better.

And, when you hear someone who is doing more than fine financially state that increasing the minimum wage is a poor investment of money, please respond the better off people are, the less they will depend on those so-called hand-outs the well off seem to hate. I do not like to use the term hand-outs, as helping people survive in tough times is an appropriate investment of resources, yet for an audience that tends to use this term freely, it is an argument that might resonate. Plus, the more we all have to spend, the better off the economy will be. Let’s increase the minimum wage. It is time.