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January 11, 2005

Comments

Hubris

Very interesting.

I don't think the problem is a conscious bad "value system" call, I think it's more a problem of shortsightedness and dogmatic thinking (yes, I know, color me naive).

Stock price maximization encourages short-term thinking. It's a lot easier to quickly increase your profits by restricting/decreasing money paid for your employees or maximizing your product profit margins, rather than enouraging the attraction, development, and retention of a superior and happy work force. A lot of people simply don't understand the long-term positive business impact the latter can have (didn't they watch 9 to 5?). Failing to spread your legs for the shareholders for a few quarters could actually yield greater benefits for the shareholders in the long run.

The CEO issue could be improved greatly by breaking down the incestuous relationship between CEOs and corporate boards, which might actually result in pay commensurate with the CEO's ability to bring a competitive edge to the company in question. That could still be a lot of money, but based in reality.

Wegman's effectively uses it's "employees first, customers second" philosophy to actually make employees and customers happy, and to make a lot of money. Of course, they have no publicly traded stock. ;)

Hubris

One more thing: I would posit that high CEO pay and the failure to invest in a superior group of employees are actually not signs of the evils/failures of competition, but rather a failure to properly implement competition. The relationship between CEOs and boards prevents downward job market pressure on bloated CEO salaries, and shortsightedness/lack of understanding leads to failing to strive to win the competition of securing the best regular employees in the job market.

Weren't those hackneyed '90s phrases good for anything? Who's going to think outside of the box? Where's my paradigm shift?

P.S. Who moved my cheese?

Shinobi

Sorry Hubris, I thought it was my Cheese, I ate it.

But I totally agree with you. As much as I want to say that Wall Street represents this horrible value system consistent with slavery (ouch) I can't. Wall Street is about making money, and the easiest way to prove that your are making money is to show it in the short term.

When I studied Decision Science in school we talked about the phenomenon of people forgoing bigger rewards in favor of immediacy. There is a part of the brain that craves immediate gratification, through food or money or whatever (then it has a dopamine reaction), and the long term part of the brain has trouble competeing with it. It is part of the human condition(Give me 50 dollars now and get 200 in a month, or get 50 dollars now, you'd be surprised how many people would go for the 50 immediately.)


Here's a study on this, I played guinea pig for a similar one that I think is by one of the guys on this study, it was a crazy computer simulation.

http://www.eurekalert.org/pub_releases/2004-10/pu-sbb101204.php

So anyway this is my attempt to say that it is natural for companies and wall street gurus and everyone to want to see short term increases at the cost of long term stability. I think it is their desire to see CostCo making more money faster that causes them to decry their good treatment of their employees, and not necessarily their need to maintain control of the hierarchy.

I doubt that when they talk about this they think about a single mother with kids who's trying to raise a family on her costco earnings, I think they are just seeing dollars being poured into the abyss of salary and healthcare never to return again. They fail to realize that Costco will see a long term return on their salary and healthcare expenditures through employee loyalty and productivity.

Hubris

the phenomenon of people forgoing bigger rewards in favor of immediacy

Shinobi, you've identified the reason for all of my bad decisions.

Shinobi

Well then 4 years and $120,000 was worth it.

hrun

Sometimes it's the smart move to take the $50 now and not the $200 in a few months. Who knows if you are really going to get your $200. I remember giving Argentina $50 of my money and they promised me they would give me $200 in a few years. Well, as you might have guessed, I'm still waiting for my money. So, the immediate payout has it's advantages.

Now, as for as stock trading is concerned, there the immediate profit has an even bigger appeal. Stock trades are still mainly driven by professional traders whose salary is either based on the profit they make or on the number of trades they make. Either scenario selects for rapid maximizing of profit with one stock and then moving on. Long-term profits are not all that interesting in that scenario.

Shinobi

So lets assume that you can give me $50 today and you will have a 75% chance of a $200 dollar pay out (immediately). Or you can give me no money today and get $50 dollars(immediately).

The issue here is not necesarily When you get the payoff, its weather or not you get it. The expected value of scenario A is $112.50 and the expected payoff from scenario B is $50 dollars. So if you are really in it for "profit" you should go with option A. But if you are "risk averse" that is afraid of losing money you would choose B. The time has nothing to do with whether or not you will get your money in this scenario.

If the probability of getting your money back decreased with time then there would be an entirely different model altogether that I'm not going to go into right now because I'm tired of playing with numbers.

Lets say the garauntee of $200 in a year was absolute from some group that was going to last forever, would you still doubt it and take the immediate 50? I think that that is the dopamine center of your brain trying to trick you, because it wants the money NOW and by doubting the source you can justify taking less money and enjoying the immediate pleasure of an immediate payoff. (Just like my brain does when I say, no dougnuts now, we'll have ice cream later, my brain says "what if there wont be ice cream?" even though it knows full well there is ice cream in the freezer at home.)That's just a theory though. But your problem would be risk aversion, not issues with the timing.


Anyway, you're right a good portion of the stock market is based ENTIRELY on the idea of immediate payoff. But long term investments are important too, and if you think ahead to the next steps for the economy etc they could probably be equally if not much more profitable. (Imagine beign an original shareholder in microsoft mmmmmmmmoney)

So what it all amounts too is that Costco while not good for daytraders is great for people like me who probably wouldn't sell their stock for 5 years, that is after Wal-mart and Sams go out of business because their employees burned it to the ground.

pyrrho

I feel I should admit that I put a couple things in there that could be considered spin, not to fool anyone or bend minds, but to bring out what I think are the underlying fundamentals of this discussion instead of just coyly let these implications lie there.

so to balance a that a little:

1) CW says that Wall Street punished Costco... it's obvious that one can say that Wall Street doesn't work that way... the buyers just didn't like the stock as much now that it stops growing... of course some people can be quoted advocating some standard quick growth techniques. However, one can also see that when the CEO says "I don't care" that Wall Street is also "saying" and neither do we... we just don't think we'll make money trading a stock that is static... that the company still has value makes it a place to park capital, makes it a place to work, makes it good for the American economy... but it's just not an attractive stock to buy because why would it's value go up?

2) Slavery... here I even admit to being provocative and I'm willing to defend why I think slave ethics relate to this, even though I don't want to claim we really have must of a slave-owner ethic in Wall Street. I think some of the fundamental overlapp, but of course... it's a fine line... I don't think CEOs think like slave owners, for one, they don't have responsibility for their slaves when they are off work. uh. I know it's some evocative language... where's Averroes to call me on it?

3) I don't think people are trying to be bad in this, but it does show how the system conspires to push labor down. In the end, without blaming anyone... all I really really take away from this in a concrete sense is that Costco and espc. founder CEO Kevin Casey deserve all our kudos, left, right and center. From the left, he's showing that treating employees good is worth fighting for, and doesn't drive you out of business. From the right, he's showing the market works, he's succeeding doing this and raising his wages without government making him via minimum wage or other regulation... he's showing that taking care of your employees is good business sense... that is, the market works, heeraaaah! And from the center... well come on, cheap goods, fun place to shop, good place to work, good place to shop... it just adds up to a lot of good.

pyrrho

bottom line: isn't it dangerous to have an economic system which gives Costco trouble over it's clearly very good policy towards it's workers? Costco, as far as I see, could easily go the route of the minimum wage staff working part time with no benefits, just like Walmart... and yet there are disincentives for them to be doing a better thing than that.

If that's intentional or an accident of how the stock market works or just the biases of MBAs... that's a bad thing... we want companies like Costco to succeed with treating their employees right? What can possibly counter that but greed?

Often it seems to me the problem is that we have an economy at the capitalist level which survives not by success (i.e. being the sixth biggest retailer) but by growth. When I want 80 rolls of toilet paper at a discount, I want Costco with buildings, moving goods, it doesn't have to be bigger than last year to serve me... at that point, who cares about "growth"... I just want my toilet paper. Just an example, I'm not posting from my laptop or anything... :)

hrun

Hmmm, I'm not sure if "we" want companies like Costco to succeed. That all depends on who the "we" are you are talking about. From my discussions with Batman, I gleaned that he did not have any inherent bias towards either the Costco or the Wal-Mart approach. The bottom line was, if people are willing to work under the conditions that Wal-Mart proposes, then that is what their work is worth. The benefits of this cheap labor can then be passed on to either the customer or the share holders. As far as I understood, that was exactly how the system was supposed to work.

So, while you and I might want Costco to succeed, I'm not sure that your premise is correct. In fact, I think that some people want Costco to fail, thinking that if you have the same kind of store, selling the same kind of products, but pay your employees less, then that would be good for the consumer or the stock holder.

But hey, I do not presume to speak for Batman or anybody else. I DO want a model like Costco to succeed and Wal-Mart to fail. There, I showed my inherent bias again. ;)

sweetchuck

Great story Pyrrho. I have often thought about these kinds of issues. I think part of the problem with the system is that the stock market disjoins the owners of a company with the employees and practices. If I own the corner store and see that my check out clerk is on food stamps, and can’t afford to take her children to the doctor, being the compassionate person I am, I might just take a hit on profits and allow her a better wage. There are a lot of good people out there, and I think many of them would not feel good about raking in profits while their workers are living in poverty. The stock market disconnects the owner with the reality of the workplace. Good people own these companies and all they want to know is the stock price. They don’t know or care that their companies employ children in third world countries and have them work in unsafe workplaces often with no protection from hazardous materials. Individually we would never rant about profits while our workers at the corner store live and work in these conditions, collectively we don’t even see it and only care about the stock price. Ah, Capitalism!

sweetchuck

Another thing that I think this article brings into focus is the simple notion of three competing but codependent things: Employees, Customers, and Owners. Employees pay, the cost to give customers a quality product, and the profit to owners. Every dollar an employee gets is a dollar that the owner could have gotten. Every dollar spent to increase quality is a dollar that the employee or owner could get. There has to be a balance, and in business, it has to be a balance that, above all, puts some money in the owner’s pocket. With this in mind, all this push toward privatization is puzzling to me. If the problem is that a government program is too expensive, or too low quality, is adding another mouth to feed (the owner) a solution? When we push to privatize, it is necessary for the private entity to do the job so much better that the new owner gets a profit, and the quality is at least improved somewhat. That is the minimum for improvement. I think often the profit comes out of employee pay and benefits and there is no quality improvement. I guess the logic behind privatization is that the government is so awful at getting things done, and the beurocracy is so inefficient that a private company can get the job done cheaper and quicker and make a profit on top of that. I wonder if that is often the case. Corporations have a beurocracy problem too (and they have to pay a lot more to the folks on the top). Of course privatization can be a good thing and should be taken on a case by case basis, but I think it is important to consider that the act of privatization means that a cut of the resources available to do the job at hand will now have to be diverted into profit. And also, those who are in charge of the private company will answer to the shareholders and be primarily interested in profit, not the quality of services or the treatment of employees. That’s something to keep in mind when considering turning control of your water source over to a private company.

sweetchuck

Another thing that I think this article brings into focus is the simple notion of three competing but codependent things: Employees, Customers, and Owners. Employees pay, the cost to give customers a quality product, and the profit to owners. Every dollar an employee gets is a dollar that the owner could have gotten. Every dollar spent to increase quality is a dollar that the employee or owner could get. There has to be a balance, and in business, it has to be a balance that, above all, puts some money in the owner’s pocket. With this in mind, all this push toward privatization is puzzling to me. If the problem is that a government program is too expensive, or too low quality, is adding another mouth to feed (the owner) a solution? When we push to privatize, it is necessary for the private entity to do the job so much better that the new owner gets a profit, and the quality is at least improved somewhat. That is the minimum for improvement. I think often the profit comes out of employee pay and benefits and there is no quality improvement. I guess the logic behind privatization is that the government is so awful at getting things done, and the beurocracy is so inefficient that a private company can get the job done cheaper and quicker and make a profit on top of that. I wonder if that is often the case. Corporations have a beurocracy problem too (and they have to pay a lot more to the folks on the top). Of course privatization can be a good thing and should be taken on a case by case basis, but I think it is important to consider that the act of privatization means that a cut of the resources available to do the job at hand will now have to be diverted into profit. And also, those who are in charge of the private company will answer to the shareholders and be primarily interested in profit, not the quality of services or the treatment of employees. That’s something to keep in mind when considering turning control of your water source over to a private company.

kjb

I never truly understood how what the Street thinks of company and what their stock price is reflects any part of the real world. The company I work for start to trade about 10 years ago. The stock was doing very well, a few years later the worst merger deal ever thought of was announced. The stock of both companies took a tremendous hit, the merger was cancelled (funny enough the higher ups were not canned right away and when they left they left with lots of money.)Our stock as never recovered from that deal. Yet my company is still doing well, has nice growth rate and everything else you might want if you were a broker. So where is the relationship between how well we do and what the stock is worth? The Street as too much power and this greed will ruin this country soon.

I also think that CEOs of today are part of the problem too. Years ago they were the guys that started the company, came up through the company, etc. Now they are brought in, their only interest is to make money for the stockholders (and themselves), they have no interest in the company itself. The employees are just another asset now. A few years ago we did not quite make our numbers (although we still very well, certainly no where near being in the red) and how bonus suffered for it. Yet CEO and his crew received their full bonus. Somehow did not seem fair.

shinobi

My company is a private company and they are having issues, basically its the same problem except none of this is driven by stock holder pressure.

As far as I can tell (having worked here for 6 months or so.... the worst six months of my life except for 6th grade) their main interest is keeping the company in the black. I know they went through some rough times because a lot of their clients were in industries that have had it pretty bad lately. Apparently a couple years ago a bunch of people just dissapeared and stopped working here, but rather than saying "weve had some layoffs but we're optimistic and here's how we're going to improve" they were saying "Everythings great look how much money we made." Workers are miserable, and apparently there haven't been any raises for anyone in years. (Which they lied to me about during my interview.) The upper management is COMPLETELY out of touch with the employees. Funny story though the owner is actually the same guy who started the company.

I guess I'm confused because I don't see what the problem is with acknowleging that there is a problem. I know they need to keep making money, but why not acknowledge they've had a few bad years and make a push in a new direction. Its not like the stock will suddenly plummet.

Hubris

Apparently a couple years ago a bunch of people just dissapeared

Check for lumps in the ground in the rear courtyard.

Shinobi

Yeah, like they'd let me go outside for that long.

pyrrho

hrun,

the thing about this example is that Costco IS cheap. That's their claim to fame day one... warehouse seller... cheap cheap cheap.

So in this case we can call this an even tradeoff... we are comparing a cheap seller to a cheap seller... but one is not a cheap employer.

pyrrho

shinobi,

the perception game in business is currently hyper-sensitive.

from a system analysis perspective (with a bias toward software that does what you tell it (though often it's anyone's guess what you've actually told the machine to do)) it worries me.

Business should rightly be very practical reality oriented... perceptions are important in marketing... but in real business... real ability, true resources, should define actual value.

The culture running companies does not seem healthy to me. And it's not because of a Greed Issue, that issue has been around and the top has always been accussed of it... forget that for a moment. The scary problem is practically no one thinks long term and few feel being reality-based is better than saying nice things.

Chum

Here is a writer that things bigger things may be afoot when it comes to Walmart, etc. and market dominance:

http://www.zmag.org/content/showarticle.cfm?SectionID=13&ItemID=7034

The 500 pound gorilla's not only have sway over market conditions, employees, infrastructure, etc. let's not forget the political clout that they wield. Who do you thimk has a louder voice in some of the tsunami ravaged countries, Bush or the Waltons?

Employee friendly companies like Wegmans, who happens to be big up here in my area, can only go so far with such policies before the margins catch up with them. A local grocer in this area just went under because they had long time employees that eventaully ate too deep into profits. Attrition set in and eventually they couldn't provide the service needed to keep the customers from defecting.

I too work for a private company that has no immedite need to go public. Employess are treated fairly for the most part as evidenced by a failed bid to unionize a few years ago. However, like all companies with benies and as they get pared down to run with the pack this could change rather quickly.

Too bad the golden rule on Wall Street means something completely different than it does on Main Street.

RyanM

pyrrho, not a totally off-base comparison between employees of modern corporations and slaves. It's dangerous, because it sort of degrades us all to discuss it like that (I have no idea what it's like to truly be a slave in terms of personal liberty).

But your observation about desire to control "human assets" is right on. In fact, there is very non-economical proof of it, that many companies will choose to invest in capital/technology rather than people even when that capital is more expensive/less productive because they do achieve a greater level of control over it.

The crap they teach you in Econ 101 simply is rarely followed, it seems.

You would also think that the recent insights into the powers of distributed computing systems would inspire higher managers to spread/enable decision making rather than agglomerate it. Oh well. No one said managers were smart, just good at keeping their jobs, having been promoted to their own level of incompetence (I'm not that cynical, I swear).

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