Wednesday, July 23, 2014

You wonder where the money went ...

Henry Ford possessed the clarity that is perhaps lacking in today's corporate leadership. Ford gave his workers substantial salary increases so that they could afford the products of their labor. It worked. Soon, his employees were filling the factory parking lots with the "tin Lizzies" they were making on his innovative and successful production lines.

Our current crop of corporate leaders are products of the bottom-line thinking taught in business curricula. It began in the 70's.  Did you notice?

In 1970, economist Milton Friedman wrote in The New York Times that the sole “social responsibility of business is to increase its profits.”  This doctrine is now at work so that labor is paid, for the most part, no more than is required to keep them from quitting all at once and mucking up the enterprise.
U.S. companies are reporting record profits and fantastic margins while creating few jobs and paying workers so little that they punch in poor and punch out poor.

In the employment and wages discussion, corporate profits and margins rightly get the majority of attention. The underlying presumption is that if American companies are raking it in, their workers should benefit for having contributed to that success.   Where workers are struggling, we wonder whether or not those profit margins are coming at the expense of labor.

America’s record high corporate margins come from higher labor output (more work) for less money (lowest possible wages paid to the fewest possible employees). We know this because, every quarter, America’s management teams gather investors and analysts on the phone to discuss earnings and operations. In 2013, Goldman Sachs released its “Beige Book,” a compendium of those discussions.
Goldman reports that firms are “pulling all available levers to support margins.” This means, in practice, that companies have, “continued to focus on pricing, cost controls and efficiency gains, with varying degrees of success.”
'Cost controls and efficiency gains'.  Those are the polite terms on Wall Street which mean employees work harder for the lowest possible wages.  Margins are high today because companies shed so many employees during the Great Recession and were able to mobilize much smaller cost centers (oops, I mean labor forces) into the recovery. If you lost colleagues during the crisis, took on their work and never got a raise, you understand. But let’s look beyond margins.

Where is all of this money going? The S&P 500 companies, excluding financial companies, had $1.3 trillion in ready cash. Meanwhile, capital expenditures (building new plants, starting projects, hiring people, leasing equipment) grew at its slowest rate in 3 years. No doubt, cash is nice to have in a storm, but all of this cash will not sit idle forever.

One little-noticed item in the most recent jobs report is that the biggest jobs-gaining sector was 'Financial Activities' - banks, insurance companies, real estate companies and related financial services firms. These are the folks who will be making the big play for this money. Some spending will go to productive use, much of it will go to the financial middlemen being hired right now. Bank stocks have been on a run and are poised to overtake technology as the S&P’s largest sector.

In other words: Here we go again.

The other constituency after that cash are the shareholders who want dividends or for the company to buy their stock. Judging from the Goldman report, most big companies are already doing a bit of both. McDonald’s, in the news because some of its low wage employees have walked out, says that, “after investing in our business we are committing to returning all free cash flow to shareholders over the long term.” Then, they announce they are cutting expansion funds.  No mention of better wages, of course.

Not every corporation is abusing their workers; a precious few treat
their personnel with reasonable recognition, opportunity, and pay.
These three represent similar positions, responsibilities and the 
average wage for similarly tasked employees.  Can you name one
other such company?
What you don't see in page after page of the report is anyone talking about paying workers more. The word “salary” is referred to once by American Express executives saying that salary costs were flat year over year. The word “wage” shows up only in the McDonald’s narrative, as a complaint about costs.

Keep an eye on all that cash. That’s the corporate goal.  Where is Henry Ford when you need him?