Pay vs. Profits

EKIMIKE

Interesting article on the BBC today. 'Why has pay not risen at the same rate as company profits?'

http://www.bbc.co.uk/news/business-17033039

I think it's one of the main issues that's really missing in all the economy/recession/employment blah blah we hear currently... incessantly (i'm not helping).

Anyway, while the title asks a question, the article doesn't really answer it IMO. The give plenty of reasons why more people are unemployed or in less skilled employment but that doesn't explain why even in highly profitable companies, pay hasn't kept pace with the profit growth. My own observation is that the top bods seem to be creaming the growth off into their personal bank accounts be it in the form of salaries of bonuses. Slightly bemused as to why this doesn't seem to get any attention in the article.

verylonglegs

I've always felt the Chief Execs salary, whilst sometimes undoubtedly grotestque, is not actually the real issue. The bulk of the profits goes to the shareholders. Very broad example, a big corporation with 25,000 employees and a top man on £5million a year..taking £4million off him and distributing it amongst everyone else still isn't alot. The £billions paid out as dividends is where the real wealth goes to.

TheStone

I've seen it argued that labour is one of the most advanced and free markets in the world, therefore the correct price is usually established.

I've also seen an argument that overall businesses lose money. More people who invest money they earn through labour end up losing it through business investment .... which points to wages being too high.

Not convinced I agree with either of those, but I would say that the return on investment for shareholders seems low, and the wages for high paid executives seems high.

I'm more worried about the bigger system. Too much government intervention and too little market forces.

At the lower level, big business can pay staff a wage that can't be lived on. The government then have to subsidise that wage. Either the wages are too low and the company should pay more, or the cost of living (mostly housing) is too high).

At the higher level, the wages paid to execs seems decoupled from the value they add. In some cases they destroy production, but are still highly paid.

On another note, which is part of a bigger problem. The price of debt and the various taxation is all wrong. Debt should be expensive, otherwise you just end up with speculation, not productivity. Taxation should be high on speculation and low on real investment, production, employment and wages.

Including national insurance (which is just hidden income tax), our highest rate on labour is now 67%.
Taxation on speculation is mostly 0%

Frank the tank

Company profits up 21% to £1.2Billion

Union ask for 5% pay rise, company offer 3.5%.

Come September due our third wage cut of 4%.

Happy days. :roll:

redjeepǃ

verylonglegs wrote:

I've always felt the Chief Execs salary, whilst sometimes undoubtedly grotestque, is not actually the real issue. The bulk of the profits goes to the shareholders. Very broad example, a big corporation with 25,000 employees and a top man on £5million a year..taking £4million off him and distributing it amongst everyone else still isn't alot. The £billions paid out as dividends is where the real wealth goes to.

I'm not sure I understand your point. The shareholders, as the owners of the company, are surely entitled to dividends otherwise they'd just put their money in the banks (and we all know how much they can be trusted to do a good job, don't we)....?

I would however agree that it tends to lead to short termism, with too much focus on short term profits at the expense of long term growth, investment etc.

Jez mon

Isn't a pure analysis of pay v. profits over-simplistic anyway?

I know this is simplistic but anyway...

The company whom I worked for on placement had an order book so large that they will roughly have to double in size in the next 10 years. They are also posting record profits, and are obviously on sound financial footings. Aside from the occasional high profile product failure, they are as sound an investment as any.

But all this doesn't necessarily translate into a proportional wage rise. The task of doubling your company in size is just massive, high HR costs (and especially in the case of this company) high infrastructure costs, with new factories needed.

Basically, you can double your profits, but if the company has had to double in size to do that, you probably aren't getting a pay rise.

Maybe should point out that I think it's the same company which Frank works for .

alihisgreat

that article is complete crap.


the reason wages haven't risen in line with profits is because the objective of a firm is to increase the SHAREHOLDERS wealth... not the employees... if you want the opposite then go and work for a cooperative where the employees are the shareholders (or the public sector where they hand out free money)


Its the shareholders who own the firm, take the risk and inject the capital... employees are simply being paid an inflation adjusted wage for performing a task.

If you pay a builder to build you a house, you don't expect him to come knocking in 5 years time when you sell the house, asking where his share of the profit is.

What right do employees have to share in the profits? none.


Above inflation pay-rises are just a motivational tool in order to stimulate better performance to further increase shareholder value.



(also Jez Mon makes a good point)

verylonglegs

Redjeep! wrote:

verylonglegs wrote:

I've always felt the Chief Execs salary, whilst sometimes undoubtedly grotestque, is not actually the real issue. The bulk of the profits goes to the shareholders. Very broad example, a big corporation with 25,000 employees and a top man on £5million a year..taking £4million off him and distributing it amongst everyone else still isn't alot. The £billions paid out as dividends is where the real wealth goes to.

I'm not sure I understand your point. The shareholders, as the owners of the company, are surely entitled to dividends otherwise they'd just put their money in the banks (and we all know how much they can be trusted to do a good job, don't we)....?

I would however agree that it tends to lead to short termism, with too much focus on short term profits at the expense of long term growth, investment etc.

I was just pointing out where the bulk of the wealth goes, not to the top bods as the OP suggested, and a reduction in their renumeration might make things seem fairer it won't actually change anything for the majority.

inkyfingers

"Shareholders" get a bad rep, and sometimes with some justification, but you have to remember that most shareholders will also want a business to grow in the long term so that they see a capital gain on their investment, it's not all about the dividends. You also need to remember that often shares aren't just held by greedy billionaires, they are often held by pension funds and investment houses who are in the end working for us. If companies stopped making as much profit the value of all our savings and investments would fall (they probably are already relative to inflation).

We also need to remember that company profits do not just go straight to the shareholders, businesses need to make profits to allow them to expand, invest in new products andnew machinery. My own business made a healthy profit in 2011 but pretty much all of it is going into setting up a new service which hopefully will improve the long term success of the company.

Those people advocating a link between pay levels and company profits need to think carefully, even successfull companies can have bad years and any link would have to work both ways. At the end of the day shareholders effectively lend to businesses to allow them to trade, if they didn't get a return they wouldn't bother investing and that's not a good situation for anyone.

squeeler

Not sure what the average shareholder adds to a company myself:
For example If I buy £1K shares in Bank X I buy those from a broker/dealer, who takes a fee. The shares themselves have been sold by a person who has either made a profit or loss. I keep these shares for a year get say £50 divdend and then sell them for £1200 again paying a broker a fee.
I've made £250, the broker made say £20 but I can't see how Bank Xs has benefited from my investment? As far as I'm concerned owning shares is simply a way of me grabbing some profits out of a company I have nothing to do with!
At least a Chief Exec contributes something to the company?

rick_chasey

inkyfingers wrote:

"Shareholders" get a bad rep, and sometimes with some justification, but you have to remember that most shareholders won't hold shares in the firm for more than a year.

Corrected.

I think around 40% of shares in firms are held for less than a day.

80-90% of cash equity trading volume comes from algorithmic trading.

There's also a significant number of 'unvoiced' shareholders - i.e. shares that are held in offshore accounts for the medium-to-long term. They tend not to get involved in how the company is run.

Shareholder participation is a known problem, and one the high pay commission and now the business secretary are looking to solve.

rick_chasey

squeeler wrote:

Not sure what the average shareholder adds to a company myself:
For example If I buy £1K shares in Bank X I buy those from a broker/dealer, who takes a fee. The shares themselves have been sold by a person who has either made a profit or loss. I keep these shares for a year get say £50 divdend and then sell them for £1200 again paying a broker a fee.
I've made £250, the broker made say £20 but I can't see how Bank Xs has benefited from my investment? As far as I'm concerned owning shares is simply a way of me grabbing some profits out of a company I have nothing to do with!
At least a Chief Exec contributes something to the company?

Floating on the stock market

http://www.businesslink.gov.uk/bdotg/ac ... =RESOURCES

Advantages and disadvantages of stock market flotation

Even if your business is suited to flotation, it may not be the right choice for you. Being a public company can present a range of benefits to your business, but there are also issues that might require careful consideration.

The benefits of stock market flotation could include:

giving access to new capital to develop the business
making it easier for you and other investors - including venture capitalists - to realise their investment
allowing you to offer employees extra incentives by granting share options - this can encourage and motivate your employees to work towards long-term goals
placing a value on your business
increasing your public profile, and providing reassurance to your customers and suppliers
allowing you to do business - eg acquisitions - by using quoted shares as currency
creating a market for the company's shares
However, you should also consider the following potential problems:

Market fluctuations - your business may become vulnerable to market fluctuations beyond your control - including market sentiment, economic conditions or developments in your sector.
Cost - the costs of flotation can be substantial and there are also ongoing costs of being a public company, such as higher professional fees.
Responsibilities to shareholders - in return for their capital, you will have to consider shareholders' interests when running the company - which may differ from your own objectives.
The need for transparancy - public companies must comply with a wide range of additional regulatory requirements and meet accepted standards of corporate governance including transparancy, and needing to make announcements about new developments.
Demands on the management team - managers could be distracted from running the business during the flotation process and through needing to deal with investors afterwards.
Investor relations - to maximise the benefits of being a public company and attract further investor interest in shares, you will need to keep investors informed.
Employees may become demotivated - if shares are only offered to selected employees, there could be resentment. Shareholding employees could feel that there is little left to work for if they are sitting on valuable shares.

rick_chasey

Jez mon wrote:

Isn't a pure analysis of pay v. profits over-simplistic anyway?

I know this is simplistic but anyway...

The company whom I worked for on placement had an order book so large that they will roughly have to double in size in the next 10 years. They are also posting record profits, and are obviously on sound financial footings. Aside from the occasional high profile product failure, they are as sound an investment as any.

But all this doesn't necessarily translate into a proportional wage rise. The task of doubling your company in size is just massive, high HR costs (and especially in the case of this company) high infrastructure costs, with new factories needed.

Basically, you can double your profits, but if the company has had to double in size to do that, you probably aren't getting a pay rise.

Maybe should point out that I think it's the same company which Frank works for .

It doesn't always work like that.

Take a look at this article in e-financial news.

http://www.efinancialnews.com/story/201 ... mod=promos

But if, instead, you look at the “payout ratio” – how much banks spend on paying their staff relative to what is left on the table for shareholders – things start to look a little less reasonable.

Over six years, investment banks have spent three times as much on their staff as they have generated in pre-tax profits for their shareholders (or 2.9 times more to be precise).

This multiple rises to more than four times if you estimate net profits across the industry by applying a notional 30% tax rate. Sir Philip is on to something.
The analysis comes with plenty of caveats.

verylonglegs

But haven't we all learnt in the last few years that investment banks aren't in the real world anyway? I wouldn't compare them to a company that has to design, manufacture and sell a tangible product.

Jez mon

Rick Chasey wrote:

Jez mon wrote:

Isn't a pure analysis of pay v. profits over-simplistic anyway?

I know this is simplistic but anyway...

The company whom I worked for on placement had an order book so large that they will roughly have to double in size in the next 10 years. They are also posting record profits, and are obviously on sound financial footings. Aside from the occasional high profile product failure, they are as sound an investment as any.

But all this doesn't necessarily translate into a proportional wage rise. The task of doubling your company in size is just massive, high HR costs (and especially in the case of this company) high infrastructure costs, with new factories needed.

Basically, you can double your profits, but if the company has had to double in size to do that, you probably aren't getting a pay rise.

Maybe should point out that I think it's the same company which Frank works for .

It doesn't always work like that.

Take a look at this article in e-financial news.

http://www.efinancialnews.com/story/201 ... mod=promos

But if, instead, you look at the “payout ratio” – how much banks spend on paying their staff relative to what is left on the table for shareholders – things start to look a little less reasonable.

Over six years, investment banks have spent three times as much on their staff as they have generated in pre-tax profits for their shareholders (or 2.9 times more to be precise).

This multiple rises to more than four times if you estimate net profits across the industry by applying a notional 30% tax rate. Sir Philip is on to something.
The analysis comes with plenty of caveats.

I would hazard a guess that banks are pretty much a law unto themselves when it comes to renumeration!

As for flotation on the stock market, it often seems to me to be a catch 22. Broadly speaking, on the one hand, it can provide a massive injection of funds into the company, which can be used to grow the company, otoh the company becomes subject to the aims/goals of the shareholders and can therefore lose whatever it was that made it such a great company in the first place...

Frank the tank

squeeler wrote:

Not sure what the average shareholder adds to a company myself:
For example If I buy £1K shares in Bank X I buy those from a broker/dealer, who takes a fee. The shares themselves have been sold by a person who has either made a profit or loss. I keep these shares for a year get say £50 divdend and then sell them for £1200 again paying a broker a fee.
I've made £250, the broker made say £20 but I can't see how Bank Xs has benefited from my investment? As far as I'm concerned owning shares is simply a way of me grabbing some profits out of a company I have nothing to do with!
At least a Chief Exec contributes something to the company?

That's my take on shareholders, whatever business they invest in, sod all to do with having any interest in the company just financial speculation hoping to make a quick quid. There are a lot of my co-workers that do that very thing.

NickintheLakes

ALIHISGREAT wrote:

that article is complete crap.


the reason wages haven't risen in line with profits is because the objective of a firm is to increase the SHAREHOLDERS wealth... not the employees... if you want the opposite then go and work for a cooperative where the employees are the shareholders (or the public sector where they hand out free money)


Its the shareholders who own the firm, take the risk and inject the capital... employees are simply being paid an inflation adjusted wage for performing a task.

If you pay a builder to build you a house, you don't expect him to come knocking in 5 years time when you sell the house, asking where his share of the profit is.

What right do employees have to share in the profits? none.


Above inflation pay-rises are just a motivational tool in order to stimulate better performance to further increase shareholder value.



(also Jez Mon makes a good point)

Agreed ^^^

I can understand why employees always want more - human nature but there sometimes needs to be a reality check.

Businesses are generally not 'in it' for the employees it simplistically comes down to return for the investors. I guess that if you are struggling on a basic wage then that is a hard one to get straight in your head.

Employees will always bleat about wages. They will always think they are worth more. The reality is though that putting the unemployed to one side you generally gravitate to a position that you are worth and that maybe some people would be a lot happier in life if they accepted that.

It really irks me when I hear employees banging on about their *anker bosses, their fancy cars and lavish holidays. They seem to forget that a lot of those employers will have put their whole lives on the line to start the business with all the risks that go with that. Maybe some of those employees who think they are so smart should go and try and do the same.

NickintheLakes

squeeler wrote:

Not sure what the average shareholder adds to a company myself:
For example If I buy £1K shares in Bank X I buy those from a broker/dealer, who takes a fee. The shares themselves have been sold by a person who has either made a profit or loss. I keep these shares for a year get say £50 divdend and then sell them for £1200 again paying a broker a fee.
I've made £250, the broker made say £20 but I can't see how Bank Xs has benefited from my investment? As far as I'm concerned owning shares is simply a way of me grabbing some profits out of a company I have nothing to do with!
At least a Chief Exec contributes something to the company?

No shareholders, no money, no company, no job.

Frank the tank

I would say the most successful economies are ones with higher wages. The more dispossable income people have to spend the more they will, thus driving the need for new goods to be manufactured and more services will be used.

If only a very few %agewise have any decent amount of income what drives markets to produce more.

As some on here would seem to drive wages down and down, if ultimately (for the sake of argument) all of us too thick or frightened to be self employed or be an employer had to work for nowt. Who would be able to buy the goods being made? Who would be able to afford the service provided, errrr, no-one thus demand would be non existent thus no profit for the company owner.

If low wages was a prerequisite to a nation being wealthy Sudan would be a superpower and we'd be having whip rounds for the Germans every other year.

rick_chasey

verylonglegs wrote:

But haven't we all learnt in the last few years that investment banks aren't in the real world anyway? I wouldn't compare them to a company that has to design, manufacture and sell a tangible product.

I'd say it's pretty common.

I heard the other day from a lord who was on the high pay commission spouting a stat about I think mining.

IIRC he said that between the '70s and now, the difference between the highest earner and the lowest earner in mining went from around 200-300% to 4000%.

It was similar in other corporates too - around the 3000-4000% mark.


You may say banks aren't in the real world, but they're a significant proportion of the UK economy, and they make A LOT of money, even when they have a bad year.

http://www.bbc.co.uk/news/business-12455303

http://www.telegraph.co.uk/finance/news ... ction.html

squeeler

So put simply floating on the stock market gives a huge capital boost for development of the company but after that it's pretty much just a way of getting money out of the business to people who've invested in it?

TheStone

squeeler wrote:

So put simply floating on the stock market gives a huge capital boost for development of the company but after that it's pretty much just a way of getting money out of the business to people who've invested in it?

Yep, pretty much, but that's the same as any investment.
The company would still like a higher share price in case they want to raise more capital via further equity or debt.

DavMartinR

Frank the tank wrote:

I would say the most successful economies are ones with higher wages. The more dispossable income people have to spend the more they will, thus driving the need for new goods to be manufactured and more services will be used.

If only a very few %agewise have any decent amount of income what drives markets to produce more.

As some on here would seem to drive wages down and down, if ultimately (for the sake of argument) all of us too thick or frightened to be self employed or be an employer had to work for nowt. Who would be able to buy the goods being made? Who would be able to afford the service provided, errrr, no-one thus demand would be non existent thus no profit for the company owner.

If low wages was a prerequisite to a nation being wealthy Sudan would be a superpower and we'd be having whip rounds for the Germans every other year.

+1
If the big supermarkets paid they're staff more or allowed them to work longer hours ( so they don't have to claim in work benefits) they could also shop in there stores and increase there turnover and profits.

TheStone

Frank the tank wrote:

I would say the most successful economies are ones with higher wages. The more dispossable income people have to spend the more they will, thus driving the need for new goods to be manufactured and more services will be used.

If only a very few %agewise have any decent amount of income what drives markets to produce more.

As some on here would seem to drive wages down and down, if ultimately (for the sake of argument) all of us too thick or frightened to be self employed or be an employer had to work for nowt. Who would be able to buy the goods being made? Who would be able to afford the service provided, errrr, no-one thus demand would be non existent thus no profit for the company owner.

If low wages was a prerequisite to a nation being wealthy Sudan would be a superpower and we'd be having whip rounds for the Germans every other year.

Wages are relative.

If a country existed on it's own, it doesn't matter if wages are high or low, they'd still be able to purchase the same proportion of the goods available.

When you import and export it becomes more complex. To buy stuff from another country, you have to be able to sell* them something of equal value in return. The relative value placed on the hours taken to produce those two things, creates the difference between high and lower relative waged economies.

* what you sell in return doesn't have to be goods. It could be services, property, investments and obviously debt.

The problem right now is that the relative wage difference between the East and West can't continue. The West have a lot of debt and no purchasing power, whereas the East have the savings. They're likely to begin consuming their own production and increase their own standard of living at the expense of the cheap consumerism the West has enjoyed.

The 'Keynesian' West seems to believe that China needs to West to keep buying their stuff or they'll all starve, but the key is production. If you produce more than you need, then your standard of living should be high. If you don't, it will be low.

TheStone

DavMartinR wrote:

+1
If the big supermarkets paid they're staff more or allowed them to work longer hours ( so they don't have to claim in work benefits) they could also shop in there stores and increase there turnover and profits.

The supermarkets are taking advantage, but the problem is the governments.

Everyone working in full time work shouldn't need benefits. Either wages are increased or living costs are reduced. Too much is taken in taxation and then used to support some parts of the economy. Right now we're keeping food costs low, and house prices high.

Jez mon

NickintheLakes wrote:

squeeler wrote:

Not sure what the average shareholder adds to a company myself:
For example If I buy £1K shares in Bank X I buy those from a broker/dealer, who takes a fee. The shares themselves have been sold by a person who has either made a profit or loss. I keep these shares for a year get say £50 divdend and then sell them for £1200 again paying a broker a fee.
I've made £250, the broker made say £20 but I can't see how Bank Xs has benefited from my investment? As far as I'm concerned owning shares is simply a way of me grabbing some profits out of a company I have nothing to do with!
At least a Chief Exec contributes something to the company?

No shareholders, no money, no company, no job.

There's more than one way to skin a cat. So to speak...

Private companies and co-operatives are valid alternatives to public trading of shares in a company, OK so these companies still have shareholders, but they're less likely to be the aloof figures in the hypothetical story above.

EKIMIKE

Hmmm it is interesting how almost everyone is focussing on publicly traded companies.

Of course this whole issue is far more nuanced than Pay vs. Profits... I don't think any reasonable person would expect a direct correlation between rising profits and rising wages for a start.

I would also add that personally, i would equate pay with re-investment into the business by other means. They both have similar benefits for the employee and, whether directly or indirectly, the company as a whole. Frankly, cash in the bank is fairly useless for any company - be it in the companies account, the companies executives/CEO's accounts, or the shareholders accounts.

Capital accumulation isn't good per se. You have to do something (productive) with it. Re-investing into your business is far better in my opinion than shelling it on a lavish property portfolio or other material possessions.

As for the article being 'rubbish', it's certainly not the best or a comprehensive analysis by a long shot but the idea that it's a load of rubbish because 'the aim of a company is to maximise shareholders profits' is a dangerous, toxic attitude that has corrupted too many minds. In actual fact the aim of a company is first and foremost to produce a product or provide a service. If you lose sight of that simple idea then your company will very quickly stagnate and lose any competitive edge it has. In my opinion this is the mistake much of the Western manufacturing base has made in the last 20-30 years - they got carried away with the profit element at the expense of the product/service element.

alihisgreat

EKIMIKE wrote:

As for the article being 'rubbish', it's certainly not the best or a comprehensive analysis by a long shot but the idea that it's a load of rubbish because 'the aim of a company is to maximise shareholders profits' is a dangerous, toxic attitude that has corrupted too many minds. In actual fact the aim of a company is first and foremost to produce a product or provide a service. If you lose sight of that simple idea then your company will very quickly stagnate and lose any competitive edge it has. In my opinion this is the mistake much of the Western manufacturing base has made in the last 20-30 years - they got carried away with the profit element at the expense of the product/service element.

yes. the aim of a business is to produce a product... oh wait.. its not.. its about profit and shareholder value.


The shareholders don't congratulate a board with a nice product and no profits.. they get rid of them.


good managers recognize the inter-temporal relationship between a good product, brand etc. and profits. so in the short term it may be about the product... but the aim is always to profit and create value for the shareholders.

why would investors fund a firm that makes no profits? they will never get a return on their investment (not for profit firms being the obvious exception.

Jez mon

Does it have to be profit or product!?

Short term it's about the product and profits,

Long term it's about the product and profits.

Profit follows product, so focus on the product and use the finances as a yardstick.

MarcBC

I think anyone who has a pension needs to be careful about complaining about shareholders. Pension Funds are one of the biggest investor groups in the stock market. Ergo your pension depends on the good returns of the shares to pay out. Oh and Governments who decide to tax pensions punitively like the previous one just make it harder to get that return.

rick_chasey

Jez mon wrote:

Does it have to be profit or product!?

Short term it's about the product and profits,

Long term it's about the product and profits.

Profit follows product, so focus on the product and use the finances as a yardstick.

In the short term you could say the emphasis is on profit at the expense of investment (i.e. product), which, more often than no hurts of longer term profits.


The reason people discuss publically listed companies is, partly, because they're more often than not the bigger companies, but also because it's harder to argue about how private companies are run, since it's quite literally their own business as long as they are within the law.

The owner of the company I work for takes any profit we make into his own back pocket to spend on Ferraris for example. No-one's going to complain about that - he set the company up from scratch and he pays us well.