Knowing the price of everything but the value of nothing

Last week in “The Magic Marketplace can be malevolent” I wrote that the marketplace for labor is not always a benevolent mechanism.  This week I would like to consider some cases where companies have ignored value for price and where companies have put value ahead of price.

Management of a large electronic chain decided to fire all their high-paid floor employees and let them reapply at a lower pay level.  The company ignored the fact that the high-paid employees had gained considerable experience and were providing exceptional customer service.  Unfortunately, many customers lost their favorite go-to employees and found the remaining help unsatisfactory.  And this attitude spread rapidly, years before social media.  The company rapidly declined and has become a textbook example on how not to treat employees.  Remember Circuit City?

Sometime ago I read a letter in a newspaper complaining about firefighters going for groceries with a fire truck.  The writer questioned why they didn’t take a smaller vehicle.  Did the writer consider the increased response time of a crew returning to the fire station to get the big rig?  If the crew returned to the fire station to get the big truck, how much more value would be lost in a burning house?

“If you can read this, thank a teacher!”  But too many begrudge teachers the salaries they get, using among other wild-eyed statements “greedy teacher unions”.  After he resigned, Nevada Superintendent of Schools James Guthrie said the top tier of teachers should be paid $200,000.  This would give teachers a salary commensurate with other skilled professionals.  Do those who decry the lack of qualified workers see any connection to their unwillingness to pay sufficient taxes to educate future employees?

Some of those who grouse about teachers’ or others’ pay keep pushing their own pay up.  Many CEOs and board members are getting pay far in excess to the value they give to shareholders.  They often play games about comparing salaries “with comparable companies”, but it is the board or if the board is hand-picked by the CEO, it is the CEO who determines his or her own salary.  Doesn’t sound like the marketplace is determining salaries.  Sometimes they get the boot; sometimes they run the company into bankruptcy.  Many CEOs groused about a law that strove to let shareholders have a say in executive pay; it was watered down so that the vote was non-binding.  See “Time to Make CEO Pay Match Shareholder Performance”,  Suzanne McGee, The Fiscal Times, 2015-05-01.  She wrote that often the pay of the CEO is inversely related to the performance of the company.  Interestingly, a proposal was made by the Securities and Exchange Committee to make corporate top executive pay more transparent to shareholders. It was voted against by the two Republicans on the committee.  Could it be that Republicans aren’t business-friendly but CEO friendly?

As an example of the inverse relation of pay of the CEO to the performance of the company consider Walmart, Target, and Costco.  The CEO of Costco gets a hefty pay package but it is far less than those of the CEOs of Walmart and Target.  The Motley Fool published an interesting comparison on five measures of company strength.  I haven’t fully understood it yet, but the Fool’s conclusion is that Costco is a far better long-term investment than either Walmart or Target.

Costco pays its employees about $20/hour compared to a third less for the other two.  It has only about four percent of its employees as part-time.  On the other hand, Walmart has one-half of its employees as part-time.  Part-time is great for students, but it is lousy for people who have to support families.

Speaking of part-time, as a college student, I was getting $1.74 an hour for around 14-16 hours a week at Kroger.  I did stocking, cashiering, and bagging.  According to PayScale, Kroger pays its cashiers $7.26 to 11.99 an hour.   Assuming an inflation rate of three percent, then somebody with equivalent experience should be earning about $10.88.  I’ll let you play around with various inflation rates; for example, do these same calculations with the actual inflation rate for each year.

But average inflation doesn’t tell the whole story.  Some things are a lot cheaper relatively than in 1958.  Somethings are a lot more expensive.

When our daughter was born in 1962, I was a graduate student earning $75 a week.  School insurance paid most of the cost.  I do remember the room cost was $10/night and the obstetrician cost was about $700 total.  At three percent inflation the room cost should be less than $50/night.  In 2010, the average cost of a hospital stay was $1,600 to $2,000/night.

We bought our first new car in 1963, a Ford Falcon.  Its cost was about $2,200.  Assuming the average inflation it would cost over $10,000.  You would be lucky to get a two-year old car for that price now.  Of course, the cars of today are packed with comfort and safety features that were only dreams in 1963.

The cost of transportation has become a big part of the budget of those with lower incomes.  And as we have spread out more, public transit becomes less available and a car has become more of a necessity.

Meaningful discussion about these issues, as it has always been, comes down to point of view.  We are right and you are wrong.  Too many of us ignore our wrong choices and give too much importance to being in the right place at the right time.

It reminds of Pete Seeger’s tale of two slugs that fell off a shovel.  One falls in the gutter and the other in a dead cat.  After a few days of eating and eating, the lucky one goes looking for the other.  When asked how he became so fat and sleek, the lucky one says, “Brains and personality!”

Many may dispute Mel's brains and personality, but he knows that a bit of pluck and a lot of luck helped.

"Makers" are takers and "takers" are makers

The "masters", in Adam Smith's parlance, claim they are the makers, the one's who get things done.  Or are they the "takers" who depend upon other people's work but take credit for it?

Adam Smith did write, "It is the stock that is employed for the sake of profit, which puts into motion the greater part of the useful labour of every society. The plans and projects of the employers of stock regulate and direct all the most important operation of labour, and profit is the end proposed by all those plans and projects."

In other words, if someone doesn't invest the capital, lots of things won't be done.  Would you be reading this on your computer if there hadn't been the capital to start a company that made a lot of computers?

Smith also wrote, "The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences [sic] of life…" and "The liberal reward of labour, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth. The scanty maintenance of the labouring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition, that they are going fast backwards."

If there are no laborers, then there is no one to carry out the "plans and projects of the employers of stock".  Michael Dell may have been able to assemble computers in his dorm room, but he needed others to make the parts.  As his business grew, he needed others to assemble and ship the computers.

But how many CEOs started the companies that they head?  Very few. Most either came up through the ranks of management or were hired from outside.  They weren't the ones who put "into motion the greater part of the useful labour".  Thus, they are not the ones who make, but are the ones who take the work of others.  In fact, they often consider the actual makers as taking from the company and as such are disposable.

How many restaurant chain CEOs are cooking the hamburgers?  Where would the CEOs be if there were no hamburger cooks, no cashiers, and no clean-up crew?  If their companies have a good year, how much of their bonus are they willing to pass on to the people who made those profits possible?

We have at least one good example of the effects of treating well-paid employees as expenses rather than assets.  I saw Circuit City's demise coming when they fired all the high-paid experienced clerks.  These clerks made the sales; the executives took the profits of those sales.  See "Labor is not a commodity".

Sometimes you have to lose money to make money

With the merger of Northwest Airlines and Delta Air Lines, some are concerned that northern Minnesota may lose air service to the Twin Cities. Delta is aware that if the cost of airfare to the Twin Cities, a major air hub, gets too high, then people will drive to the Twin Cities to catch a flight. If they do, they may choose other airlines than Delta.

See "Delta lands in Duluth to try to ease Northland concerns", Duluth News Tribune, 2009-02-12

The tickets for connecting flights may have to be loss leaders in order to get people on the longer flights.

Government and industry are filled with examples of loss leaders creating greater gains and of cutting out "losing" activities that actually lose profitable activities. Think Circuit City laying off high-paid clerks. How many people stopped going to Circuit City because they couldn't find knowledgeable clerks?

Circuit City, I could have told you so

When Circuit City announced that it was firing its highest paid sales people, I thought that it would be counter-productive. The lower paid people would probably not be as knowledgeable and would thus sell less. Also, many customers would boycott Circuit City and go to other electronic retailers. This week my thoughts proved correct. Circuit City's holiday sales fell 11.4 percent and its stock is "about 80 percent below where it was the day before it made the staffing announcement" last spring.

"Cost-cutting backfires for retailer Circuit City", Duluth News Tribune, September 12, 2008, Rachel Beck, Associated Press. For an online version, try http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/01/13/BUFBUD4TG.DTL
If that doesn't work because of archiving, try a search for

"Circuit City" staffing "Rachel Beck"