Do very rich companies have an obligation to pay their lowest workers above market rate wages?

Great Debates
#1

A recent op-ed in the NYT is by a cafeteria worker at Harvard University, sharing how difficult it is to live on the $31k salary in the Boston area. Even though she admits that Harvard pays more than other cafeterias in the region, she points out that with a $35 billion dollar endowment, they could easily afford to pay their workers more.

Other such stories have been written about adjunct professors at other universities who struggle to pay the heating bills in winter, or security staff at companies like Google or Facebook who are sleeping in their cars.

The economic orthodox response to such claims are that these workers are being paid at a rate at which demand matches supply and companies have no obligation to their workers beyond that point. And that while it may seem heartless, articles like the one above are preying on emotional sensitivity to push bad policy.

However, I do think there’s a valid argument in support of this as well. I’ve been privy to the financials of tech companies similar to Facebook/Google and their payroll costs are overwhelmingly dominated by six figure salaries to highly skilled workers. In cases like this, increasing the pay for their lowest level staff would not meaningfully affect their margins. I imagine the cost structure at Harvard is somewhat similar and this would also not be a huge hit to their endowment. This is distinctly different from businesses like Walmart where the bulk of their labor force is working for close to minimum wage and any attempts to raise their pay would result in serious economic repercussions.

Harvard is also different from Facebook/Google in that it’s a non-profit and doesn’t have a duty towards stockholders. In such a case, I think the argument is even stronger that they should be looking at something much broader than just pure supply and demand when determining the wages of their workers.

This is one of those arguments though where I believe both sides have a lot of legitimate points so I’d be curious to hear what others’ perspectives on this are.

#2

Henry Ford

Milton Hershey

#3

The fact that two people did X does not mean that others have an obligation to do X, which is what the OP is asking. I can’t see why a company has an obligation to pay above market rate. It might be a generous thing to do, but if it’s not good business practice, then it’s just that-- a nice thing to do. In the case of Harvard, the endowment is meant to provide for the university go forward, pretty much forever. Just saying “wow, what a big endowment you have” is meaningless.

#4

I think employers should pay a living wage to their employees but that the employees needs to decide what a living wage is and not take jobs that do the meet the requirements. If a security guard is living in his car because his employees doesn’t pay enough then he needs to move when he can be paid enough to living where he wants to. On the other hand if he’s happy living in his car then good for both the employer and employee.

If all of the major companies that are making ‘excess’ profit pay way above market rates then small business would slowly die. While an oil company in downtown Denver can afford to pay a secretary 100k a year my distillery certainly couldn’t since we don’t even make 100k in revenue so the good people would work at the largest companies and the crap would fall to the bottom where there is no margin for error.

#5

Yes. Profits deserve to be shared, maybe not equally, but fairly. If the company is a fantastic success, it can’t be just because of the CEO’s business plan or relations with financeers, it’s not just because of the marketing dept, it’s not just because of shit hot code or smooth implementation, and it’s because the sales drones did their job well too. All of it was necessary, everybody contributed, everybody oughta get a share.

As for the stockholders : fuck 'em. They didn’t lift a finger. If they make a token profit, that’s good enough for the lot of 'em. I don’t see that there is a duty to maximize their takings, much less as a cost to the actual workers.

You think a person living out of their car can afford to a) move cross-country and b) do market research and cross-country job interviews ?

#6

It always seemed to me that a lot of companies feel the need to take the greediest, most employee-unfriendly path as though they have no other options. As examples, Costco and In-n-Out treat their employees way better than their competitor companies and yet they’re still very successful.

Given the relatively high cost of incredible turnover at some of these companies and the costs associated with new employees, I’m not sure that treating employees like dirt and replacing them regularly is actually a smart financial decision, but it almost feels like everyone is doing it because everyone else is doing it - and if you aren’t exploiting people to the maximum then you’re not doing your job as an Evil Corporation. Even if it’s actually not helping your bottom line.

There are other viable alternatives while still maintaining a free market capitalistic system. Germany, for example, has worker councils that have power and influence over the company’s direction, and built in profit sharing for successful companies. That results in them not treating employees like dirt, and employees actually have a vested interest in the company profiting, and get to share in that profit.

Which makes them sound like pinko commies to me. True capitalists know that you can only feel good about yourself if you know your employees are staying up stressed that they might not be able to pay for a minor but necesary medical procedure and still buy food and rent this month.

#7

No one is working for free, so it seems everyone is getting a share. As for what is “fair”, I’m not sure how you are going to objectively define it. Why don’t you tell us what you think is fair and why, and then we can decide if your argument makes sense.

Good point. So what if the entire world economy is destroyed, as long as those greedy stockholders get fucked!!

#8

What makes an efficiency wage efficient is that it is higher than other wages. The most famous efficiency wage example is Henry Ford raising wages for his factory workers. He was losing money due to workers only lasting an average of three months at his plants. So he raised worker pay and reduced turnover. However, if all employers had raised wages in a similar manner then his increase would no longer have been an efficiency wage and turnover would have gone back up.
Every business can not pay an efficiency wage or else it ceases to be an efficiency wage.

#9

Harvard is a non-profit, so its not like they are a high-profit company funneling money to shareholders. Their endowment is spent on student aid, research, and keeping the plant going (old buildings are damned expensive). Apparently they already pay better than other employers for the same position.

Profitable companies have an obligation to remain profitable. In many cases, better pay gets you better performance and is worth the investment (see In-n-Out burger vs McDonalds, or Price Club vs Sam’s Club).

#10

Do you want your 401k to invest in companies that are offering, at best, a “token profit” or companies committed to maximizing your returns?

As to the OP, companies are certainly not obligated to pay above market value just because they’re more profitable or successful than their competitors. As noted above, it’s a nice thing to do. And often, doing nice things leads to financial success. But that’s still a business decision, not an obligation.

#11

What is fair is that people get paid according to their contribution to the business. What would the damage to Harvard be if their food service workers were 10% worse? Would anyone refuse to go there or would any alumnus stop sending them money if they were known to have a poor cafeteria? Since they have not contributed materially to the success of Harvard financially, then it is only fair that not be paid an above market wage for their services.

As for other companies like Google, if an employee wants to participate in profits they can purchase shares and become a stockholder. An employee gets a certain agreed upon amount and if the company does better they don’t get more and if the company does worse they don’t get less. For most people this is a better deal than only getting paid if the company does well. It is a tradeoff of not participating in the profits in exchange for not being held liable for the losses.

#12

I am a uuuuuuuge believer in profit sharing. I’ve started 2 small (very small) businesses and worked it into my workers’ pay both times, and I think it did very well. But I don’t see that as an obligation. I saw it as good business practice.

When you sell your house, do you give the guy who painted it a share of the profits? If not, then you understand why businesses don’t always profit share.

#13

I was actually discussing this last night with a friend of mine that is still in fast food management.

He has nearly quit on several occasions, though he makes over $50k a year, because of how the employees are treated.

They are hired at MW, are told that there are no raises in their future, and are limited to 29.9 hours a week.

Most employees last a week or two before they go somewhere else. The ones that stay, those are the ones that can’t go somewhere else.

The result, an apathetic and untrained crew, who does not care about the company, the customer, or even really their job. The quality of the food is poor, the service is slow and inaccurate, and the attitude of all the employees is pretty shitty.

My friend complains that there’s no way to motivate his employees. He cannot give them raises. He cannot give them hours. The work, in the words of Office Space, “just hard enough to not get fired.”

Sales are down, year to year, even with price increases. Profits are down, way down, in fact, they are actually losing money for the first time last year, and are on pace to lose even more this year.

This isn’t really all that good for the shareholders, but due to the “trickle down” mentality, they will probably demand more of the same, and be upset at more of the same results.

#14

:smiley: Says the guy that apparently has no clue how companies are formed.

#15

The more parsimonious answer is that you misunderstand what market those two companies (Costco, InOB) are in and who their competitors are. Otherwise, you have to assume that thousands of businesspeople are so stupid that they can’t see a better way to do business when it’s right in front of their noses.

#16

This is an interesting view: “everybody contributed, everybody oughta get a share”, excep the stockholders, “they didn’t lift a finger”.

It’s really simple: if the people running the company don’t think selling shares of their company does anything to benefit the business, they don’t have to do it.

#17

I don’t think the shareholders are making demands, but they certainly react when an investment turns out to be a poor one, by going elsewhere with their money.

#18

Shareholders do make demands. Specifically by threatening to go elsewhere with their investment money if this investment isn’t profitable enough for them.

This isn’t really a problem, except that with “long term” capital gains at only a year now, those profits that they demand are NOW, NOW, NOW. The don’t care about the next quarter, or the next year, as long as they can get out of a stock at 15% capital gains, that is as long term as an investment as they are willing to make.

So, yeah, this is good for the investors in the short term, and it is good for the investors that will pull their money out as soon as a company begins to falter, but this is not good for the company, the employees, the customers, the economy, or any other investors that may have been looking for more of a long term investment in the company, or in the economy as a whole.

#19

My experience as a shareholder is that they care more about return than about how it is achieved. If mistreating your workers is bad for business, most shareholders will be against it.
If your friend is correct, then you can short the stock of the company and use the profits to open your own quick service restaurant that treats its employees like princes and subsequently makes loads of money.
When you follow this advice and get really rich I don’t even need a cut, maybe just some free food at your restaurant empire.

#20

If you know how the stock market works, you would know that your advice is risky at best. Shorting stocks may work in the longer run, but in the short run, it is likely that I would end up with a balloon payment that I could not afford, and get into a fair amount of financial trouble.

By cutting hours, by cutting wages, by cutting quality of product, the stores look more profitable. There is the same or even more money coming in through revenue, and less going out through expenses.

This lasts as long as you have some sort of equity to your company. If you have brand name recognition, if people know that your name stands for quality, then they will continue coming, even as the quality falters. You will continue to make money here, as loyal customers continue to come in and give their money in return for a decreasing value in product and service.

Your loyal customers will slowly be attritioned, as they one by one have the final straw dropped upon their back, their loyalty evaporates, and they go elsewhere. Your sales will start flagging, then dropping, then plummeting. I have seen this at several food service (not only fast food) places, as they try to “increase profitability” to appease shareholders.

This is inevitable, as long as the incentives behind capital gains don’t change, but it is not predictable on a specific timeline, so your idea of selling short, while a good one, has significant risk that the company holds out a bit longer than I thought it would, or its stock price only drops slowly, leaving only a small margin of profit for the shorted shares to hedge against the risk of a bubble.

Now, me personally, I have gotten out of food, and I run a dog grooming business. We have had 25%-33% growth consistently for the last 4 years.

I treat my employees well, and pay them as much as I can afford to. My employee turnover is very low, I have not had anyone leave because of pay or conditions. My clients are ridiculously loyal to me, embarrassingly so sometimes. I haven’t taken that much money off it the past few years, as I wanted every penny I could get a hold of to be added to my equity, but this year I am taking a pretty decent pay, and next year on, I should be able to pay myself quite well. As I grow and expand, I will be able to take more and more compensation for myself, while still leaving more than enough capital and equity in my business for it to continue to grow.