One Last Attempt At Understanding [investment] Risk

Great Debates
101

I’ve looked into this in the past and the laws of pretty fuzzy on the subject. As a cook/chef I’ve had to sign the non-compete and non-disclosures as when I was an engineer.

The difference is that recipes are much more fungible. It’s harder to sub out sections of code or electrical components and still have a similar device. But with recipes you can make pretty minor changes and have something that’s legally different.

If the guy at Coke walks out with recipe it’s obviously protected along with the name. But if he calls it Pepsi and makes it a bit sweeter it’s all fair game.

Note: I am not a lawyer, at least as far as you know.

102

No, I’m using it right, just not in the normal way. A house wears out with time, my deck and roof need to be replaced. My furnace and water heater are near the end of their life. So work has to be put in, even if it’s just mowing the lawn and taking a pressure washer to the siding. It’s the reason you guy buy shit property “for a song” and why classic cars can still have value.

Right, and chutzbah on the tenant side would demand lower rent because the place looks like shit.

It’s easy to discuss this when the value added or subtracted is tangible (new kitchen vs hole in wall). And like I said, when the topic gets emotional (like unions and unskilled labour) people flip to the other side of their brain and start making irrational demands.

Exactly. But it can also play out on the other side: ideologues that try to be too nice to their employees get railroaded. I’d love for there to be harmony and fairness, but unless both sides some how agree, one side will get screwed.

So I say, let the investor take his profit, and let the dishwasher earn his wage. If the dishwasher adds more value the investor will cough up some of the cash. If the market is shit the dishwasher makes less. The whole thing can be remarkably efficient.

103

It’s not hard to envision a system where dishwashers and tenants share in the profitability of their respective ventures, both for the good and for the bad. Consider, for instance, a profit sharing contract for an employee. You can earn $8.50 an hour (current market wage) and assume no risk, or you can earn $7.00 an hour and earn a chance of some percentage of the profits, calculated monthly. If the business does well, you can earn as much as $10 an hour. If it doesn’t, you’ll get nothing above and beyond your $7/hr. Now there’s both a floor and a ceiling, and the dishwasher has assumed risk in both directions. Whether or not a business would be able to get employees using this scheme, I have no idea, but there’s absolutely no reason it couldn’t be written into an employment contract.

Likewise, your rent can either be $1000 a month straight up, or you can pay $1200 a month and get in on the investment. After a year, the homeowner will have the house appraised. If it maintains its value or increases in value, he’ll give you a cut of the increase, up to $4000, plus interest on the $2000 that you “overpaid.” If the house loses value, your cut goes down based on some scale, up to the point where he keeps every dime that you overpaid to help cover his losses.

Theoretically the first case would be incentive for the dishwasher to work hard for the sake of the business. In the second case, the renter would have incentive to keep the place looking nice and maybe make some small improvements.

However, the renter faces 2 problems. One, he has no idea how impartial the appraiser is. Two, he has very little control over the actual value of the house, since it’s based mostly on the real estate market and square footage. I can still see some renters taking this contract, but only because it would be a way for them to gamble on the real estate market without having to get too involved.

The owner also has a problem with this – presumably he’s not actually interested in selling his investment after only a year, but every year he rents it out he has to pay out some of the equity he’s getting through appreciation, even though it may be years or even decades before he realizes that appreciation in the form of cash money. However, if the real estate market is risky, I suppose can see some landlords doing this just to help offload some risk to someone else.

Overall, though, it’s a complicated arrangement and I can’t really see anyway taking part it in. The dishwasher profit-sharing seems much more likely.

104

…and it’s not hard to imagine the scenario you’ve laid out because it’s both not good enough and not bad enough. Let’s continue with your example…

You’ve made an admiral attempt for fairness but this is really just a “token” wallpapering of variable pay somewhat tied to profits. There’s not enough upside here (employees don’t want a profit cap) and there’s not enough downside (employees aren’t losing all their money like the owners.)

Your proposal doesn’t get to the very emotional essence of profit sharing that employees (whether its dishwashers or millionaire NFL football players) have in mind.

For example, let’s pretend the employees signed up for that $7 to $10 variable pay scheme. Everybody’s happy right? Not really. Let’s say the restaurant starts getting celebrities like Tom Cruise eating their all the time. The restaurant’s popularity and resultant revenue have increased 10-fold.

Emotionally, the dishwasher is going to be very unhappy with his $10 profit-sharing ceiling. In his mind, the big reason why Tom Cruise and his A-list actor buddies are even eating there is because the dishes are so fucking clean!!! If he was making $10/hour before, he wants $100/hour now.

It’s more likely because it’s really just a roundabout variable pay scheme. If certain unexpected upsides happen, the dishwasher would ultimately feel insulted by it because he always feels he’s “undervalued.”

105

If the dishwasher feels that he’s getting screwed he can start slacking off and doing a half-assed job of washing the dishes. If profits remain high due to Tom Cruise’s influence, then he’ll still get $10.

Maybe you’re right that even then he’ll still feel entitled to a greater share of the windfall profits. However, at least in that case the owner could point to the contract and identify specifically how much risk and reward the employee agreed to take on in the first place. There would be no ambiguity, and (I think) a lesser sense of any unwritten entitlement.

Also, at least the risk to the dishwasher would work in both directions.

Also also, I don’t think every employee, or even the majority, would opt for this profit sharing. In that case, the owner could vary easily quiet any request for a share of the windfall profits by pointing out that they had the option to assume some risk and chose not to.

106

Sir, there’s no “maybe” about it.

Right, but this “legal” aspect has never been up for debate. Legal is legal. Everybody already understand this.

The debate has always been about what profits the dishwasher FEELS in his mind is owed to him regardless of any particular contract he signed. Yes, the dishwasher knows the letter of the law, and he will follow the letter of the law, but there’s a FEELING of being shortchanged.

That FEELING is what all these “risk” debates have been really about. It’s always been about this. It’s never been about legal interpretations – even though we seem to always keep coming back to this subtopic!

The owners want the employees to stop feeling shortchanged by reminding the employees that they chose not to participate in the scary world of uncertain businesses going bankrupt.

The dishwashers want the owners to feel like they are owed more than market hourly rate because, as they say, if there were no clean dishes, Tom Cruise would find it disgusting and wouldn’t even want to eat there. No dishwasher leads to no clean dishes which leads to no Tom Cruise. Q.E.D.

107

We already do this with waitresses, and the results were predictable. Owners began scaling back the base pay rate to well below minimum wage. And then the government decided tips were income and should be taxed. Long story short, waitresses still aren’t sharing in the wealth.

Essentially you are creating commission based earnings, which can be either really good or really bad. From an owners perspective you’ll lose all your employees when things slow down as they’re likely to head for greener pastures. They also get paid before the owners do. Lastly, if there commission is built into the price, their pay goes down as the item in question loses value. Imagine you get paid $50 each time you sell an iPad. Life was good a year ago, now you can’t pay rent.

108

Long story short, it’s the de facto standard for waiters across the country and the system isn’t collapsing. I’m not sure I agree with your inevitable conclusion there about dishwasher pay getting scaled back to $2.30 an hour, mostly because waitresses seem a lot more in control of customer satisfaction than dishwashers, but point taken.

Now you’re stretching it too far. Commission-based pay would be paying the dishwasher for each dish washed. While the owner might assume that getting paid per dish would effectively be profit sharing, the dishwasher certainly wouldn’t. It doesn’t matter to him if the customer ordered a $7 salad or a $45 steak, it’s still exactly 1 dish to wash. He doesn’t want that. He wants a cut of the $45.

The scenario I laid out would be tied to the restaurant’s profits. I don’t consider that to be commission-based income, especially for a dishwasher.

109

Well, we’re never going to eliminate envy, greed, or compassion, but in my scenarios there are mechanisms to help counteract those feelings without making the situations one-sided (i.e., only sharing in profits and not losses).

Look at it too from the perspective of the tenant or dishwasher who opted not to take part in the profit/loss sharing schemes. The tenant can’t even morally claim he’s justified in getting a cut of the property value increase if his next door neighbor was willing to take on risk that he wasn’t. At that point his envy is spread. He has to feel envious of the landlord, who won his bet on the real estate market, as well as his neighbor, who won his bet on his rent. You might think that’s all for nothing, but I know I’d have a harder time feeling I was owed something in that situation.

110

I didn’t mean to suggest that it was collapsing. Simply pointing out that wait staff have that pay structure, and it didn’t result in profit sharing. But it did tie their earnings to sales volume. Like I said in my other thread, this means they share in some of the risks. More [higher paying] customers means more income and would imply a successful restaurant. If business slows the owner loses money and the waitress misses an earning potential.

Oddly enough, this system is already in place and extremely profitable. One form is the linens restaurants use that are cleaned by outside contractors. Another form is the party rental business that makes [what I think is] a fortune renting dishware for 50cents a pop.

If an enterprising young dishwasher wanted ownership (and risk) he could set himself up as an independent contractor that provides clean dishes and removes dirty ones. Then it would be on him to get the dishes clean while remaining profitable.

In a past life I considered starting a business that provides silverware wrapped in a napkin. A time consuming process that is currently done by waitstaff during slow portions of the day. It always seemed inefficient to me, and a poor use of resources. Reality was that I’d have to pay someone minimum wage, but a waitress works for less.