Most of us would agree that sky-diving is considered inherently risky.
But consider two people jumping out of a plane: one is the soul earner for a family of 12, the other is a terminally ill cancer patient with a billion dollar life insurance policy.
Both face the exact same risk, the issue you are looking at is risk tolerance. Should they take that risk?
Both people in your question stand to lose the same amount of capital and hence have the same level of risk, but for each that amount of capital represents something different. So it is up to each individual person to decide if they want to jump out of a plane or not. Some people do it at 20, some at 80. The risk is the same, but the decision is different. Gravity doesn’t care.
That is why I brought up the casino so many times. Two people at a blackjack table face the same odds and the same risk. The dealer doesn’t care and neither do the cards. If one person is betting is last $1000 that is his choice. It can’t cry after the fact and ask for it back. Nor can the casino tell the millionaire that they aren’t going to pay him because he’s already rich.
The risk is the same for both players, but the decision to take that risk is individual. Restaurants (as an investment) are insanely risky, and investors should know that before going in.
I have nothing against profit sharing. If workers want to they can open a co-op. But do you realize that if there aren’t profits no one gets paid? That seems to be the point most people miss. The owner only gets paid if there is profit, the dishwasher always gets paid (assuming enough solvency).
I can’t help but feel you think that if there are profits the workers all they paid plus bonus, and if there aren’t profits the workers all get paid anyways.
Do you believe that in your experiment all workers are going to be okay with that? Or do you think they’d rather the certainty of knowing they’ll get a paycheck at the end of the day?
From my experience, unions demand higher compensation when times are good, but then refuse concessions when times are bad. (I’m picturing the airline industry here, autoindustry too but I don’t remember concessions).
So no, I don’t believe entrepreneurship would disappear. But what you’ll soon learn is that the four players in the OP choose that level or risk.
The scenario you describe does actually work well in small cases. But more often that not when the company gets too large each individual contribution can’t make enough of a change. My wife works for a massive multinational with at least a dozen business units. Her unti is extremely profitable, but 6 others drag the company down. Her performance isn’t enough to generate profit at the company, nor would it alone sink it. Profit sharing just wouldn’t work. She’s also a highly skilled engineer, how are you going to profit share her involved with the guy that mops floors? I’m not deminishing the janitor, but how does his involvement fit in with the profit made? He is needed and valued, but to what degree compared to the the technical and sales staff?
I really have no idea what you’re trying to say here. Nothing in my OP is disparaging towards workers, but if you read through this thread you’ll notice lots of people trying to shit on investors.
So I’ll say this again, all the employees get paid. Yes, they are a “cost” of doing business, but that means they get paid first. What’s left over goes to the evil capitalist pig.
Some times, a lot is left over and the capitalist pig gets fat and wealthy.
Othertimes there is nothing left over and the capitalist pig goes broke.
But the employees still get paid.*
My first job in culinary school was with a high end caterer owned by two women. I thought for sure they were ranking in cash. But after 6 weeks working there they had an emergency staff meeting. Turns out, they were extremely dependent on corporate Christmas parties, and that year it just didn’t pan out. They then informed us that they hadn’t taking a salary in three months, but that things had turned around, they’ve resigned their lease, and everyone was going to keep their jobs. During that three months, everyone got paid but the owners. That is risk.
The other story from culinary school was a chef telling me about a two year period he worked in Banff. There were tons of cooks coming out of culinary school but not enough dishwashers. As a result, he just kept upping the salary for dishwashers until they were paid considerably more than the cooks. Eventually cooks started applying for dishwasher jobs and things balanced out again.
Go back to the OP and note who gains when the restaurant fails. The chef’s reputation will suffer but he’ll still get paid. As long as there were at least a few customers the waitress will still get paid. And regardless of customers, the dishwasher always gets paid*–always. He has no risk.
It is impossible to know ahead of time the value of a skilled contributor, since that value depends on the commercial success of the enterprise, which is unknown when the contract is signed. You clearly don’t want to pay the chef a salary based on an optimistic view of the returns, because you then increase your costs and you give the chef no incentive to do better. You don’t want to lowball the salary, because then you won’t be able to hire a good chef. Where do you decide to place his compensation?
Giving him a part of the profits costs nothing if you lose, and gives him an incentive to do better, which also increases the profits of the investor. Why would you want to destroy the chef’s incentive to make you more money?
Exactly. And as I said in the OP the value of a skilled contributor [generally] goes up over the course of a year as their skill/reputation improves.
For jobs like chefs, directors, architects, and pro athletes, their salary will always lag their skills. They need to prove their worth, by putting in the time and effort to do a good job. That is an investment they make in themselves, and at the end of the year it pays off with increased worth.
And like I said, I have nothing against profit sharing. It is a tremendously powerful motivator for key contributors.
But that means that the chef is then taking risk, in this case committing his time as capital. His salary at the end of the year will depend on the success of the venture. If it fails he makes less money, if it succeeds he makes more. Keep in mind that he is only part of the equation, dozens of other factors might prevent profits, so he will want to split his compenstation between a salary and a bonus, maybe even {gasp} some stock options.
Also consider that after the first year, if the restaurant proves to be a success, the investors will want to retain their chef (who is now worth more). So they will give up some of the profits they expect for the next year in exchange for increasing his compensation.
If it turns out that the waitress is also instrumental in generating sales, they will likely give up some profits and increase her commissions.
Unfortunately, the dishwasher is in a position where although a key player, his performance can’t improve. Dishes are either clean or they aren’t. This isn’t meant to be disparaging towards dishwashers, it’s the nature of the job. The world is full of those positions and they need to be done, and the worker who does it deserves to get paid. In my experience, if the individual is contributing, they are usually promoted out of that position and given more money.
ETA And again I need to say, I’m all for profit sharing, when it also includes risk sharing. That’s sort of the point right? Everyone wants some of the profits, but no one wants some of the losses.
A dishwasher is legally entitled to a share of profits if and only if he’s able to negotiate that as part of his contract. Everyone here knows that, and everyone here knows that everyone here knows that. I guess one of my questions is: If we’re adults, why do we feel the need to pretend we think someone doesn’t know that?
AFAICT, not one single person in the thread has claimed that the dishwasher is “entitled” to a share of the profits. One poster, who admitted to a slightly “marx-y” viewpoint, suggested such a system might be preferable, but without offering any specific remedy. Other posters have been discussing issues on a somewhat higher plane than mere recitation of definitions from a dictionary, as e.g.
Ooooh. The one risking capital isn’t just risking the capital, he’s risking the LOSS of that capital?!?!? Ooooh! This is such a complex notion, maybe we need a cite for it. :smack:
For such a bright boy, I’m surprised you can’t recognize right-wing diction:
Ummm. Would he have to write “Hussein Obama was born in Kenya” before we’d know he was a right-winger?
While you focus on your debate versus a hypothetical moron who thinks dishwashers get stock options, others have looked beyond the surface. Even you focused attention on CEO’s who do get stock options:
You said that you’d answer questions. I asked for your comment on:
After a fall in stock price, American executives often had their options replaced with new in-the-money options.
… and after that you didn’t mention executive stock options again. I guess that’s your “answer.”
If calling you on debating strawmen, gibberish, and your pretence that tautologies have synthetic truth is “shit”, then I plead guilty to “shitting” on your thread.
Do you have a cite for that? I just assumed you were talking out your ass since searching Google for “replaced with new in-the-money options” turns up nothing. I’m also not sure why it’s relevant to this thread. Other than to try to suggest somebody somewhere didn’t have risk.
Because it reduces the short- to medium-term returns for major investors;
Because it doesn’t work for every type of business (and no single business model does); and
OMGWTFBBQ COMMUNISM LOL.
Ignoring #5 and assuming #4 is basic business sense, 1) and 2) can make it an uphill struggle to get it to work as a way of doing business. You need to have a management team that understands how it works and why it works, and frankly a lot of businessmen aren’t very good at thinking outside the box. (In the interest of fairness I should add that in the past some unions have also scuppered attempts to develop such businesses, presumably because it renders them irrelevant.)
#3 is about the money. Profit sharing requires investors with a longer-term view and/or an altruistic investment strategy (or an employee buy-out, as happens from time to time). And the advantages are often intangibles: you get increased employee commitment to the success of the business (which can result in greater productivity, although this is difficult to measure without a comparison), and you get increased goodwill (which is measurable in that odd accounting way I still can’t quite get my head around). It’s not a business model to attract speculators after quick returns. And of course there are different models. EBOs involve a sharing of equity as well as profits, whereas other companies simply distribute excess profits in proportion to the employee’s contribution to the business.
Make sense?
Dunno about septimus but I get pretty peeved at executives who get golden parachutes despite poor performance. All it demonstrates is their ability to negotiate a good contract for themselves (for reasons already discussed here).
What I’d like to see is more shareholder uprisings about executive remuneration, since they’re the ones with both the power to change things and the detriment if the exec screws them over. There have been a few but not nearly enough in my view.
Have you really never heard of such new options being issued?? :dubious: I am not any avid reader of business news, etc. yet have heard such stories several times. And did you really think the claim is valid if and only if the peculiar Google search “replaced with new in-the-money options” yields hits?? :dubious: At this point, I’m close to retracting my concession that you are a “bright boy.”
Anyway, between this and a subsequent post, you appear to be claiming:
[ul][li] My claim is false.[/li][li] My claim, even if true, is irrelevant.[/li][li] Some executive contracts specified in advance that out-of-the-money options would be repriced! :smack: (I’ll guess this would be against both IRS and SEC regulations.)[/li][li] Granting that so-called “options” are just a way to funnel cash straight to executives, that’s the company’s right.[/li][/ul]
Reduce your focus to just one or two of these, and I might help address your ignorance.
Because the point of the debate and OP is not focused on what people “know.” It’s a discussion on what people feel is “right or wrong.” That is quite clear in the OP.
You need to perform another layer of meta-analysis on top of your attempted meta-analysis of this thread.
Yes, in many debates, there is already an underlying status quo (e.g. in existing laws, statutes, etc.).
For example, when there is a debate on abortion, everyone on both sides already KNOWS what “Roe vs Wade” says and its current legal status. So you’re saying because its status is already settled, there is NO DEBATE??? Well, debates are not about regurgitating tautology of status quo is it?
Is it possible to debate universal health care? Why bother?! We ALL KNOW there is no law requiring it in the USA and to discuss it further is tautology. Right? Period end of story.
It looks to me like the OP made serious intellectual effort to discuss the perception of profits and who should get them. I saw not a single word saying that people are ignorant of the existing laws. You invented that complaint because of your bias.
And nobody claimed that posters were so illiterate about corporate laws that they think they are legally entitled to the profits.
Have you ever actually managed anybody? Have you ever run a performance review session?
The important thing for the owner is not the reputation of the chef but whether the chef’s actions are aligned with the goals of the business. He can improve his reputation by spending every spare minute doing interviews, writing cookbooks, talking to food reporters, but if this doesn’t put asses in the seats it is of no use to the owner.
Only if that increased worth helps the bottom line of the company. If a guy is getting stiffed, his effort at reputation enhancement might be working against the goals of the company, not for them.
Wonderful - except …
I don’t know how chefs are paid, but that is not the way it works in the rest of the world. Unless there is a real disaster, losses do not result in salary cuts. They usually result in job cuts. Salaries are sticky - once you give it, it is hard to take it away. If you are in any sort of a business where revenue can fluctuate, raises can be dangerous. Let’s say you make a ton of money and want to share it with employees. You can give a $10K raise, or a $10K bonus. Next year you barely break even. If you gave a $10K raise, you’re probably not going to break even, but lose money, since your break even point is higher. If you gave bonuses, you will break even, since you pay nothing extra. Now it is true that in the real world each person has a smaller piece of the action, and has less influence on profits, which is why bonuses go up as percentage of compensation as you get higher. (One of the reasons, there are other tax reasons.) The reason many companies share profits broadly is to include everyone in the raise for profits.
BTW granted options are not part of compensation, in that you don’t pay taxes. Exercised options are.
Actually, a good dishwasher can decrease breakage and increase turns of place settings, thus reducing the need for expensive plates and silverware. But, as I said, it is a commodity type job, and since there is probably turnover no one will stick around long enough to get bonuses even if some were given.
Execs are not owners, but they act with the power of owners. The money comes from somewhere, so in this kind of case they are skimming money off the top, where it should go to the owners in the form of enhanced dividends or enhanced investment in the company, and putting it in their own pockets though they did not perform well.
On Iron Chef Japan some of the chefs made dishes with really expensive ingredients so that they could open the container, use a scoop of caviar or something, and bring it back to their own kitchens. Legal, but not particularly moral.
When the Bubble burst there was a lot of talk about doing this, since those with options now underwater felt cheated. (And not just CEOs, I assure you.) It happened very rarely because stockholders, who would not get any compensation for their prices going down, began to raise a stink, and because there would be horrendous tax implications for everyone. IIRC a few companies did it, but not many. Looking up “repricing stock options” is more likely to come up with something, but I agree with you that this isn’t particularly relevant.
So you made a claim that you can’t back up? And don’t appear to want to back up, just something you heard “several times.”
Looking up stock option repricing there are dozens of articles, I suggest you take a look:
So here is my take, since you asked:
Stock Options are worlthless on their own. They are issued with a strike price (say $60) and usually a vesting period (can’t be cashed until a year later). They have no actual value, but allow the recipient the “option” to buy at the price listed.
They are used as part of compensation because of the way they don’t really cost anything to the company, the recipient doesn’t have to pay taxes, and it’s believed that it will encourage the executive to take more of an ownership in the company.
Side note about options: if the strike price is $60, it only has value above $60. At $59.99 it is worthless. If the stock goes up to $70 it’s worth $10 per share awarded.
So, the company used stock options to lure/retain a CEO and they felt the package represented $10,000. After the crash, those options were worthless, so the CEO feels like he got cheated. He had been offered options as part of his compensation, but {through no fault of his} those options are worthless. The company, hoping to retain the CEO offers new options at the current strike price, so technically it doesn’t cost them anything more.
On a personal note: My wife was issued a LOT of options between 2005 and 2007 at a strike price of $60 that vested over 4 years. The company stock is now at $40 so all of those options are worthless.
They were issued to her as a non-cash reward for her performance, that encouraged her to stay with the company (they knew she wanted to leave). Problem here is that the entire market went down through no fault of her or her company. So the reward she was offered now had no value. Nothing. So after the crash, they offered her a bunch of new options, with a 1 year vesting period, set at the current price.
Stock options are just one form of compensation, that pays off very well if the stock goes up, and is worthless if the stock goes down.
Maybe now you’ll tell us what your issue is with the practice.
