That is correct, you don’t understand award options as they pertain to employees of publicly traded companies. When the company fails, the options are worthless.
No, I’m not doing your homework for you.
Confirmation bias. You see the stories you want, and ignore the stories that fail to fit your narrative. You also assume that “lack of stories” implies lack of occurrence.
Yesterday, I noticed a story about a house fire, but I didn’t see any stories about houses that didn’t burn. What can we conclude?
That’s the point of this thread: understanding risk. The owner risks losing everything and ending up in the poor house. The dishwasher does not.
I don’t care what you consider hugely wealthy, it’s not relevant to the discussion. Do you see the different between $100million and $50million? Are you aware that they are not the same thing?
If I offered you the choice between $100million and $50million which would you choose?
The difference between those two numbers represents risk. Both took risk, for one it paid off.
As I noted the CEOs are almost always invested in the companies they run. Frequently a sizable chunk of their pay comes in stock options.
It is not uncommon for the CEO to also be the majority shareholder. For example Rupert Murdoch is the majority shareholder of News Corp and he is the Chairman and CEO of News Corp.
Likening the CEO as akin to any paid employee simply is not the case (or rarely is).
The example is a bit simplistic, in that it doesn’t account for upside potential.
The owner may be putting her own money in, but she might also have collected money from a pool of investors, in the way VCs do. Assuming she does this well, she can reduce everyone’s risk by reducing their contribution to levels they can afford to lose. Losing 5% of your money is a lot different from being wiped out. The investors, like those in VC funds, may diversify their money to contain their risk.
The chef may be an employee. If, however, he is a highly skilled chef, he may get profit participation without putting his money at risk - similar to the first employees at a startup. He risks his reputation and earnings at an established restaurant (though hardly any non-chain restaurants are that safe) but to a large extent his rewards depend on his skills.
In a similar vein, it is odd to talk about the opportunity costs of a CEO not being in a successful company, since we’d expect it quite possible he’d have run the successful company into the ground also.
The waitress share some of the risk but little of the upside. If the restaurant is a bomb, her tips will suffer and she’ll have to live on her wages. There is also the risk of being thrown out of work. If the restaurant thrives she’ll have a job, but there is a limit to her tips, partially based on her skills, since better servers can go to fancier restaurants and make more money off of higher bills.
The dishwasher is a commodity, and doesn’t share much of anything.
The big problem with the OP is that it assumes that only the investor deserves upside benefit. If the restaurant is a success, the reason isn’t that her money is any greener than anyone elses. The more an employee can contribute to the success, the more that employee deserves of the upside benefit. Is it a right? No. But not doing it will leave you with employees convinced they can’t contribute, and you’re going to be in trouble.
BTW, to go back to the banks, I assume you are then saying that the traders who don’t have money invested in the bank, and no more reputation than the waitress, don’t deserve bonuses?
I’m someone who sometimes finds himself thinking workers should get a share of the profits. My thoughts are formed as a result of roughly marx-y (yeah I said it) worries about exploitation etc. So I take it I’m one target of the OP.
The OP only works on a presumption that the system works on the basis of wages. But what a lot of people think (I may sometimes think this) is that the very idea of “wage labor” is broken from the start.
You may have accurately described how a wage labor system can be made to work–but wage labor itself may be a bad idea. Perhaps it should be that everyone participating is risking something thereby, and not just these few in whom capital is concentrated. Maybe it shouldn’t be that the dishwasher washes dishes by virtue of having been hired out to work at a certain wage, but rather, washes dishes by virtue of having invested his own capital in the system and having found that his own best way of helping that investment get a return is by washing the dishes.
I don’t know how to make such a system work, scale up, etc, nor do I know whether it can do so, but I’m just pointing out that many of the presuppositions in the OP are simply not shared by some people who say things like “workers should get a share of the profits.”
Sure, in a capitalist system it might not be workable to divide profits between everyone (it might–depends on what the market determines) but if the system isn’t a capitalist one, such presuppositions about workability go out the window.
An unrelated suggestion: It may be that “risk” isn’t the only thing we should measure appropriate rewards by. (Now I’m allowing myself to moralize the topic as the OP implicitly does–but I want to register that I’m not comfortable with doing so.) Perhaps differentials in degrees of freedom also should be taken into account. The people likely to become dishwashers, by and large, simply don’t have the power to easily do any other kind of job. So one guy risks more, and so maybe should be rewarded more. But another guy has been for all intents and purposes forced to have the kind of job he has (if not that specific job)–and so maybe “reward” isn’t the right word to use here, but perhaps the guy deserves something different–something more–than merely the wage he “agreed” to.
That’s right. Unless the owner is cheating by taking money out of the business and hiding it from the creditors, the owner has the greatest risk. (And if the owner is cheating then there’s a risk of being caught and sent to prison.)
Ah yes, demand I got nothing, although way better if you use the nuthin’
Let’s see what happens if instead of googling terms that confirm your bias, we look for things that disprove it, you know, like doing honest research instead of desperately attempting to support a misguided nothing.
CEO Firings On the Rise As Downturn Gains Steam(JANUARY 13, 2009)
“William Watkins, ousted Monday at Seagate Technology LLC, is the sixth CEO of a publicly held company to be replaced in just the last eight days. His exit follows the departures last week of CEOs at Tyson Foods Inc., Borders Group Inc., Orbitz Worldwide Inc., Chico’s FAS Inc. and Bebe Stores Inc.”
Murdoch is also the owner of News Corp. Company founders may have lots of stock. CEOs of large, publicly traded companies typically have very little. The CEO of the old AT&T had practically none. I doubt Carley Fiorina had significant amounts of HP stock. She was certainly equivalent to an employee, though one who got a nice payment for screwing the company up.
Stock options don’t cost the employee anything, and losing theoretical value is not the same as losing money in a real investment. Trust me - I’ve lost more imaginary money in investments than I like to think about. Options are given (or were) because there are tax implications on too much salary.
Smart CEOs have a Change in Control Agreement, trust for pension, and a pre-agreed upon severance agreement - all negotiated in advance. You can read the details in a company’s def14A / Proxy statement on file with the SEC and available online.
The Senior Management of Lehman didn’t parachute out.
The Senior Management of Arthur Andersen didn’t parachute out.
The Senior Management of Enron didn’t parachute out.
There are plenty of examples of CEOs NOT making it out with a lot of money, others with getting their parachute, others with being paid off rather than having a court fight.
None of which is relevant to risk. In a public corporation, it is the investors with the risk, and the investors with the reward.
You started buy mentioning upside potential, then went on to describe out to spread risk, but forgot to mention that you are also spreading the upside potential.
In the OP the owner is 100%. That should just as easily be 100 people putting in 1%.
So owner at 100% will get (and deserves) 100% of the rewards, because she is taking on 100% of the risk.
If instead 100 people by a lottery ticket, they each risk 1cent, but they also share the reward. They don’t each win $1million, they win 1/100th of the profits.
Yes, the skilled tradesman risks his career and reputation, the way a CEO does.
It is entirely possible to blur all this and create confusion by trying to go back and forth with CEO as owner, or chef as owner. There are plenty of examples of that, and plenty where CEO/chef is just an employee.
But it doesn’t change the nature of risk.
At any point an employee can decide to incur risk. The labourer at the bottom could just as easily say that he wants a stake in the profits. But to do that he’ll have to risk his capital. He could put up cash, he could buy equipment, or he could forgo salary. All incur risk, and from my experience 99 times out of 100 employees don’t want to be part of the risk. They want to show up, and get paid.
Sorry, that wasn’t the point of the comparison.
The comment made was that shitty CEOs still got bonus, to which I countered the successful ones got better bonuses. The shitty CEOs took risks and lost.
You’ve confused a few terms here. The waitress in essence is a contract work who chooses to align herself with a particular product. First and foremost she needs sales volume to generate tips (commissions). But as the product (restaurant) becomes more successful she’ll generate higher commissions.
With that said, there is a high degree of skill to the sales position that I had no intention of dismissing. A great waitress (like a great dishwasher) is a highly valuable asset. Which is why she incurs opportunity cost when she chooses one restaurant over another.
Well, yes, that is the point of the OP, the investor is the one that stands to lose capital. No one else.
No, the more an employee contributes the more they should be rewarded for their skill, that is where compensation packages kick in. That is where you will stock options awarded to CEOs, because stock options are only valuable if the stock is up, and worthless if they are down.
That is an investment decision: what chef do you choose, and how do recruit her, and how do you retain her?
In that case, a chef/CEO might invest their time (which has value) and risk losing if the restaurant fails.
Why are you so resistant to understanding risk? What do you stand to lose? Would gaining knowledge not be slightly more valuable than trying to save face?
The $5milliion severance was not his risk. He got fired for doing a bad job. Had he done a good job he would continue to be employed making way more than $5million.
I don’t know (or care) what you do, but let’s say you make $20k a year. If you fuck up you stand to lose that job. If you do fuck up and they give you a $50 compensation package, what did risk? Was it $50 or $20k?
As we keep telling you, a CEO position is a skilled job, meaning that Watkin’s now has to look for another job while carrying the shame of fucking up Seagate. Do you think he’s worth more now or less? Seagate stock went from almost $30 to almost $3. Would Emc Corp., Brocade Communications, Sandisk, or Western Digital want to hire him?
You also glossed over the fact that his options AND pension were bought out, you forgot the part where his pension was bought out, in order to make it look like his options were worth more.
Again, I don’t care what you do, but what risk do you carry? If you want to be paid more get a better job. She would have gotten paid more had she done a better job.
In the restaurant of the OP, sure, the owner has the greatest risk.
Now imagine another restaurant, except this time the owner has several other business investments. Lets suppose he owns ten restaurants. Now, all the owner is risking is 10% of his capital. If the restaurant goes under, who cares? He has another nine. The staff, on the other hand, now find themselves unemployed. They have arguably lost more (their entire livelihood) than the owner, who is still a long way from the poor house.
You have picked the perfect scenario to come up with the conclusion you wanted, ie that capital owners risk everything and labour risk nothing.
Then there is theleveraged buyout in which the new owner assumes little to no risk by financing the purchase with loans against the company. Then you run the company in the way that maximizes short term profit, pay yourself the best dividends you can, and when you don’t think you can squeeze any more profit out, sell whats left for as much as you can or declare bankruptcy. No risk, maximum profit.
And here we are, knee deep in it trying to explain stock options and contractual obligations.
And for the record: in the OP the cook, waitress, and dishwasher can and do screw up, and those screw ups can and will destroy the restaurant.
With that said, it is no uncommon to have someone fired and be told they’d be paid for the rest of the week. I think we can all agree getting a week’s pay doesn’t make up for a yearly salary.
And there is no reason why any of the players can’t negotiate a severance as part of employment.
He cares! It doesn’t matter how much of his total capital he invests, he still stands to lose 100% of that investment. Just because YOU think it’s chump change he probably wants that money. In fact, research shows people feel a loss much more strongly that a win.
I feel each any everyone one of my failed stock trades, regardless of how small the loss.
What if I said, “meh, he has 9 other kids, he can stand to lose one.”
Even in your scenario, he is taking the risk, no one else. So why shouldn’t he stand to make gains off the profit?