The chef risks little if he/she is not an owner. Even the damage to reputation is minimized since he can demonstrate skills, and blame the restaurant’s failure on the owner. The waitress risks nothing since she will leave at any time for a better job if it’s available. The only possible risk for the dishwasher and the waitress are not getting their final paycheck (which for the waitress may be a minor part of her take home). The rewards for the chef, waitress, and dishwasher are paychecks at fixed rates (and some amount of tips), but the return is unrelated to investment. The owner risks everything, the employees, nothing really.
A better understanding of investment and risk can be seen through the owners investment in incentives for the employees and customers. All the restaurant owners I know will provide bonuses to employees as an incentive. They range from free food to extra pay. It’s common to pay employees in restaurants cash off the books so they can save on taxes. This essentially comes out of the owner’s pocket (and the governments if he’s taking out cash and not reporting it). When he prices meals, advertises, runs specials, etc., he is investing in marketing to gain an increase in business. The benefits of those investments have to result in enough increased business to justify the costs. That can be very difficult to determine because the benefits can be very indirect. For instance, it’s beneficial to lose money on a meal sold at a low price if it gains the restaurant a regular customer.
Obviously he cares, I wasn’t actually looking for an answer to that question. But you suggest that whenever a business fails its owner loses everything, which is miles from the truth. Most people with money to invest spread out their investments, precisely so that when one fails they don’t lose everything.
You don’t think employees have anything to lose if the business closes? Ever been unemployed or poor? Ever struggled to pay bills? The point is, it hurts a lot more to lose your job when trying to support a family than to lose 10% of your riches when wealthy. You don’t seem to consider losing a job actually losing something, because you have no money invested.
Do the employees lose anything when the business fails? Or do they all walk to the restaurant across the road and get instantly rehired, as so often happens in economic fantasy-land? What if the business fails during a time of high unemployment, and the staff can’t find new jobs?
Who loses more then?
Great OP. It will of course have zero impact on the target audience. They want what they want, and if you don’t want it too then you are a bad person who must be resisted.
Stock options convey neither ownership nor votes. They are of potential value only when issued. I got to take losses for the stock I owned, but not for any options I owned when the expired underwater.
What’s the point of the OP supposed to be? Is it that the owners should get all (or the significant majority) of the profits, since they face all (or the significant majority) of the risk? But why would risk be the only thing that deserves profit? The chef might not have much risk himself, but the quality of the food he makes is going to change how much risk there is to the owner. If you’ve got a really good chef who turns your restaurant from being an iffy proposition to a sure thing, doesn’t he deserve a reward for that?
The chef isn’t a slave though…if s/he doesn’t think they are being compensated adequately then they are free to take their labor to another restaurant and negotiate a better deal.
The owner is the one risking his or her capital on the venture though. Without that capital then the chef, the waiter and the dishwasher don’t have a job at that particular restaurant. They would have to compete at a different restaurant…one that has an owner that was willing to pony up the capital to open that establishment and thus open the opportunity for employment by our trio.
Well, yes, but without the chef, the waiter, and the dishwasher, the owner wouldn’t have those particular employees, either. But the owner is free to approach other employees and negotiate a better offer with them. The owner isn’t a slave, either.
Yes, obviously the upside potential for investors is in proportion to their investment. But that’s not the upside I mean.
No, I’m not claiming that the chef has a role as either owner or CEO. A noted chef is not going to work for salary only - he’ll want part of the success that he helped to create. There are examples of this throughout many industries, from CTOs of startups getting stock to actors getting a share of the profits of a movie (and let’s not get into a Hollywood accounting discussion.)
Not at all correct. I shared in the profits of my company through options without putting a penny at risk. Before the tax decision. many, many workers did, including Admins.
The bonus system, which is on top of this, can be said to put money at risk because perhaps we’d get some of the bonus money as salary - but it mostly involved extra money coming out of profits, with nothing really at risk. Certainly my offer when I started was competitive without considering bonuses at all.
I’m not sure then what you mean by opportunity costs. That would seem to imply they could have done better going elsewhere, when in fact their supposedly shitty bonus was a result of their own performance. I’d also want to see some evidence that poorly performing CEOs do get bad bonuses. Compensation committees for very large companies are often in the pocket of the CEO, and if the CEO is doing that badly they tend to get fired, not take rotten bonuses. Good ones voluntarily renounce direct compensation in the place of options - which is often a good deal because at the time the stock prices is depressed and so they can make a bundle on the resurgence of the industry as a whole. This kind of compensation is usually based on absolute stock value, not value in relation to the competition.
Say she can handle 20 tables, and is the first server hired. The restaurant bops along at 20 customers, so she gets all the tables and tips. Now it takes off, and does 80 tables worth of business. 3 more servers have to be hired, and she still gets tips from the 20 tables she can handle. Assuming there is no increase in prices, the owners get the extra profit and she gets nothing.
If she is only doing 10 table worth of business then she does do better - until she hits the ceiling of the tables she can handle.
True, if she can increase the amount of the average check she’ll do somewhat better - but nowhere near as well as the owners.
But in many cases the relative pain of a small investor losing capital is less than that of the dishwasher or waitress losing a job. It is marginal utility again.
Initial compensation is based on the market and on potential. Only a foolish owner would award initial compensation based on the rosiest forecast of revenue. However if that does happen, and he doesn’t share the profits with the chef, he risks losing the competitive advantage of the restaurant. it is clearly to the owner’s advantage to make this a profit sharing plan, not a compensation increase only plan, since then he is protected from the downside to a certain extent - like the chef losing interest.
And CEOs are hardly the only people getting stock options.
No one is saying that the owner should be forced to share profits. However, an owner who takes all the profits because he has all the risk is not likely to be very successful for long, especially if there are crucial employees. Risk is only part of the equation.
[QUOTE=Chronos]
Well, yes, but without the chef, the waiter, and the dishwasher, the owner wouldn’t have those particular employees, either. But the owner is free to approach other employees and negotiate a better offer with them. The owner isn’t a slave, either.
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Exactly. Both parties are free to push for the terms they feel are advantageous to themselves. If the owner REALLY wants that chef or that waiter (or even that dishwasher), they they will be prepared to pay a premium for a particular individual in the hope/expectation that it will increase the potential profitability of the venture. The chef, waiter or dishwasher may feel their labor is worth more (or less) than a particular owner is willing to pay, so both sides have to make a decision as to whether it’s in their best interests to come to a mutual accommodation.
The owner, however, having put up the capital to make the whole thing possible will obviously reap the biggest potential rewards, while the others (assuming they aren’t stakeholders) will reap rewards consummate to their ability to make the venture successful.
Your notion of risk here is bizarre. If I get into a crash because a red-light runner T-boned me, I can reasonably say that driving is risky. If I get into a crash because I was doing 110 on slippery roads, I can’t really say that the reason I get creamed was because driving is risky. The reason was that I was a moron.
The application to CEOs should be obvious.
[QUOTE=Voyager]
No one is saying that the owner should be forced to share profits. However, an owner who takes all the profits because he has all the risk is not likely to be very successful for long, especially if there are crucial employees. Risk is only part of the equation.
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I agree that an owner who is stupid and attempts to gouge his employees to the lowest amount he can get them for their labor is unlikely to be successful, but I disagree that risk is only part of the equation. Without the initial willingness to risk there would be no equation, and those workers would have to sell their labor somewhere else…a somewhere else that also exists only because someone was willing to risk capital (as well as their time, effort and skills) to make it possible. I don’t see how anyone could work anywhere doing anything without risk by someone.
Yes, I realize it is bizarre to a lot of people, which is why I started this thread, to help people understand what risk means.
Driving a car is risky, when you go through an intersection you always have a risk that someone might t-bone you. I could just as easily say you were a moron for not looking center-left-right before proceeding (thank you Young Drivers of Canada).
And yes, the second driver was a moron who took what would be considered an unnecessary risk. The point of this thread is that when two people set out from their house, each can choose to take a level of risk. One might drive at high speeds while they other stops at green lights to be sure.
One took more risks and got to his destination sooner (or not at all), the other took longer.
The issue at hand is what was the upside potential? If they were both trying to get $100million, you might think the second driver a fool. In fact, there is an entire industry that revolves around people driving insanely fast on slick roads in order to win money. Would you still call the guy going 110 on a slippery road a moron? (I’m talking about NASCAR etc)
I’m sorry, this whole thread is invalid because “risk” has not been properly defined as yet. To me “risk” means what are the potential harms that may befall you if things do not go well. Let’s recast our four restaurant employees and show you what I mean:
The owner is a the wife of a successful middle manager making $250,000 a year plus stock options and bonuses. She has talked her husband into bankrolling the restaurant as something to keep her busy as the kids are grown and he spends all his time travelling for work (and snorting coke off the butts of various whores on the company dime while out of town, but she is not supposed to know that). The hubbie sets up the business as a tax shelter for him and various other buddies who need one, figuring it will go under pretty soon.
If the restaurant fails, he loses very little, as does the wife. They stand to make big money in the unlikely case that the restaurant takes off, of course. Hey, they’re taking ALL the risk, capital-wise, and that’s the ONLY thing that counts … right?
The chef is also the manager, running the restaurants, with some nice bonuses lined up if the restaurant does well, but no stock options. He or she will be risking his reputation which is worth money, but he or she already has a good one and will be able to find work running another restaurant fairly easily if the restaurant goes south, which, being a realistic chef, he knows is quite possible. His goal is to keep the kitchen and the service up to snuff so his personal reputation stays high, even if the restaurant tanks. He faces some risk if the restaurant tanks, but not a great deal.
The waitress is a good waitress but the economy is tight and it will take her weeks or months to find a new job if the restaurant folds, if she’s not lucky. And she does not make that much money in the first place, she lives from paycheck to paycheck and she is having a hard time making payments on her car, her car insurance, and her rent as things are. She could be without transportation if the restaurant folds and she cant find work really fast, and if the waitressing job market is really tight, she stands to lose her ability to make the rent. She is married now and cant live with several other waitresses as she has in the past, and her husband is unemployed, and, to be honest about it … a bum. She is facing a LOT of risk. If the restaurant succeeds, she can support her husband and herself, but it kinda has to succeed. Her upside is marginal at best.
The cook is a reformed alcoholic who sobered up in jail after his last DUI conviction. He’s determined to stay sober on the outside but his life is really hard … he has no health benefits, and after he finishes washing dishes at that restaurant he goes to another restaurant and busses tables cause neither job pays enough to keep him fed and housed, even in a cheap apartment he shares with four other guys. All he does is work and sleep. If the job goes south, he will have a lot of trouble keeping himself fed and sheltered on his own dime, and have a lot of trouble staying sober, cause frankly the straight and narrow life is not all it’s cracked up to be. His life is mostly downside, and he is at great risk. If the restaurant succeeds, he has an assured job as a dishwasher for as long as he can stand it, a fairly narrow upside in the trap he is now in.
Now I say the waitress has the greatest personal risk, followed by the dishwasher, with the manager having some personal risk but nothing on the scale of the other two, and the owner having virtually no personal risk. She won’t have to forego vacations, move to a less nice house, or not go on those fun shopping trips at antique stores she loves if the restaurant goes south.
Now I will grant you that some owners of businesses are indeed risking their personal fortunes on their enterprises, but it’s not a given that they are. You should have known that, Mr. OP.
Money is FAR from the only measure of risk, and possibly the most inaccurate.
A decent social safety net would even up the risk for the dishwasher and the waitress, as they could be assured of food, health care and a place to live even if the restaurant folded, but typically conservatives HATE that … guess they are not into risk management.
Wow. I award you no points, and may god have mercy on your soul.
The complete dense idiocy of your post began with your suggestion of a restaurant as a tax shelter, and it just went downhill from there. Your post shows that you have no idea how the world works and simply aren’t interested in learning.
I need to stop you right there. It doesn’t matter what YOU think risk means. I started this thread specifically because there are at least a dozen posters on this board that what to apply their own definition of risk, and thus apply their own system of reward.
Go into a casino, walk up to the roulette table, and put $20 on black.
You just risked $20. If it is not black you lose all $20, if it is black you stand to gain $20 (plus your original). That is risk.
It doesn’t matter what YOU think risk is. Perhaps you think it was risky driving to the casino, or standing for too long in one spot.
Now, while at roulette table, stand next to someone who is betting, wait until they win, and then demand half. Tell them what you told me, that you took a risk just showing up, and that you are some how entitled to half of what he won.
I’m sorry but the rest of your post is nonsense. It is true that I set up the OP in a way that made the owner the protagonist. Which is in direct conflict with the multitude of union threads that set up the hardworking American labourers as the hero.
You tried to create a scenario where the owner is evil. But the dishwasher could just as easily be a bored retireee with a nice sized pention and doing it to keep busy. He doens’t care if the restaurant succeeds or fails.
In the end, it doesn’t matter how rich the owner is to begin with. It is still the owner’s money on the line (like in a casino) and hence the owner’s reward should it succeed.
This statement has already been made, too many times. It doesn’t matter who lives paycheck to paycheck.
Would you’re opinion of the OP change if you found out the owner lives paycheck to paycheck? That may very well be the case for at least a year. And when times are hard, it’s unlikely the owner will continue to draw salary when bills have to be paid (which include the salary of the staff).
The risk you are describing has nothing what so ever to do with the restaurant, any more than you can ask the dealer to refund your $20 because you really need it.
The risk you are refering is all based on her life choices such as becoming a single mom, leasing a car, getting an adjustable rate mortgage with zero down, or driving fast in the rain. None of that has anything to do with the restaurant and more than it has anything to do with placing a bet at a casino.
Again she is not dependent on the restaurant, she is actually dependent on the restuarant industry. As a waitress she has the skills and training to work at any restaurant, but her sales (commissions) are based on the health of the industry, not specifically on the health of the restaurant. Like I said, when she signs up she risks the potential to earn more at a different restaurant.
Likewise, I don’t care about the sob story you’ve created for the cook. If he places $20 at the blackjack table, he stands to lose it like the rest of us. The DUI was the result of a risk he took.
And like I said in the OP, he is not dependent on the success of the restaurant but rather on the industry in general.
Would it change anything if the owner was a recovering alcoholic? What health benefits do you think the owner gets?
Why do you feel the need to victimize the three other players in this arrangement and demonize the owner?
Again, it really doesn’t matter what you think. I think placing your money on black is the greatest personal risk, but my buddy swears that it’s red.
Try this, four people each place money on red: $100, $200, $300, and $400. Who has taken the most risk? Who stands to lose the most? Does the life story of each person involved matter?
Now, when it lands on red and they each win, how much should each person get? Again, does it matter what their life story is? Does it go to the person that deserves it the most?
Try to rationalize in your head why each person should get $250. That’s what the OP is about, the person that risks capital stands to gain. Your scenario is touching in a Michael Moore sort of way, but says nothing about risk.
I do know that, and it was never suggested that ALL are risking their personal fortunes. You should have known that.