We were discussing "excessive executive compensation" and if government should interfere in some way. This got me thinking about all the ways in which us Americans are goofy. We want so much, and so much of it is not aligned:
- We want good paying jobs with good benefits
- We want good deals when shopping
- We want the freedom to buy what we like.
- We want investments that earn good returns
Of course this makes no sense, does it? I mean:
- if our retirement investments are not returning adequate growth and dividends, we change to a different investment where the returns are better.
- if not ourselves, we delegate maximizing our gain to the pension managers, the mutual fund house, the financial planner. our company, etc.
- to fulfill our demand and stay in business, companies need to make more profits than their competitors. (ie raise stock price and afford dividend payouts)
- to maximize profits, companies need to aggressively control costs while attracting and retaining the best employees they can afford.
- the vast majority of American customers are not going to pay more for a product or service just because the company chooses to pay their employees more than necessary.
- the vast majority of American customers want to maximize the value of the transaction for themselves. (ie low cost, high quality, high features, etc)
- the company is then highly incented to hire employees where their quality and effectiveness is high and cost is low.
Therefore:
- the investors who are often employees and customers demand high profitability
- the employees who are often customers and investors demand high wages and benefits
- the customers who are often investors and employees demand high value and low cost
Let's use GE as an example, I would dare to say that everyone with stock or blended mutual funds in their 401K, IRA, Pension, etc own some of GE. And we all are customers of GE, whether we know it or not.
With this in mind, are we okay if they start paying their employees more than the market requires? Remembering that as their costs increase and profits decrease, the growth of our retirement fund slows.
Are we willing to buy their product just because they pay their employees more, even if it came at the expense of less R&D and their product does not keep up with the features, quality, effectiveness, value, etc of a competitor who paid their employees less?
And yes GE is paying their CEO a small fortune, however that is because the Board of Directors thinks that CEO is worth the expense... I mean most of them are also GE stock holders who want to maximize the return on their investment by attracting and retaining the best employees they can afford.
That said, I do agree that there is too much mutual back scratching and collusion between Board members and Management now days. Though I am not sure how to control this if the financial houses who own most of the stock in our names don't work to fix it.
So are you willing to buy low value product or accept lower returns on your investments if a companies decides to pay higher wages and benefits than their competitors?