Corporate Hustle Series: Here’s why you’re underpaid
The Corporate Hustle Series will focus on how to really boost your salary & make sure you're pushing a strong set of numbers. Anyone who has ever worked a corporate job will acknowledge, there's a small group of people who do actually get paid handsomely. The first step in knowing how to get paid is understanding who is getting paid (& why).
One of the inherent flaws of unchecked capitalism is exacerbating inequality. The benefits of your labour accrues disproportionately to people more senior within the organization. Many corporations are incubators for mediocrity while masquerading cheaply sourced labour as value creation.
Despite the shiny skyscrapers, glossy ad campaigns and extensive PR - a number of these juggernauts remain lethargic, suffocating under their own self-imposed bureaucracy and draped in ineptitude. The ability to recruit base level employees cheaply not only creates congestion but also leads to duplication, deep inefficiencies & widespread mediocrity. Ever encounter someone in the office & quietly think "How can this person get paid so much for being so incompetent?"
I'm underpaid... so who is actually being overpaid?
Introducing more layers only creates even more distance between the average employee and senior executives. As the distance grows, the pay gap grows with it.
Last year the average CEO of a S&P 500 company earned 287 times more than their median employee. At Estee Lauder the gap is close to 1,700 times and if you work at McDonalds the gap is over 2,000 times.
Does the CEO generate over 300 times more value than the average employee? Of course not, the CEO takes a slice of the aggregate value from the entire pyramid of contributors below - but the real kicker comes from financial instruments. Much of executive compensation is linked to stock options.
Take a look at the sharp spike in the chart above from 1990 to 2000. What happened around 1990? The inflection point sparking the catalyst for accelerating inequality is largely owing to President Ronald Reagan's tax cuts. Incidentally cutting taxes also sparked the student debt crisis. The government simply spent less on higher education funding and student aid. A disconnect in base level wages remaining unchanged against soaring cost of services previously covered by government results in even deeper inequality. Education, healthcare and housing became more expensive but salaries remained fairly flat. So no, we aren't poor because of avo toast.
The marginal tax rates on the highest income earners (post World War II) went from over 90% down to 28% but that's only part of the reason why CEOs became remarkably rich. Reagan's administration also passed legislation making it considerably easier for companies to buy back their own stock.
Now you have CEOs sitting with tons of stock, they run companies which are also allowed to buy large blocks of company stock AND you have lower taxes (greater cash). So why not get the company to keep smashing the BUY button and push up your own stock price, giving yourself a huge raise in the process?
That is exactly what happened. Who is the largest driver of demand for stocks? Pension funds? Robinhood/ EasyEquities traders? Hedge funds?
No. It's corporates buying back their own stock.
Over a 10 year period, companies in the S&P 500 spent more than 50% of their net income buying back their own stock and close to 40% on paying out dividends. That doesn't leave you with much cash left to reinvest in companies or spend on Research & Development (R&D) or paying your base level employees better.
In 2018, more than half of companies did not spend a cent on R&D. Just 38 of the 500 companies account for 75% of all R&D spending. Like trembling degenerate gamblers, companies started BORROWING money to buy back their own stocks & push up prices. Since companies can't help themselves, Congress even had to make sure companies don't use COVID-19 relief funds for stock buybacks.
What happens when you spend a ton of cash on buying back stock and go bankrupt? Well, you simply beg for more money from taxpayers.
There's no better example than airlines. Here's a chart showing the big 4 US airlines (Delta, United, American & Southwest) who are desperately pleading for a government bailout despite spending $43.7bn in cash on stock buybacks since 2012.
When I grow up I want to become a CEO
More layers in the corporate hierarchy makes it considerably more difficult to reach the top. If anything, nearly every single person who walks into a corporate job will never make it to CEO or the board. The chances of becoming a Fortune 500 CEO is estimated to be well over 1 in 100,000. You're more likely to be struck by lightning or 10 times more likely to win an Oscar. Like any great pyramid scheme, the promise of riches and seeing a few successful people fills the corporate employee with hope they too will ascend the ranks and lounge in the upper echelons. While it is very possible to become a highly paid executive (at least close to the top) - the focus really should be on getting paid now.
The system has (& will likely never will be) "fair". A glance across the executive salaries in large, underperforming companies is a clear signal it's very possible to be rewarded for mediocrity.
Senior executives also have misaligned incentives. Bonuses and executive rewards are often linked to growth in earnings. In an underperforming company, one way to boost earnings is to buy up more companies (mergers & acquisitions). Another way to make earnings per share look really great? Stock buybacks! The best way to think of the impact of stock buybacks on earnings per share is to picture earnings as cake and shares as people. Let's say you invite 100 people to your party & have 5 cakes, there's not a lot of cake to go around. This time you invite 5 people and each person gets their own cake! Same quantum of earnings (cake) - just less shares (people). It's not magic, it's just math yet executive compensation thrives off this.
Here are a few common arguments defending high executive pay.
"They get paid for the risk they take on"
"It's performance related"
"Nobody else can do the job"
"They work hard..."
While it is true being a senior executive comes with a great deal of responsibility, accountability for bad decisions is often absent. Large guaranteed pay packages ensure large pay even if a company does poorly. Executives in large corporate teams are seldom held to account for terrible deals, lack of growth and complacency. During restructures, base level employees are faced with retrenchments, reduced pay and fewer benefits. The pain isn't shared equally. If things get really, really bad - companies simply ask the government to help out. While it is also true there's a general leadership crisis, with the juggernaut of large corporates needing approvals at multiple levels, having a fully staffed board and needing shareholder approval for really big decisions it's difficult to imagine anyone is indispensable - yet there is a very present culture of professional board sitters. These are people who make a living doing little more than sitting on a number of boards.
Corporates love subservient people who never question their worth or push for a higher salary - people without a game plan drifting through life who settle with a slow-growing figure and spend their years crafting their lifestyles around it to try & painfully make it work. The more people you can convince to climb onto the scheme, the more layers you introduce and the more their efforts accrue to you disproportionately. It's most acceptable pyramid structure in modern history.
One strategy to end up financially better off involves cutting out your daily coffee, recycling the bath water for tea or generating electricity using the spark from your non-existent relationships. This is an incredibly miserable way to live & won't fix being underpaid.
Of course - an emergency fund, a liquid portfolio, an investment budget, paying down expensive debt and smart decisions are definitely important since it's impossible to outspend terrible habits - just ask Mike Tyson or Diego Maradona. That said, finding yourself on Extreme Couponing stockpiling toilet roll & stuffing your handbag with chicken nuggets to take home from a kid's party isn't much fun. A focus on maximizing your salary with limited disruption to your current lifestyle is far more satisfying.
You deserve good things.