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February 6, 2012
Rethinking the Debate Over the 99-to-1
I hold a staff meeting every week here at SRC. We go over the financials of the company and anything else of material significance. This is a critical part of how we communicate to our associates. It keeps a constant flow of information coming and going. You always hear a lot of companies talking about their “communication problems.” Well, I think the problem is that we don’t give people enough information to communicate.
Our last meeting came after President Obama’s State of the Union speech. If you watched the speech, you know what the major theme was: the economic disparity plaguing the country today.
I’ll admit that I didn’t think much of the speech. In fact, I’m really tired of hearing about the “99-to-1” problem facing our country. I agree there is a growing problem of the “haves” and the “have-nots,” but I’m frustrated that nobody is talking about how to fix it.
With this being a very current topic, I decided to talk about it in our staff meeting. We opened up a discussion about it where we tried to avoid using any of the political jargon or taking anyone’s side.
There were a lot of financially astute leaders in that room. We got great questions and perspectives on things. What follows are some of the highlights of our discussion.
We tried to define what the “99” and the “1” really meant. We had mixed opinions. Some were talking about the “income earners” while others were talking about “wealth accumulators.” There’s a big difference between the two and I think it tripped a lot of us up. I can see why politicians are confused.
I think a lot of us fall into a trap of focusing on salaries instead of income, such as money earned as wages, as opposed to wealth, which is accumulated capital in the form of money in the bank or held in company stock. Mitt Romney, for instance, pays a lower tax rate on the business income he earns – the profits and dividends – from his accumulated wealth. So while everyone gets worked up about how much he paid in taxes, they’ve overlooked the key concept: how did he accumulate all that wealth? That’s where we should begin looking for answers of how to level the economic playing field.
When you really look at the numbers, I think you’ll find that the top 20% of the people control 85% of the wealth. The bottom 40%, on the other hand, control a minuscule 3/10 of 1% of the wealth. That’s a massive gap. So how did that 20% accumulate so much wealth? I think the vast majority of the cases would show that people became wealthy because of business income.
I hope you noticed that I said business income and not wages. I would contend that we as a country have focused more on wages than on business income over the past century. By paying attention to wages over patient long-term capital as in equity, the owners of capital experienced the true engine of wealth creation. Sadly, by focusing on keeping wages high rather than at competitive rates, we forced business owners, who are accountable to their stakeholders, to move those jobs someplace else, where wages were significantly cheaper. While we lost jobs in the U.S., business owners kept their equity and business income, which increased the domestic wealth gap.
Again, the big question is how do we go about shrinking this gap? We just recently became a 100% employee-owned company. That means that every associate in the company now has what we call a Stake in the Outcome or, more plainly, an equity stake in the company just like Mitt Romney had in Bain Capital. But to get there, we had to take on debt to pay off the company’s original shareholders.
Here’s how the math plays out. Since our associates own the company, they theoretically could pay themselves whatever they wanted. Raises for everyone! Or, they could continue paying themselves competitive wages and focus on paying down the debt on the books to convert toward greater wealth for everyone in the company. Under our current stock appraisal, for every $1 million we pay down in debt, the share price of the company will go up $1 until the original shareholder debt is completely paid off, assuming steady earnings from one year to another. Obviously if earnings continue to rise, so does the value of the associates’ shares.
In other words, they can turn that debt into equity, which is their share of the wealth of the company. This is a straightforward example of how we can convert risk (in this case, debt) into ownership. But rather than a single person taking on that risk like we see in most companies, it’s a shared mission for everyone who works at SRC.
This is a lesson in the literacy of the language of business that we teach every one of our associates through The Great Game of Business. Employee ownership is also, I believe, a way that we as a country can take a proactive approach to closing that wealth gap we’re looking at.
Focusing on raising wages isn’t the answer. Nor is it about taxes and giving the government the power and responsibility to redistribute wealth. It’s not about increasing the minimum wage – it’s about teaching everyone how the “haves” made it. This is one of the most significant challenges of our time.
We have to be careful here because I think we’re putting the American Dream at risk. Why would anyone gamble by climbing a slippery and difficult ladder when, if they do succeed, everything they gain will be redistributed anyway? The reward is what makes the climb worthwhile. But now it’s almost like we’re trying to hold down the climbers and I’m not sure how that makes any sense.
Shouldn’t we all want to be climbing the ladder rather than pulling down those that want to try? Isn’t that what the American Dream is all about?
As you can imagine, this topic provoked an interesting debate in our staff meeting. Now I’d like to know what you think. What kind of critical number can we come up with as a society that would help shrink the wealth gap without taking anything from anyone? How can we get everyone, including folks like teachers and firemen, to participate in finding that balance between creation and distribution of wealth? What kind of incentive program can we create that gives everyone a chance to grab the brass ring?
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15 Comments
Andrew says:
On February 6, 2012 at 3:39 pm
Thank you Jack! As an observer of the current debate from just north of you In Canada, it has amazed me that in the land of the free, where entrepreneurship has driven the country for so long, so many asking for others to make their way – or to set the rules that will somehow protect them. Financial literacy, business literacy and an economy that responds to great products, great service, great value… that is the only sustainable solution.
Keep up the great work sharing your message. Some of us are listening!
Ed Garrison says:
On February 6, 2012 at 4:07 pm
Hi, Jack! Everytime I hear or read about this redistribution of wealth issue, The LIttle Red Hen children’s primer comes back to my mind. Some of the answers to this country’s problems are found in some of the simplest places. If folks believe they can get a free handout while someone else does all the work, some (how many the “some” are is an indicator of how close we are to the tipping point) will choose not to invest their time, effort, and energy beyond simply holding out their hands. And then they get irrirated and can’t understand why the Hen is so selfish. It’s simple, and I wish our politicians would get it — those who do the work and heavy lifting should get the rewards for their efforts, If people knew that was how our economic system was going to work and our government policies were writtent to support this framework, more might decide to get in the game.
Brian Skeele says:
On February 6, 2012 at 6:31 pm
Hello Jack! Thank you for opening up the conversation. As an advocate for sustainable neighborhoods, I got really excited when I first realized neighborhoods that want to go sustainable could be democratically organized, owned and profits shared in a similar way to SRC. All the values lined up! It’s a big vision, but it meets the challenges of our times by tapping into the greatest resource, as has SRC, namely human ingenuity.
I believe the sea change before us, as a society, as a planetary community, is how to lower our costs of living, while raising our quality of life. Just as Rocky Mt Institute is lowering costs at industrial plants 10 fold, these are the kinds of saving to be had by integrating our neighborhoods’ systems while sharing amenities, facilities, and services. I call them “Mixed use, mixed income neighborhoods with lifelong learning and open space”.
Americans have risen to monumental challenges in the past. By adopting best practices wherever they’re found, we can do it again. As I recall in your first book, when offered backing to pursue their entrepreneurial passions, one employee wanted to open a hair salon and another wanted to open a liquor store.
What if SRC were to branch out into sustainable community redevelopment? What if the wealth accumulators were given investment opportunities with real, lasting values; highly efficient, sustainable lifestyles with deep affordability that live lightly on the planet?
A lowered cost of living enables lowered wages. By mining our ingenuity and creating win-win-win solutions, a new era of prosperity can emerge that’s good for people, the planet, the polar bears, and the 1%.
Mixed use neighborhoods with creative ownership models based in good business acumen, will allow us to go beyond the Us vs. Them, just as SRC evolved beyond the white collar vs the blue collar turfs. Just as SRC realized the entire company had to find a new form to survive, so does our “every man for himself” car-dependent sprawl lifestyle.
Maybe this all seems too far outside SRC’s mission, just as opening a hair salon and a liquor store did many years ago. Maybe it was an idea before it’s time. I didn’t think so then, and I don’t think so now.
Steve says:
On February 6, 2012 at 6:49 pm
While I agree with what is being shared – and wholly embrace the concept of employee ownership I will add a dimension that I witnessed in the early 1980′s.
Employee ownership gives us a picture of a company with pride in what they produce and pride in ownership. This was the original picture of a business owner in our free market system who took the opportunity (and risk) to start and grow a business, offer a product or service they believed in and in the process brought jobs to their community.
(I welcome corrections to the following statements)
In the late 1970′s, early 80′s the wisdom and creativity of the growing financial sector of our economy (now at 40% of our GDP) developed products that circumvented rules governing the fairness of company sponsored benefits, which limited owners and upper management from receiving benefits much greater than the rank and file. I am not certain what that difference was capped off at, but these new products of deferred compensation and the like opened the door and changed the perspective of business owners to now see their companies as a cash cow worthy of providing them and their families with life long benefits regardless of the impact on the longevity of the company and it’s other employees.
I would fall short in fully explaining the details of this impact but it is clear that the disparity of incomes began at this time and we have the financial sector of our economy to thank for finding ways around the well intentioned laws set in place to discourage just this behavior and outcome.
I will end by pointing out that this sector of our economy (banking, credit cards, investment firms and even insurance ) fail to produce a service or product that is exportable thereby off setting our trade balance with the world, nor a service to which many Americans can feel a sense of trust or cooperation.
Vik Karode says:
On February 6, 2012 at 7:36 pm
Very well put! Just like your comments suggest, there are a lot of us who are tired of hearing this “Havs” and “Have nots” debate by the current administration. Some of us also worry that instead of showing a way to “have nots” a path to become “Havs” our proposed and some current policies are leaning towards forcing “Havs” towards “Have nots”; a sure fire killer of the American Dream.
I am all for taking care of the Have Nots but rather do it by leading them out than distributing to them largesses from those who have worked hard to become the Havs.
Tom Bissonnette says:
On February 6, 2012 at 9:42 pm
Now I have to admit that I plagiarized this from an email that I recently passed on to my daughter in college – she is being brainwashed into thinking the rich do not pay enough taxes – and I believe this little story speaks to the situation you are referring to:
Barstool Economics 101
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that’s what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the arrangement, until on day, the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.” Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’ They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
“I only got a dollar out of the $20,”declared the sixth man. He pointed to the tenth man,” but he got $10!”
“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I!”
“That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”
“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
Clive says:
On February 7, 2012 at 4:31 pm
WOW – what a far fetched story to try emphasis a particular point of view! I am sure the opposition can come up with one that is just as far-fetched and lame.
As a non-American, it is interesting to observe all the posturing and stories with very few real solutions being offered. So many people are quick to tell you why things don’t work with VERY few offering workable solutions.
My perspective is that the tax system has evolved to the point where it is just way too complicated and there are too many vested interests. Unfortunately the rich are the ones that are most able to influence the politicians and therefore I can only see it getting worse.
Amanda Kuda says:
On February 7, 2012 at 4:47 pm
Thanks for the commend Vik!
Amanda Kuda says:
On February 7, 2012 at 5:11 pm
Great points Brian,
You’re right on track! In fact, none of this seems too far outside SRC’s mission. You’re getting right to the core of what we’re about: Teaching regular folks to think, act and feel like owners. Even though we’re not literally developing the type of community you’re talking about, you will find that employees involved in The Great Game of Business (at SRC, or not), tend to be more active in their communities. We think we’re headed in the same direction. Hopefully if people like yourself continue to reinforce ingenuity we’ll see these types of changes sooner rather than later.
Bay Jordan says:
On February 8, 2012 at 4:09 am
I think there is a lot of confusion all round here, and that the problem of a widening wealth distribution will continue to grow until we create a revoultion that destroys the entire temple. That is because both the earnings system and the tax regime have departed from one of the basic premises of democracy – equality.
Unfortunately that premise has been misrepresented, because it should not be equality but equitablity. People do not contribute equally and they are not rewarded equally; that is totally right. However, they should still be rewarded equitably according to their contribution – and by the same argument – they should pay taxes equitability.
That means Hal Cain had it right: there should be a single flat tax rate, where after a basic allowance that allows people to retain enough of their income to cover life’s basics, all income should be taxed at the same rate. (The matter of what that rate should be is the only issue that should be the subject of debate.)
Thus if you use the same bar stool economics that the last commentator has given us you can use the following table:
Man Original Saving Revised
1- 4 : – – –
5 : 1.00 0.20 0.80
6 : 3.00 0.60 2.40
7 : 7.00 1.40 5.60
8 : 12.00 2.40 9.60
9 : 18.00 3.60 14.40
10 : 59.00 11.80 47.20
Total 100.00 20.00 80.00
(The table looks good as I have keyed it in. I hope it retains its format when I submit the comment!
Aplogies if it does not,, but please do make the effort to refigure it.)
This table would apply to both earnings and tax and thus the equitability would be consistent throughout. It counter’s Jack’s differentiation between “income earners” and “wealth creators” which – while understandable – will perpetuate the widening divide, but retains the incentive and the basic premise which underpins the entire capitalist system.
Bo Burlingham says:
On February 8, 2012 at 12:59 pm
Jack has been making this argument in one form or another since I first met him in 1986, but never so well or so clearly. (He must have a better co-author now.
) I became a disciple right away, and so have thousands of other people in the past 26 years, and why not? It makes such perfect sense that, as soon as you hear it, you just have to nod your head in agreement. So why haven’t we been able to inject it into the national conversation? Why is the debate over the 99%-versus-the 1% continuing on such a low level? It desperately needs to be elevated, but I see no signs that it’s going to be. Maybe it’s time for us to put our heads together and come up with some fresh, creative thinking about how to make this message heard.
BTW, Tom. I love the story you put together for your daughter. Mind if I steal it?
Amanda Kuda says:
On February 8, 2012 at 6:39 pm
Hi Bo! Good to hear from you again. We agree, why HASN’T this conversation went to a higher level? And as for the clarity of the message; perhaps it’s more of a refinement in argumentation skills as opposed to the co-author
Hope to see you in May!
Bo Burlingham says:
On February 9, 2012 at 2:10 pm
Bay, I’m all for a flat tax, and Herman Cain’s 9-9-9 plan had some appeal. But it would have no effect on the wealth gap, which can only be addressed in one of two ways. One is to impose confiscatory taxes on the wealthy, which (a) won’t work (the wealthy will just leave for greener pastures) and (b) will accelerate the transformation of the USA into Greece. The other is to give the have-nots the tools and opportunities to acquire what the haves already have. That’s what Jack is saying, and–more important–what SRC has been doing for the past 30 years. And it has worked better than any other approach we’ve seen. Just ask the members of SRC’s ESOP. If you know of a real, live example of someone else achieving the same or better results, I’m sure we’d all like to hear it.
George Ruiz says:
On February 12, 2012 at 6:48 pm
If the GGOB/ESOP would be adopted by most businesses, it would help to close the wealth gap. Unfortunately it is taking too long for it to get out.
One solution to speed up the adoption of GGOB/ ESOP by the entrepreneurs and corporations could lie in the governments’ hands. The government has given incentive to industries with so called promising futures (Some of them a fiasco). Why not a government incentive to promote the GGOB?
As Jack said “the GGOB is now a science”. It could be replicated and produce measured results. And the results are outstanding.
The government could offer tax benefits and other kind incentives to those companies that get GGOB Certified and work toward an ESOP. If the incentives are good enough and well promoted, the GGOB could take off like fire and once the entrepreneurs and the corporations taste the benefits of it; they wouldn’t want to go back to the conventional way of running a business.
It is a manner of pitching the idea to the right politician. Washington more than ever needs ideas of how to create jobs and if the idea adds some social justice at the same time. It is a very appealing concept for a politician.
Another solution could be for the GGOB to get really ambitious and to market itself to the business world like GEICO, AFLAC or the Holiday Inn Express markets themselves to the consumers. This would require a big plan and investors with deep pockets. But that shouldn’t be a great obstacle; the GGOB is a great product, much better than any of those three put together.
A third solution, which complements any of the above, involves the use Hollywood mass communication power. The SRC case is a beautiful story of determination, team work and the will and vision of one man which innovate management ideas, transform “a company of losers” into winners.
The SRC story has all the elements that make an appealing Hollywood script. A story that could make a great movie, the kind of movie that brings tears to your eyes and a smile to your face. Yes, that kind of movie that, if well directed could deserve an academy award. (By the way I would title the movie “The Great Game of Business” to promote the GGOB)
A successful movie would make it easier to approach the right people and to get the right help. It will open many doors. The first step could be to pitch the script idea to some successful screenwriters in Hollywood.
It’s simple but not easy!
Amanda Kuda says:
On February 14, 2012 at 5:21 pm
Thanks for the great comments George! You’ll be glad to know that Jack’s next blog (out any minute) will go into some more details about our recent ESOP transitions here at SRC. Love your enthusiasm for getting GGOB out to the public! Did you, by any chance, get that idea when you were staying at a Holiday Inn Express?