3 Reasons Why Companies Should Invest in Workers And Not in Their Stock

Too many CEOs are focused on short-term stock gains rather than on long-term sustainability for their companies and the economy as a whole. This is a major factor in two of our country’s largest economic problems: low wages and wealth inequality.

As Rex Nutting pointed out in his article “How the Stock Market Destroyed the Middle Class,” buying back company stock instead of investing in employees can have many negative effects. This action can “encourage executives to loot companies, stall innovation and depress wages,” according to Mr. Nutting.

Due to pressure from short-term shareholders and Wall Street analysts, companies are strongly encouraged to meet or exceed quarterly earnings expectations. When sales fall below expectations, CEOs often fire workers and buy back stock to offset the decline.

Buying back shares increases earnings per share because there are fewer shares to divide the total earnings amongst. Firing workers decreases operating costs which will boost the bottom line. While this works in the short term, the long-term effects of these actions are damaging to the overall health of our economy.

Lower wages hurt the growth of an economy based upon consumer purchases. Buying back stock (instead of investing in the business for long-term growth) drags down productivity, which also has a negative effect on wages.

As noted capitalist and Home Depot Founder, Ken Langone recently stated in a Newsday interview, “If we don’t do something about helping the people in the lower end of the pay scale, I think we are setting ourselves up for serious problems.” Something is seriously wrong when we see headlines that state, “Company XYZ fired 20,000 workers and the stock is up 5% in premarket trading.”

CEOs are idolized for their ability to fire workers and slash research and development costs. Activist investors are lauded for the rise in short-term stock prices. Investors’ positive reactions to these actions display the obvious fact that something is broken in our current system.

Changing this system will not be easy. Most top executives earn the majority of their pay in the form of company stock. This incentive encourages short-term thinking because rapid price increases will lead to huge payouts to the CEO. This system was originally designed to align the executives’ interests with those of shareholders.

Unfortunately it has enabled CEO’s pay to inflate to over 300 times the size of their average worker’s salary. CEO actions are now often in conflict with the interests of long-term shareholders, company employees, and the economy as a whole.

The idea that the only concern of the CEO is to please its short-term shareholders has damaged our economy. When the benefits to workers; innovation; customers; and the environment are secondary, the privileged few benefit while the majority suffer. Stake holders and shareholders should not be pitted against each other.

Here are three ways in which the resources of large companies can be allocated that would benefit society; grow our economy; and put the direction of our country on a more sustainable path. Companies should devote more resources toward employee retirement benefits, wages, and education.

Retirement Benefits– Most Americans are woefully unprepared to face retirement. The demise of the pension and the establishment of the 401k are the main contributors to this serious problem. Most people do not have anywhere near the knowledge to invest their money properly. A financial industry in which the majority of its employees are not legally required to look after their clients’ best interests compounds this situation.

A solution could entail requiring large corporations to offer low-cost investment plans with impartial advisors available to guide employees. Company matches of employee salary levels from 6% to 10% would provide a catalyst to save more. A system like Australia’s Superannuation would be ideal. The law requires workers to put a percentage of their income in these savings plans. This is often accompanied by a company match and many ways to contribute above and beyond the minimum.

The results of this program are staggering. According to Business Week, Australians have 1.52 Trillion dollars in their retirement accounts while Americans have saved 2.8 Trillion. While Americans have more money saved, The U.S has 14 times the population of Australia! This system would also help relieve the enormous future obligations of our Social Security and Medicare entitlement programs.

Increase Wages– When Henry Ford decided to pay his workers $5.00 a day, it sent shock waves through our nation. This massive salary increase had nothing to do with his generosity. Ford realized he needed 52,000 workers each year to do the job of 14,000. Turnover, retraining, and work stoppages were costing him a fortune!

Higher paid workers lead to more loyal employees who don’t call in sick as much or break and steal stuff. Ford figured this out a long time ago. Recently companies such as Wal-Mart and McDonalds have raised salaries for some of their employees. Hopefully this will be a trend that will lead to a much more balanced economy. Having more people that are not reliant on government programs and who have more purchasing power will benefit us all.

Education– According to The Atlantic, “Our class-based, higher education divide explains more about America’s widening income gap than any other single factor.” Companies can work to change this. Howard Schultz, CEO of Starbucks, is at the forefront. He created a partnership with Arizona State’s On-Line University to provide a free college education for all of his employees that work at least 20 hours a week.

Though employees must qualify and there are some other requirements, this arrangement is revolutionary. In addition, Starbuck’s employees are under no obligation to stay with Starbuck’s after finishing. Schultz understands that it is not easy to attend college while working. Being a graduate of public housing he gets how life changing this opportunity may be for his many workers who also come from modest backgrounds.

Not only will Starbucks gain more productive employees, this will help our entire nation. Even if they leave Starbucks after receiving their degree, they will be able to buy more frappuccinos with their increased salary at their new employer! If companies made education a large part of an overall benefits package, they would also be able to make our university system more accountable.

Often many colleges woefully prepare their students for many of life’s challenges. If corporations were paying the bills, they would rightfully demand much more for their money, which would benefit everyone.

Secure, well paid and educated workers would do wonders for our economy. The benefits toward solving the twin problems of wealth inequality and underfunded entitlement programs would be immeasurable. This would be well worth the price of some companies not being able to raise their dividends by .05 cents and fewer short- term pops in their shares.

In the words of Blackrock CEO, Larry Fink, “Innovation, skilled workforces, and essential capital expenditures are necessary to sustain long-term growth.”

Making money in the stock market based on these principles, rather than from the misery of fired, uneducated workers, would be a refreshing change.

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Please see disclosures here.