Income Inequality is a Business Problem

Income inequality is a business as well as a social problem.  I will start off by saying I am anything but a socialist.  I strongly believe that people should have to work (hard) for their compensation, but also that the compensation needs to properly reflect the contribution of each stakeholder in an enterprise.

When Pat Allin and I were doing the research that would eventually turn into Textura (now a NYSE company), we talked extensively about how the company would work.  It was our belief (subsequently driven, at Textura, by Pat) that:

• We would take care of Textura’s employees; and as a result
• Textura’s employees would do an excellent job of taking care of Textura’s customers; and
• If we properly took care of the previous two items, Textura would, take care of its investors.

So, let’s be clear, I believe that companies are in business to make money for their investors.  But, that is not possible if you don’t take care of your employees.  And, so far, that formula has worked, at least for Textura!

And, I believe that the only way a company can effectively and in the long term serve its customers and its investors properly is to give the employees (as important stakeholders) a vested interest in a good outcome for the business.  I would argue that this is the case whether we are talking about Google or McDonald’s There are several reasons for this:

• The employees contribute their expertise in the form of ideas and the effort that turns into the products and capacity to deliver those products that make a company successful. The employees are also instrumental in the continuous improvement and/or refresh of the products and we all know that without fresh products, growth is not possible;
• The employees interact (or develop the systems that interact) with the customers and the ability to make customers happy (or angry) is in large part a function of their interaction with the people or systems that support the delivery of products and/or services to the public;
• Employees make a company a good (or not) place to work. Good companies hire and retain good people, who in turn help to (either through personal reference or reputation) attract other good people.  And, it is difficult to successfully grow a company without good people.

Next, I believe that companies have to invest in their employees if they want their employees to be able to effectively fulfill their roles (as outlined above) in contributing to the success of the company.  How do they do that:

• Provide employees with a fair wage. This allows them to live their lives without worrying about the basics of food and shelter.  They will then feel fairly treated and be able to concentrate on doing their job;
• Provide employees with the opportunity for advancement. This concept is broken down into three parts:
  • Experiences that allow them to grow and be capable of more responsibility;
  • Training that provides them with a framework and understanding necessary to take on the next challenge;
  • Opportunity, which is in some ways the hardest part. I have always told the people who work for me that I will always try to find the next opportunity for them, but they have to be ready to take it on.  And, if I can’t provide that opportunity that I will not be disappointed (provided that they have worked their hardest when they worked for me) if they move on to a place to another company to get that next opportunity.  Without an opportunity for advancement your best people (the ones that can make your company great) stagnate.  They don’t look to the future.  They look to the present (at best working hard and diligently, focused on today) or they look somewhere else, but they aren’t thinking about how they can contribute to the growth and long-term health of the company.

• Listen to your employees. Let them participate in the operation and continuous improvement process that is so important to the long term health of a company.  And, make no mistake about it.  This is an investment, because there are quicker less expensive (in the short term) ways to make decisions and make improvements, but those ways don’t result in employees who are engaged in the business and who are growing with the business.

So, where does income inequality come into this picture.  A high level overview of profit and employee compensation trends shows that profits (going to the owners) have seen a long term improvement while employee compensation has shown just the opposite trend.

Source:  The New York Times

I have argued that employees are important (to the success of a company) stakeholders and am wondering why they aren’t being rewarded for their contribution to the success of the companies that they work at.

It is clear to me that the facts summarized in the two exhibits (above) are obvious to the general public.  And, they don’t like it.  And, they shouldn’t.

If we don’t change the view of corporate America with regard to what constitutes success (and rebalance the monetary attribution for that success) we will have much more than just a business problem—we will have a significant social problem.  And, make no mistake we already have it and it is just going to get worse.

There are many things that we can do to adjust the picture:

• Rethink the relationship between the contribution of employees to profits and adjust those ratios. It was after all Henry Ford who raised the wages (to double that of the then current average) of his employees which is by many credited with a big boost in the middle class and many years of improved average living conditions in the US.  That said, this is a difficult problem that deserves thoughtful study.
• Invest in employees in other ways than just wages. Bernie Sanders has struck a chord with his proposals to make a college education universally available.  The idea is right, the mechanism for achieving it is wrong.  Businesses benefit from employees with better education.  Let employees earn education as part of their compensation.
• Figure out how to provide more opportunity for our employees. In some cases, this will be disruptive (when employees are forced to leave their employer to get that next opportunity or as companies automate some jobs to provide the higher wage), but that is progress. 

I concede that my thinking around the answers to the questions I have posed are clearly not as well formed as the questions, I do know that there is lots of work to be done.  Let’s get on with it and let’s get it right!