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This article fundamentally misunderstands what profits mean in a financial statement. "Record profits" are recorded because companies are afraid to expand. They

by temphn 13y ago

This article fundamentally misunderstands what profits mean in a financial statement. "Record profits" are recorded because companies are afraid to expand. They expect a macroeconomic contraction. Remember: profits aren't included in the salary number, as that's a cost. So "record profits" aren't going to executives - that would be salary or options. And they usually aren't distributed as dividends. They go into the corporate bank account, namely the rainy day fund of the company. And the reason they are going into the rainy day fund of the company is that businesses in general expect many costs to come over the next few years, from the QE tapering to Obamacare. Otherwise businesses would spend those "record profits" on hiring and expansion, or on salary increases to retain top talent, or on acquisitions. I think the fundamental misunderstanding here is that "record profits" have anything to do with executive salaries. Salaries are a cost. Visual analogy: this is like reducing your marginal headcount and husbanding your corn with the expectation of a massive storm on the horizon. It does NOT mean you are feasting on your corn after kicking out marginal producers.

michaelochurch 13y ago
I think the fundamental misunderstanding here is that "record profits" have anything to do with executive salaries. Salaries are a cost. There's an association and correlation, though. It's easier for executives to ramp up their compensation if the company is profitable. So if an executive can do something short-sighted that improves profits in the short term, or even something degenerately risky that may turn a huge profit. Principal and agent usually break (that is, their interests diverge) at the second moment (risk/variance). Everyone wants profit/expectancy (first moment). There's no tension there; who doesn't want to make money? Risk is a nother matter. Principal usually wants as little risk per unit upside as possible; agent typically wants more risk because upside leads to higher compensation but the difference between a small down year and a big one is minimal. For example, a hedge fund manager collects 2% of assets managed and 20% of profits. (If profits are below zero, redemptions happen and that often kills the fund.) So a return of -30 and -10 have the same effect-- shit year, no bonus, everyone gets fired-- but the difference between +10 and +30 is huge. That's why a lot of these firms take degenerate bets. Someone else eats most of their losses, but they get a lot if they win. Executives work the same way. They push for huge initiatives that add risk to the business. Big wins makes them rich, little wins make them comfortable; the difference between little losses and big losses, for them, is zero. They have no reason not to take big risks with the company. Large-scale cost-cutting is especially good from an executive perspective because the benefits are immediate but the problems it causes tend to show up in the long term, giving the executive time to flee if the results are bad.
- sseveran 13y ago
  Your analogy to hedge funds is utterly inaccurate for most large funds. Smaller funds tend to take more bets but most large funds and fund groups attempt not to take on too much risk. If you got to a conference for large asset managers you will hear almost nothing about how to make returns, instead on how to gather and retain assets. 2% on $2B (smaller end of medium size) is $40M per year.
7Figures2Commas 13y ago
> "Record profits" are recorded because companies are afraid to expand. They expect a macroeconomic contraction. That isn't necessarily true. A company's expansion does not always require the expansion of its work force and increased profit can reflect many things: higher productivity, lower cost of goods sold, increased revenue from higher margin lines of business, accounting and tax events, etc. This said, it is important to recognize that while profit describes where a company has been, head count is in many respects a forward-looking figure based on future expectations. Who you hire and fire today often has a lot less to do with what's happening now than what a company expects will happen tomorrow, good or bad.

by temphn 13y ago

michaelochurch 13y ago

I think the fundamental misunderstanding here is that "record profits" have anything to do with executive salaries. Salaries are a cost. There's an association and correlation, though. It's easier for executives to ramp up their compensation if the company is profitable. So if an executive can do something short-sighted that improves profits in the short term, or even something degenerately risky that may turn a huge profit. Principal and agent usually break (that is, their interests diverge) at the second moment (risk/variance). Everyone wants profit/expectancy (first moment). There's no tension there; who doesn't want to make money? Risk is a nother matter. Principal usually wants as little risk per unit upside as possible; agent typically wants more risk because upside leads to higher compensation but the difference between a small down year and a big one is minimal. For example, a hedge fund manager collects 2% of assets managed and 20% of profits. (If profits are below zero, redemptions happen and that often kills the fund.) So a return of -30 and -10 have the same effect-- shit year, no bonus, everyone gets fired-- but the difference between +10 and +30 is huge. That's why a lot of these firms take degenerate bets. Someone else eats most of their losses, but they get a lot if they win. Executives work the same way. They push for huge initiatives that add risk to the business. Big wins makes them rich, little wins make them comfortable; the difference between little losses and big losses, for them, is zero. They have no reason not to take big risks with the company. Large-scale cost-cutting is especially good from an executive perspective because the benefits are immediate but the problems it causes tend to show up in the long term, giving the executive time to flee if the results are bad.

sseveran 13y ago
Your analogy to hedge funds is utterly inaccurate for most large funds. Smaller funds tend to take more bets but most large funds and fund groups attempt not to take on too much risk. If you got to a conference for large asset managers you will hear almost nothing about how to make returns, instead on how to gather and retain assets. 2% on $2B (smaller end of medium size) is $40M per year.

7Figures2Commas 13y ago

> "Record profits" are recorded because companies are afraid to expand. They expect a macroeconomic contraction. That isn't necessarily true. A company's expansion does not always require the expansion of its work force and increased profit can reflect many things: higher productivity, lower cost of goods sold, increased revenue from higher margin lines of business, accounting and tax events, etc. This said, it is important to recognize that while profit describes where a company has been, head count is in many respects a forward-looking figure based on future expectations. Who you hire and fire today often has a lot less to do with what's happening now than what a company expects will happen tomorrow, good or bad.