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What's particularly disturbing is the sheer greed being shown in pursuit of these profits. There was a recent article about an auto plant in Michigan that went

What's particularly disturbing is the sheer greed being shown in pursuit of these profits. There was a recent article about an auto plant in Michigan that went through near-bankruptcy but is now making a $2bn/year profit. The profit was attributed in part to $50m/year in reduced wages that were extracted from the union in exchange for not closing the plant. Those concessions represented over one third of the wages but only 2.5% of the resulting profits. That's just disgusting. They should have kept the wages steady and enjoyed their more-than-sufficient 1.95bn/year in profits.

mh- 13y ago
link?
- GolfyMcG 13y ago
  I second this.
- aheilbut 13y ago
  http://www.nytimes.com/2013/07/16/business/last-car-plant-brings-detroit-hope-and-cash.html?pagewanted=all http://www.nytimes.com/2013/07/16/business/last-car-plant-br...
kiba 13y ago
What is considered "sufficient" profit, anyway?
- pekk 13y ago
  Suppose that no amount is sufficient. That means every business is a failure to fill an infinitely large stomach.
  - rosser 13y ago
    It's as good a hypothesis as any I've heard to explain the observed behavior, and better than most.
    - 178 13y ago
      "On the gravestone of capitalism it will say: 'Too much was not enough'." – Volker Pispers, German Comedian
      - moocowduckquack 13y ago
        Should you wish to bring down capitalism, your plan should have the feature of being immensely profitable in the short term. Then the transnational investment arm of a major banking conglomerate will steal your idea and go off and do it for you and you can put your feet up.
        davidgerard 13y ago
        Some say ...
    - eli_gottlieb 13y ago
      By definition, the legal obligation of a business company is to maximize its profits, preferably while not getting caught breaking any laws. That is not a hypothesis. That is the legally enforced and encoded definition of what capitalism must do.
      - eru 13y ago
        The duty of the business is to the shareholders, yes. But the shareholders can vote on any goal they feel like (including making profit, of course).
      - Xylakant 13y ago
        > By definition, the legal obligation of a business company is to maximize its profits, preferably while not getting caught breaking any laws. That is the legally enforced and encoded definition of what capitalism must do. [citation needed]. There is no law that I can think of that forces me, as a business owner to maximize my profits nor does any law prescribe the golden path for achieving said maximum. Generally speaking my business can incur losses as long as I find people willing to pay the money - either through loans, donations, whatever other means. I'm free to run my company as I wish as long as I get the majority of shareholders to agree. There is one caveats that applies: If I run out of money, my company goes bankrupt. If I willfully or negligently damage the company by e.g. performing illegal acts and thus damage the property of other shareholders I might be liable. Paying decent wages certainly does not fall into this category. Capitalism does not require companies to become bad actors. It certainly provides a lot of incentives to do so, but it's still the actors decision. Blaming any "legally enforced and encoded definition" is blame shifting.
- hueving 13y ago
  The people in control of the company have a legal duty not to waste shareholder money. Giving everyone a raise without a good reason would get them in hot water. There would need to be a fact-based reason to give that raise out to the entire workforce. For example, workers would need to be leaving for better jobs, or the workers would have to go on strike.
  - netcan 13y ago
    I hope this doesn't sound too harsh, but I think this comment is a case of "enough knowledge to be dangerous." Companies certainly do have a duty to shareholders. That's absolutely true and breaches in duty should be taken seriously. A common issue where this responsibility needs to be better policed is lopsided risk decisions where in many cases executives can make large bonuses and on rare occasions they don't make a bonus while shareholders lose big - a complicated mess of scheming and tricky incentives that can in extreme cases amount to theft. This is the main type of abuse that these legal duties are meant to prevent. They do so imperfectly, but that's a different discussion. "This company pays a fair wage and maintains a high standard of labour conditions. These are core values of this company and an important part of how we do business." The above statement is completely legitimate position for a company to take and absolutely does not count as wasting shareholder money.* These are not new legal concepts. They have many years of legislation and litigation behind them.
  - jacalata 13y ago
    I have frequently heard this statement, but just as frequently heard people say its a myth. Do you have any citations for it, such as a case where a board was sued for paying wages too high?
    - vellum 13y ago
      A union sued Goldman Sachs, "alleging the firm's notorious pay structure is grossly unfair to its shareholders". http://www.law360.com/articles/154407/ibew-fund-sues-goldman-over-pay-practices http://www.law360.com/articles/154407/ibew-fund-sues-goldman... They didn't win. http://courts.delaware.gov/opinions/download.aspx?ID=161650 http://courts.delaware.gov/opinions/download.aspx?ID=161650
- aestra 13y ago
  The goal of the business is to "grow," make more money than you did last year. That's a measure of "success."
michalu 13y ago
Disturbing is that apparently some people would prefer to see this "one of last plants in Detroit" bankrupt a all employees and their jobless, rather then tripling workforce in what is now most distressed place in US with 16% unemployment. http://www.nytimes.com/2013/07/16/business/last-car-plant-brings-detroit-hope-and-cash.html http://www.nytimes.com/2013/07/16/business/last-car-plant-br... Apparently these (pre tax) profits don't end up in somebody's pocket as you imagine but are reinvested in giving more people jobs and growing the plant.
- eru 13y ago
  The bigger plant is still in the investors' pockets. (No moral judgement implied.)
  - michalu 13y ago
    Depends on who are the investors. Fiat is publicly traded, the investor might be anyone with 401 or mutual fund investment.
    - eru 13y ago
      Oh, and you mean these people are not on savvy enough, so the managers run the plant for their own benefit rather than the shareholders' benefit?
      - michalu 13y ago
        For their own benefit??? Do your only see what confirms your world view? No they hired 3 times more people for the money they made. If I had a family in Detroit I would be much happier to have a job that stay unemployed. They are doing the good thing. Apparently managers are doing a good job - the company was bankrupt all of those people would risk ending up on streets - it's Detroit we're talking about. Instead they turned it over and gave jobs to 3 times more families. And no not everyone is savvy enough to run a business, some people don't have necessary skills - we all have different talents and aspirations.
tsotha 13y ago
I don't find this disgusting at all. Some years car companies make billions, some years they lose billions. How much money has this plant made, on average, over the last 20 years?
hessenwolf 13y ago
Devil's advocate here... the higher than average profit margins have resulted at a time when the cost of capital is much higher. The market has seen a huge move away from risky assets, into dull stuff like bonds and non-productive assets like gold (and, go on, bitcoin). Hence, the required return in order for companies to access funding has been much, much higher, forcing them to aim for higher than normal profit margins. So, really, they are justing paying back their higher costs of borrowing. (equity is a form of borrowing, in a sense) Now, why is the cost of capital so bloody high with TARP and QE and all that quatsch? Answer: Because banks are cs and investors are short-termist r*ards.
- deleted 13y ago
  [deleted]
- eru 13y ago
  Are private equity companies making a killing, then?
gwenfre 13y ago
One disturbing thing this thread shows (if you read down) is that many people on HN are to the right of Goldman Sachs. What has happened to the Hacker community? The comments (aside from yours and a few others) sound like far-right robber baron logic from another age. 40 years of neoliberalism has proved that the welfare state is the best thing for the economy...
EpicEng 13y ago
This is entirely anecdotal, but I grew up in the Midwest and know many people who spent their lives working in automotive factories. I wish these people the best, and I'm glad that they are doing well, but many of them are making $25+ / hour installing doors and seat belts (and the '+' here has a high ceiling). This is a job that any able bodied person can do, but they make that living, for better or worse, because of their unions. If I were funding these plants I wouldn't want to pay those wages either. As a reasonable person I have to admit that this sort of work is simply is not worth that pay, regardless of what my personal feelings toward my friends and their families are. These are not skilled positions.
- mattmanser 13y ago
  So what? This is the thing I don't get, why shouldn't the employees of the company, no matter how skilled, share in the good times? They certainly pay in the bad times. As companies have become ever more callous and unions ever weaker all the money has moved to the owner side. It's not simply just about "I won this factory, therefore I get all the money", as I think we're going to find out in the next 20 years, that kind of thinking leads to major civil unrest and we will probably see the replacement to unions forming in the next decade or so.
  - gaius 13y ago
    The way to do that is via profit sharing/bonuses - converting payroll from a fixed to a floating expense, essentially. I disagree that "companies" have become more callous. The general public want their cheap stuff, and they don't really care. The press is full of horror stories about sweatshops every week and yet, everyone wants their new iPhone and their new trainers and their clothes to wear for a few months at most... What will it take to effect a change in the mind of the consumer?
  - FollowSteph3 13y ago
    But they don't generally share in the bad times. If a company has a bad year most people don't take a pay cut. And they definitely won't get paid nothing for a year while lending money to the company!!! For example you own a local garage. On normal years to make $500,000. Your costs are $400,000. One year thing go bad and you only make $300,000. In most cases the owner will borrow the money to cover the difference. Maybe someone is let go but in most cases the owner tries to retain the staff hoping next year is back to normal. Maybe the owner will use his own money rather than borrow. In any case they will find the money somehow or close. And remember this is at the same time as having your salary reduced to $0! Eventually the owner wants to recoup and protect themselves from any bad year. But at a $100,000 profit a year, and remember this is pre tax, and profits are double taxed for the owner, then how long will it take to save pay them back and save enough for the next bad year? So if one year he make $600,000, or double the profits, he needs to keep those profits for the bad years. Now big corporations are slightly different but at the same time they need to be absorb harder years. So right now they squeezing profits but at some point those profits will be needed for a bad year. Or perhaps it was to pay for the recent bad years in which they may have acquire debt... Some corporations are greedy, but a lot aren't. You have to look at the multi year picture when it comes to profit sharing. And most employees are not willing to loan money to a corporation in a bad year like the owners will most likely have to ;)
yummyfajitas 13y ago
Business income is volatile. The business made a $2B profit in one particular year, whereas in other years they made losses that nearly destroyed them. Somehow I suspect when the business took losses, the employees did not return their wages. Unless you want employees to share the downside of business income volatility, it's unreasonable to expect them to share the upside.
- valisystem 13y ago
  > Business income is volatile. Yet, a very few concentrates a bigger share every year.
- andyjohnson0 13y ago
  "Unless you want employees to share the downside of business income volatility, it's unreasonable to expect them to share the upside." Can you justify that? It seems like one of those statements that is designed to appear correct without provoking concious analysis. Kind of like "truithiness" [1]. Isn't there rather a lot of evidence that properly implemented profit sharing results in more motivated, productive employees? [1] http://en.wikipedia.org/wiki/Truthiness http://en.wikipedia.org/wiki/Truthiness
  - yummyfajitas 13y ago
    The justification is simple - a call option is worth more than a forward with the same strike price. If employees are to receive their market rate in cash (call it $X), they can receive $X worth of forward contracts, or $X worth of call options. If they choose call options, either the value of the contracts or the strike price will need to be lower. So more precisely, the reasonable choices would be wages, profit sharing in upside and downside, or lower wages + profit sharing in upside only. Profit sharing works great when employees have the ability to significantly affect profits. Traders/hedge fund managers are a great example of this. For manufacturing employees, a piece rate (rather than hourly rate) would be a similar way to create such incentives.
    - eru 13y ago
ArbitraryLimits 13y ago
Isn't this case the exact opposite of what's being claimed in the article? I.e. you're saying wages don't really affect total profits one way or another.
vinceguidry 13y ago
That sounds like an abject failure of union leadership.
mathattack 13y ago
Those concessions represented over one third of the wages but only 2.5% of the resulting profits This doesn't seem to make sense. It's a VERY rare industry that has labor costs as little as 7.5% of profits. Very few are even as low as 7.5% of revenues, and those are high automation businesses. (Think software, not automotives) All that said, this article quotes "After tax" profits. Given how much tax avoidance is happening at big companies, I think it would be interesting to see pre-tax profits too. How much of this is coming from tax loopholes, in addition to squeezing workers?

mh- 13y ago

link?

GolfyMcG 13y ago
I second this.
aheilbut 13y ago
http://www.nytimes.com/2013/07/16/business/last-car-plant-brings-detroit-hope-and-cash.html?pagewanted=all http://www.nytimes.com/2013/07/16/business/last-car-plant-br...

kiba 13y ago

What is considered "sufficient" profit, anyway?

pekk 13y ago
Suppose that no amount is sufficient. That means every business is a failure to fill an infinitely large stomach.
- rosser 13y ago
  It's as good a hypothesis as any I've heard to explain the observed behavior, and better than most.
  - 178 13y ago
    "On the gravestone of capitalism it will say: 'Too much was not enough'." – Volker Pispers, German Comedian
    - moocowduckquack 13y ago
      Should you wish to bring down capitalism, your plan should have the feature of being immensely profitable in the short term. Then the transnational investment arm of a major banking conglomerate will steal your idea and go off and do it for you and you can put your feet up.
      - davidgerard 13y ago
        Some say ...
  - eli_gottlieb 13y ago
    By definition, the legal obligation of a business company is to maximize its profits, preferably while not getting caught breaking any laws. That is not a hypothesis. That is the legally enforced and encoded definition of what capitalism must do.
    - eru 13y ago
      The duty of the business is to the shareholders, yes. But the shareholders can vote on any goal they feel like (including making profit, of course).
    - Xylakant 13y ago
      > By definition, the legal obligation of a business company is to maximize its profits, preferably while not getting caught breaking any laws. That is the legally enforced and encoded definition of what capitalism must do. [citation needed]. There is no law that I can think of that forces me, as a business owner to maximize my profits nor does any law prescribe the golden path for achieving said maximum. Generally speaking my business can incur losses as long as I find people willing to pay the money - either through loans, donations, whatever other means. I'm free to run my company as I wish as long as I get the majority of shareholders to agree. There is one caveats that applies: If I run out of money, my company goes bankrupt. If I willfully or negligently damage the company by e.g. performing illegal acts and thus damage the property of other shareholders I might be liable. Paying decent wages certainly does not fall into this category. Capitalism does not require companies to become bad actors. It certainly provides a lot of incentives to do so, but it's still the actors decision. Blaming any "legally enforced and encoded definition" is blame shifting.
hueving 13y ago
The people in control of the company have a legal duty not to waste shareholder money. Giving everyone a raise without a good reason would get them in hot water. There would need to be a fact-based reason to give that raise out to the entire workforce. For example, workers would need to be leaving for better jobs, or the workers would have to go on strike.
- netcan 13y ago
  I hope this doesn't sound too harsh, but I think this comment is a case of "enough knowledge to be dangerous." Companies certainly do have a duty to shareholders. That's absolutely true and breaches in duty should be taken seriously. A common issue where this responsibility needs to be better policed is lopsided risk decisions where in many cases executives can make large bonuses and on rare occasions they don't make a bonus while shareholders lose big - a complicated mess of scheming and tricky incentives that can in extreme cases amount to theft. This is the main type of abuse that these legal duties are meant to prevent. They do so imperfectly, but that's a different discussion. "This company pays a fair wage and maintains a high standard of labour conditions. These are core values of this company and an important part of how we do business." The above statement is completely legitimate position for a company to take and absolutely does not count as wasting shareholder money.* These are not new legal concepts. They have many years of legislation and litigation behind them.
- jacalata 13y ago
  I have frequently heard this statement, but just as frequently heard people say its a myth. Do you have any citations for it, such as a case where a board was sued for paying wages too high?
  - vellum 13y ago
    A union sued Goldman Sachs, "alleging the firm's notorious pay structure is grossly unfair to its shareholders". http://www.law360.com/articles/154407/ibew-fund-sues-goldman-over-pay-practices http://www.law360.com/articles/154407/ibew-fund-sues-goldman... They didn't win. http://courts.delaware.gov/opinions/download.aspx?ID=161650 http://courts.delaware.gov/opinions/download.aspx?ID=161650
aestra 13y ago
The goal of the business is to "grow," make more money than you did last year. That's a measure of "success."

michalu 13y ago

Disturbing is that apparently some people would prefer to see this "one of last plants in Detroit" bankrupt a all employees and their jobless, rather then tripling workforce in what is now most distressed place in US with 16% unemployment. http://www.nytimes.com/2013/07/16/business/last-car-plant-brings-detroit-hope-and-cash.html http://www.nytimes.com/2013/07/16/business/last-car-plant-br... Apparently these (pre tax) profits don't end up in somebody's pocket as you imagine but are reinvested in giving more people jobs and growing the plant.

eru 13y ago
The bigger plant is still in the investors' pockets. (No moral judgement implied.)
- michalu 13y ago
  Depends on who are the investors. Fiat is publicly traded, the investor might be anyone with 401 or mutual fund investment.
  - eru 13y ago
    Oh, and you mean these people are not on savvy enough, so the managers run the plant for their own benefit rather than the shareholders' benefit?
    - michalu 13y ago
      For their own benefit??? Do your only see what confirms your world view? No they hired 3 times more people for the money they made. If I had a family in Detroit I would be much happier to have a job that stay unemployed. They are doing the good thing. Apparently managers are doing a good job - the company was bankrupt all of those people would risk ending up on streets - it's Detroit we're talking about. Instead they turned it over and gave jobs to 3 times more families. And no not everyone is savvy enough to run a business, some people don't have necessary skills - we all have different talents and aspirations.

tsotha 13y ago

I don't find this disgusting at all. Some years car companies make billions, some years they lose billions. How much money has this plant made, on average, over the last 20 years?

hessenwolf 13y ago

Devil's advocate here... the higher than average profit margins have resulted at a time when the cost of capital is much higher. The market has seen a huge move away from risky assets, into dull stuff like bonds and non-productive assets like gold (and, go on, bitcoin). Hence, the required return in order for companies to access funding has been much, much higher, forcing them to aim for higher than normal profit margins. So, really, they are justing paying back their higher costs of borrowing. (equity is a form of borrowing, in a sense) Now, why is the cost of capital so bloody high with TARP and QE and all that quatsch? Answer: Because banks are cs and investors are short-termist r*ards.

deleted 13y ago
[deleted]
eru 13y ago
Are private equity companies making a killing, then?

gwenfre 13y ago

One disturbing thing this thread shows (if you read down) is that many people on HN are to the right of Goldman Sachs. What has happened to the Hacker community? The comments (aside from yours and a few others) sound like far-right robber baron logic from another age. 40 years of neoliberalism has proved that the welfare state is the best thing for the economy...

EpicEng 13y ago

This is entirely anecdotal, but I grew up in the Midwest and know many people who spent their lives working in automotive factories. I wish these people the best, and I'm glad that they are doing well, but many of them are making $25+ / hour installing doors and seat belts (and the '+' here has a high ceiling). This is a job that any able bodied person can do, but they make that living, for better or worse, because of their unions. If I were funding these plants I wouldn't want to pay those wages either. As a reasonable person I have to admit that this sort of work is simply is not worth that pay, regardless of what my personal feelings toward my friends and their families are. These are not skilled positions.

mattmanser 13y ago
So what? This is the thing I don't get, why shouldn't the employees of the company, no matter how skilled, share in the good times? They certainly pay in the bad times. As companies have become ever more callous and unions ever weaker all the money has moved to the owner side. It's not simply just about "I won this factory, therefore I get all the money", as I think we're going to find out in the next 20 years, that kind of thinking leads to major civil unrest and we will probably see the replacement to unions forming in the next decade or so.
- gaius 13y ago
  The way to do that is via profit sharing/bonuses - converting payroll from a fixed to a floating expense, essentially. I disagree that "companies" have become more callous. The general public want their cheap stuff, and they don't really care. The press is full of horror stories about sweatshops every week and yet, everyone wants their new iPhone and their new trainers and their clothes to wear for a few months at most... What will it take to effect a change in the mind of the consumer?
- FollowSteph3 13y ago
  But they don't generally share in the bad times. If a company has a bad year most people don't take a pay cut. And they definitely won't get paid nothing for a year while lending money to the company!!! For example you own a local garage. On normal years to make $500,000. Your costs are $400,000. One year thing go bad and you only make $300,000. In most cases the owner will borrow the money to cover the difference. Maybe someone is let go but in most cases the owner tries to retain the staff hoping next year is back to normal. Maybe the owner will use his own money rather than borrow. In any case they will find the money somehow or close. And remember this is at the same time as having your salary reduced to $0! Eventually the owner wants to recoup and protect themselves from any bad year. But at a $100,000 profit a year, and remember this is pre tax, and profits are double taxed for the owner, then how long will it take to save pay them back and save enough for the next bad year? So if one year he make $600,000, or double the profits, he needs to keep those profits for the bad years. Now big corporations are slightly different but at the same time they need to be absorb harder years. So right now they squeezing profits but at some point those profits will be needed for a bad year. Or perhaps it was to pay for the recent bad years in which they may have acquire debt... Some corporations are greedy, but a lot aren't. You have to look at the multi year picture when it comes to profit sharing. And most employees are not willing to loan money to a corporation in a bad year like the owners will most likely have to ;)

yummyfajitas 13y ago

Business income is volatile. The business made a $2B profit in one particular year, whereas in other years they made losses that nearly destroyed them. Somehow I suspect when the business took losses, the employees did not return their wages. Unless you want employees to share the downside of business income volatility, it's unreasonable to expect them to share the upside.

valisystem 13y ago
> Business income is volatile. Yet, a very few concentrates a bigger share every year.
andyjohnson0 13y ago
"Unless you want employees to share the downside of business income volatility, it's unreasonable to expect them to share the upside." Can you justify that? It seems like one of those statements that is designed to appear correct without provoking concious analysis. Kind of like "truithiness" [1]. Isn't there rather a lot of evidence that properly implemented profit sharing results in more motivated, productive employees? [1] http://en.wikipedia.org/wiki/Truthiness http://en.wikipedia.org/wiki/Truthiness
- yummyfajitas 13y ago
  The justification is simple - a call option is worth more than a forward with the same strike price. If employees are to receive their market rate in cash (call it $X), they can receive $X worth of forward contracts, or $X worth of call options. If they choose call options, either the value of the contracts or the strike price will need to be lower. So more precisely, the reasonable choices would be wages, profit sharing in upside and downside, or lower wages + profit sharing in upside only. Profit sharing works great when employees have the ability to significantly affect profits. Traders/hedge fund managers are a great example of this. For manufacturing employees, a piece rate (rather than hourly rate) would be a similar way to create such incentives.
  - eru 13y ago

ArbitraryLimits 13y ago

Isn't this case the exact opposite of what's being claimed in the article? I.e. you're saying wages don't really affect total profits one way or another.

vinceguidry 13y ago

That sounds like an abject failure of union leadership.

mathattack 13y ago

Those concessions represented over one third of the wages but only 2.5% of the resulting profits This doesn't seem to make sense. It's a VERY rare industry that has labor costs as little as 7.5% of profits. Very few are even as low as 7.5% of revenues, and those are high automation businesses. (Think software, not automotives) All that said, this article quotes "After tax" profits. Given how much tax avoidance is happening at big companies, I think it would be interesting to see pre-tax profits too. How much of this is coming from tax loopholes, in addition to squeezing workers?