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"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

"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
  The employees do sell a put option in the form of "employee can be fired", though. And the shareholders are only liable up to their equity invested.
- erichocean 13y ago
  So more precisely, the reasonable choices would be wages, profit sharing in upside and downside, or lower wages + profit sharing in upside only. In another comment, someone asked about the executives who get paid and then "only have upside", as if that somehow proved that employees should also get an upside. Not so: executives are the last option: lower wages + profit sharing in upside only. Employees are—literally—taking the first option. If they want the last option, they can become executives. We don't have a legally-mandated cast system in this country, anyone who is competent can become an executive and take option three. And the wages really are lower for executives who only have upside potential. If you are an executive (not a manager, an executive) you can either run your own company, or run someone else's company. If you run your own company, you've got upside and downside risk. If you run someone else's company, you have (much) smaller upside potential, but that's compensated by: (a) lower, but guaranteed, wages + (b) no downside potential. It's a reasonable trade for a lot of executives to make.
Quequau 13y ago
You are of course obviously correct. Employees, at least those earning income from real labor, always share the downside of business income volatility. In fact, it's arguably an outsized share. One simply needs to observe the various employment metrics, and their rate of change. Particularly those tracking layoffs, discharges, and other involuntary separations initiated by employers. What's perhaps even more illustrative are the comparisons of job requirements and starting salaries for positions with similar responsibilities; found in employment advertisements before, during, and after a "business cycle". In fact I've read several studies showing that people who happen to graduate and enter the workforce during the nadir of financial crises earn, over the course of their entire career, substantially lower wages as compared to people who simply happen to enter the workforce at any other point of the business cycle.
- syntaxfree 13y ago
  They share some risk in the form of correlations to the actual risk to their employment contracts. But employees who are fired during downturns walk away with all of their human capital and most of their future earning potential (minus what the firing signals in their CV), while the downturn chips away at the firm's capital. Let me put this another way: no one is really entitled to a job; not in the way their entitled to their properties, which have a _title to their name_. Capital, on the other hand, risks its very entitlement. Employees don't have any assets seized during a downturn. If they wanted to share in the risk and return, they could have bought stock.
wycx 13y ago
I think the word you are looking for is "sophistry". http://en.wikipedia.org/wiki/Sophistry#Modern_usage http://en.wikipedia.org/wiki/Sophistry#Modern_usage

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
The employees do sell a put option in the form of "employee can be fired", though. And the shareholders are only liable up to their equity invested.
erichocean 13y ago
So more precisely, the reasonable choices would be wages, profit sharing in upside and downside, or lower wages + profit sharing in upside only. In another comment, someone asked about the executives who get paid and then "only have upside", as if that somehow proved that employees should also get an upside. Not so: executives are the last option: lower wages + profit sharing in upside only. Employees are—literally—taking the first option. If they want the last option, they can become executives. We don't have a legally-mandated cast system in this country, anyone who is competent can become an executive and take option three. And the wages really are lower for executives who only have upside potential. If you are an executive (not a manager, an executive) you can either run your own company, or run someone else's company. If you run your own company, you've got upside and downside risk. If you run someone else's company, you have (much) smaller upside potential, but that's compensated by: (a) lower, but guaranteed, wages + (b) no downside potential. It's a reasonable trade for a lot of executives to make.

Quequau 13y ago

You are of course obviously correct. Employees, at least those earning income from real labor, always share the downside of business income volatility. In fact, it's arguably an outsized share. One simply needs to observe the various employment metrics, and their rate of change. Particularly those tracking layoffs, discharges, and other involuntary separations initiated by employers. What's perhaps even more illustrative are the comparisons of job requirements and starting salaries for positions with similar responsibilities; found in employment advertisements before, during, and after a "business cycle". In fact I've read several studies showing that people who happen to graduate and enter the workforce during the nadir of financial crises earn, over the course of their entire career, substantially lower wages as compared to people who simply happen to enter the workforce at any other point of the business cycle.

syntaxfree 13y ago
They share some risk in the form of correlations to the actual risk to their employment contracts. But employees who are fired during downturns walk away with all of their human capital and most of their future earning potential (minus what the firing signals in their CV), while the downturn chips away at the firm's capital. Let me put this another way: no one is really entitled to a job; not in the way their entitled to their properties, which have a _title to their name_. Capital, on the other hand, risks its very entitlement. Employees don't have any assets seized during a downturn. If they wanted to share in the risk and return, they could have bought stock.

wycx 13y ago

I think the word you are looking for is "sophistry". http://en.wikipedia.org/wiki/Sophistry#Modern_usage http://en.wikipedia.org/wiki/Sophistry#Modern_usage