Can McDonald’s Pay $15 per Hour?

There were several strikes this week at fast food restaurants.  McDonald’s was held up as an example of a corporation that could be paying its workers a lot more ($15 per hour versus $7.25 to start now).  The arguments were that workers today aren’t teenagers.  Instead they are single moms with two kids to feed.

Three arguments are commonly used.  The first is that McDonald’s pays its chief executive millions of dollars more than companies did in the past while entry-level workers have seen wages stay stagnant or decline.  The second is that McDonald’s and other corporations are seeing record profits and could share more.  The final one is that the workers need the higher wages to live in places like New York City and raise two kids.  Let’s look at each of these.

The CEO has seen a big rise in pay compared to the workers.  I actually agree that the average CEO is paid way too much.  The pay of a CEO (or any employee) should be what is required to find a keep a person who does a competent job.  In the case of a cashier that is someone who will show up on time, work while they are there, and be fairly efficient in taking customer orders.  A great cashier would present a great attitude and make people want to come back.

A competent CEO must be able to handle the day-to-day operations of the company.  He or she must also have a vision, deciding how and when to grow the company, what things to change to bring in more business, and how to handle down turns in the economy.  A great CEO will bring in a lot more money for the company than would an adequate CEO.   Obviously there are far fewer people who have the skills and experience needed to be a competent CEO than there are who can be a cashier, so the pay should be quite a bit better – say $500,000 per year.  There are far fewer still who have the vision and the ability to act on the vision to bring in significantly more money, so they can command a better salary, maybe a million dollars a year or more.

Often CEO pay, beyond the day-to-day operations pay, is linked to how much money they make for the company and the shareholders.  For example, they may receive options that allow them to buy stock at a certain price.  If they do a great job and the stock price rises a lot, they make a lot more money by buying the shares at the option price and selling them on the market.  This is fair since the shareholders make a lot more money than they would have with a mediocre CEO.  The trouble is that CEO base salaries have risen dramatically and the bonuses are getting easier to get.  During the 2008 crash, many companies were even looking at lowering the prices for the options they had issued before the crash since they felt the stock price would never reach the original price again and the CEOs might leave without the additional compensation.  The trouble with this is that the shareholders were losing a lot of money but the CEOs were getting paid the bonus anyway.  Not exactly the way it was supposed to work.

The other issue is that CEO pay is normally set by the board of directors, which is usually made up of CEOs from other companies.  Over the years, each board has raised the pay of their CEO, which has caused other boards to raise the pay of their CEO to catch up to or exceed the average.  This has caused a huge increase in CEO pay to ridiculous levels.

The pay of CEOs has nothing to do with the pay of hourly workers, however.  The pay for the CEO does not come from worker’s salaries, and the CEO is not the one who owns the business and keeps the savings from lower wages.  It is the stockholders who are paying both salaries.  CEO wages should come down because the stockholders are being abused, and stockholders need to get organized and demand more reasonable CEO pay.  Just because the CEO were paid less, however, does not mean the hourly workers would get paid more.  Note that three or four million dollars saved by lowering CEO pay would not go far split among hundreds of thousands of workers.

McDonald’s and other corporations are seeing record profits and could share more.  McDonald’s did see record profits last year of $5.5 B, but that does not mean necessarily that they could pay a lot more to hourly workers, especially not $15 per hour.  With 440,000 employees, if the entire profit were used to increase wages, that would be an increase of $6 per hour.  This would only bring wages up to $13.25 for new employees – not the $15 being demanded.

Paying all of the profit out as salaries would also eliminate the ability of the company to use the equity markets to fund expansions.  If all of the profits were used for salaries, there would be no reason for stockholders to buy the stock.  The price of the stock would immediately go to zero since the stockholders would be getting nothing for their investment, causing great damage to the shareholders, many of whom are everyday workers who hold the stock in their 401k accounts.  Do this too often and the ability to get funding for new companies that one day will provide millions of jobs goes away.

This would also be a one-time trick.  Once it was done, the ability to do it again to increase wages in the future would greatly diminish.  This is because although the overall numbers are very large ($5.5 B), the amount made per employee is fairly small.  To see this, let’s suppose we have a company that pays $1 per year per employee (to keep the math simple).  Let’s also say that the company make $1 per year per employee (in other words, they make $2 in revenues, pay one as salary, and keep one as profit).

Now, because most companies make more money by expanding – hiring more workers, building more locations and so on – the number of workers will grow with the profit.  This is because each worker can only contribute so much profit and you make more money by serving more people.  This requires more employees.  Let’s say we give all of the additional profits to the workers, keeping the profit for the company at $1 as the business expands.  Here’s what you’d have:

Number of workers            Revenues        Profit           Wage per worker

1                                                 $2                   $1                 $1

10                                               $20                 $1                 $1.90

100                                             $200               $1                 $1.99

1000                                           $2000             $1                 $1.99

Note that after 100 workers the gain would be less than a cent no matter how many workers you brought in.

So, while the first workers would receive a big pay raise as the next few workers were hired on, very quickly there would be only very small increases as more workers were hired.  This is true even if all of the profits beyond the original $1 were given out as pay raises.  So, while at McDonald’s you could give out an initial raise of $6 if you took all of the profits and decimated the shareholders, the raises would get very small after that even if you gave all of the additional profits to the workers.

Workers need the higher wage to live in places like New York City and raise two kids.  Living in New York City is expensive.  It is also very difficult to raise children on minimum wage.  Someone whose only source of support is a minimum wage job, however, has no business living in New York or trying to raise children.  These jobs do not pay enough for this, nor can they as shown above.

The best thing to do is to avoid this situation.  Before deciding to have children (or doing the things that cause children), one needs to have made their way to the point where they are beyond minimum wage.  One should get a good education, learn useful skills, and take the minimum wage jobs when they are young to get the experience needed to move up.  Also, if one is in New York City and can only do minimum wage jobs after leaving one’s parents’ home, one needs to move out to a less expensive area where they can support themselves until they move up and make more.

Now of course, things happen, and people find themselves in the situation where all they can get is a minimum wage job when they have children to support.  This is just a lousy situation with few good options, at least in the short-term.  Beyond moving where the cost of living is lower and there are better job opportunities, there is not a lot that can be done immediately.  Still, over time one can make it out of that situation to a better one.  This is done by 1)taking advantage of things like housing assistance and food stamps to live and eat, and subsidized child care and relatives to give time to work and get training, 2) getting job training to gain skills, 3) being a great employee and learning skills at work to move up in the company, 4) getting married to someone who can help support you, 5)looking for other jobs that may pay the same but where there is the potential to learn skills for jobs that can pay a lot more (for example, learning plumbing or electrical skills).

The important thing is to not sit there and decide to stay put in that minimum wage job for another 20 years.  Striking and demanding better wages isn’t the way to go either.  Even if you get the higher wages, you’ll soon find that most of the jobs will be replaced with technology.  (Think how easy it would be to replace cashiers with kiosks, particularly now that credit cards are the norm.)  The answer is to change yourself instead of expecting your job or pay to change just because you want or need it to.

Unlike in places like Vietnam where there are no opportunities unless you are politically connected or wealthy to begin with, there are plenty of opportunities in places like America to move up and better your life.  The best thing is not to get into a bad situation, but even if you do, there is a way out for those willing to make the right choices and do the right things.

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Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Don’t Forget to Invest in Relationships

A lot of posts on this blog are spent talking about saving and investing money.  The goal is to get into a situation where you can generally take care of yourself and your family even if your regular source of income – your job – goes away.  This is known as being financially independent.  Being in this state opens up a lot of possibilities not available for those tied to their jobs such as great freedom in what you do, opens up options not available to those without money such as private schools and home healthcare, and allows people to get more for their labor by reducing the amount that is lost to interest.  Regarding that last point, you can easily get twice as much “stuff” for the same amount of labor if you just don’t borrow to buy things.

There is another type of investment that is equally important, however, and that is investment in relationships.  While there are a lot of things money can provide, there are also times when everyone has a task they cannot do alone.  In rural communities, while each person is expected to generally take care of themselves, it has always been the practice to help others when they needed to build a barn or do some other large task.

Even if you don’t need to raise a barn, you might need someone to watch your pets when you’re out-of-town or take you home from a surgery at the hospital.  One thing that has really surprised me as I’ve gotten more experience is how much the medical system relies on family and friends to do all kinds of things for the patient.  One would think that if there were a need for something as a ride home from the hospital or medical aid in the house during recovery there would be plenty of quality services to meet the need.  For most other needs there are many companies to choose from.  For whatever reason, however, often many of the needs of the sick and elderly fall on family and friends.  (Maybe this is an area a budding entrepreneur should look into.)

Sometimes the people you help may fall outside your circle of friends or acquaintances.   When you help the stranger at the side of the road you may never see again, you start to create a society where people help others.  Perhaps the person you help will “pay it forward” to another person, who in turn will pay it forward to another, until eventually someone will help you when you are stuck at the side of the road.  Unfortunately the creation of cell phones has reduced people’s willingness to help since they think the person in trouble can just call someone.  I think it still never hurts to stop and ask because not everyone has someone they can call or even has a cell phone.

People in cities tend to be more closed-off than people in rural communities and suburbs.  Most apartment dwellers say, “hello,” or nod to their neighbors in the halls (sometimes) but probably don’t know their names or anything about them.  Maybe because there is little privacy and solitude people put up virtual walls to keep separation from others.  Doing so, however, keeps a community from being established where people can share talents to make things better for everyone.

Relationships are also very important in your work life.  Often that next job, promotion, opportunity, or sale depends on who you know and who knows you.  This isn’t “kissing up.”  How can someone select you for a position or contact you about a product if they don’t know who you are?

One opportunity people miss at work is participation in trade groups and technical societies.  In the past it was just expected that you would join the trade group, but many today as what’s in it for them.  More than just being a member, taking an active role in planning and setting up for events and doing the daily work of the group like taking meeting minutes or sending out newsletters helps establish important bonds.  You may not get the opportunity to show your boss some of the big things you can do at work because of your position, but you might be able to organize a great event or produce a great product for your trade group where there is a lot less competition for the assignments.  You will also get the opportunity to perhaps work on a team with your boss’ boss and others in senior roles who might remember you the next time there is a position to fill.

So, while you’re building up your portfolio of stocks, don’t forget to also build your portfolio of favors.  Help out neighbors and others in your community when you have the chance.  Get away from the office and spend time building relationships outside of work.  Not only will this enhance your life, it will create the important social network you will probably need at one time or another.

Please contact me via or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How Many Different Stocks Should You Buy?

Diversification is often touted as the be-all end-all.  Many advisors suggest holding dozens or even hundreds of different stocks in your portfolio.  They say that you should hold several different mutual funds since that is the only way you can achieve enough diversification if you don’t have several million dollars in the bank.

This is thinking like a speculator, however, and not like a business owner.  Speculators think it is all about chance and that you cannot predict what any particular stock will do.  You therefore spread out your bets to cover all of the bases and let the natural tendency of the market to grow lift your boat.

Business owners, on the other hand, usually put all of their money into one business – their own.  They even go out and borrow money from family, friends, venture capitalists, and even credit cards.  They have a clear vision of where they want to take the business and how it can make money.  All of their energy is focused on the one endeavor.  Of course, businesses can and often do fail, and when they do it can be financially devastating to the business owner.

Stock investors also lack one critical advantage the business owner has, control.  As an investor you cannot control what the board of the company does or what the company officers do.  Putting it all on the line when you don’t have control is even more risky than doing so when you do have control.  The right balance lies somewhere between full diversification and betting it all on one horse.

When I look at diversification, I base it on a simple principle – how much am I willing to lose.  If  I put $5000 in a single stock, there is a very real chance that the company may go bankrupt and my $5000 will be gone forever.  I’ve found that perhaps 1 in 20 or 30 stocks will do this, so it is not that likely but it is extremely possible.  It is also possible that the stock may drop in price somewhat, or just keep trading within a range while the rest of the market is going up.  You then miss out on a significant return hat you could have had if you had just been in index funds.

While staying below the maximum I’d be willing to lose in any one position, I try to concentrate in a few positions when I don’t have much to invest and therefore don’t have that much to lose.  If I make a great pick and buy just 100 shares of a company’s stock and it goes up 10 points, I’ll only make $1000.  Even if it goes up 20 points, I’ll only make $2000.  This is better than a loss, but won’t be life changing.  I like therefore to buy 500 or 1000 shares.  If I buy 1000 shares and it goes up 10 points, I’ve made $10,000.  If it really takes off and goes up 100 points over the period of five to ten years, I’ve made $100,000 – enough to buy a small house in many parts of the country.  This is the power of concentration.

Of course, these can be fairly large positions.  If the stock costs $15 per share, 1000 shares would be $15,000.  If the stock went to $50, that would now be $50,000 worth of stock.  I therefore wouldn’t start right off of the bat putting $15,000 into one stock if all I had was $15,000.  I also wouldn’t hold $50,000 worth of stock in one company if all I had was $50,000.

Instead I would start out by picking three to five stocks that I liked as long-term purchases.  These would be the best stocks in five different industries, and each of these industries would be hot industries that have plenty of room for growth.  I then would pick up 100-200 shares in one of the companies.  I’d save up more, and buy 100-200 shares in a different company. I’d do this for the third company, and then the fourth, and then the fifth.  I’d now have a portfolio worth maybe $20,000 with positions of about $3000-4000 in five companies.  I would  then start building up these positions, buying 100-200 shares at a time of whichever company seemed to be the best value at the time.

This would continue until I had 500-1000 shares in each position.  At this point I would have several positions each worth about $15,000-$20,000.  If one failed entirely, I’d lose $15,00-$20,000, but it would only be about a 20% loss for the portfolio overall.  There would be times when two or more positions fell in price at teh same time, but the chances of more than one company declaring bankruptcy and the entire position being wiped out is fairly low.

At this point I would start to think about more diversification.  As the positions grew I would take some profits and as I saved up more money I would start to put some of my money into index funds and ETFs.  This would be money I was content to grow at the rate of the return of the markets in general.  I might do this until I had about 1/2 of the portfolio diversified and the other half concentrated.  Starting out this way — buying shares of one stock and then shares of a mutual fund, is another possibility.  This would reduce the levels of the fluctuations in the value of your portfolio when it was small.

As I started to have $100,000-$250,000 in the diversified funds, I could start letting some of the positions get a bit larger, maybe as large as $30,000-$50,000, because a whole loss of a position would be a small part of my portfolio overall.  I’d get less risky over time, using a smaller and smaller portion of my portfolio for the concentrated positions, but the size of the portfolio would be growing over time, so the absolute size of the positions might actually remain about the same.  For example, if I had a $10 M portfolio, I might have $8 M in diversified index funds and then have twenty large stock positions worth around $100,000 each for the remaining two million dollars.  The diversified portion might also contain some fixed income investments to provide income and further reduce volatility risk.

In summary, I tend to use concentration in a few great companies to improve returns, but keep positions manageable relative to the size of the portfolio.  At the start I would concentrate more, having less money to risk and therefore smaller potential losses when compared to income from work.  As funds built up, I would shift to a more diversified approach to reduce risk and preserve the capital I’ve built up.

Note that this strategy takes a strong stomach.  Large losses can and will happen from them to time and one needs to be willing to stick it out and wait for things to improve.  If this does not allow you to sleep at night, there is nothing wrong with accepting the market returns and buying a diversified set of mutual funds.  You’ll do better than 90% of the fund managers out there in index funds and do a lot better than those in bank CDs or credit cards.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.