Do Record Earnings Mean that Wages Should Rise?

We often hear about how unfair it is when companies are seeing record earnings yet wages are stagnant.  How can that company that makes $50 million in earnings not raise wages by $5 per hour for everyone?  Obviously the rich are growing richer and the poor are growing poorer, right?  The big boss man is raking in the majority of the cash while the workers are collecting the crumbs.  One can almost picture an owner who looks like the Monopoly man, kicking back in his leather chair, big cigar between his lips, counting his wad of cash.

But not so fast.  How much of the profit money generated by a worker does he receive, and how much does the owner collect?  Let’s take a look at the earnings of a big company, like Home Depot.  Home Depot had $76B in revenue last year (money collected) and $4.5B in net income.  That $1.1 B more than they made in 2011.  Surely, you thin, if they are making billions they could have spread some of that money around to employees and given them a big raise.

Let’s say they give 1/2 of the increase in their profit to employees, or $550M .  They have 340,000 employees, so that would be $1,618 per employee per year.  I doubt many people would turn this down, but it isn’t the huge windfall when compared to $1.1 B.  After taxes it would be closer to $1,000, or an increase of $0.48 per hour for a full-time employee.  If you were making $30,000 per year, that would be about a 0.3% raise.

But obviously the employee is making a lot of money for the company and getting very small percentage of it, right?  The employee probably gets 50%, or maybe even 25%, right?

Well, let’s look at that.  Home Depot made a profit of $4.5B last year.  Divide that by 340,000 employees, and you have that Home Depot made $13,125 per employee.  An employee making $15 per hour makes $31,200 per year.  Let’s say that benefits (vacation, health insurance, life insurance, sick leave, Social Security and Medicare) are 50% of pay, which is probably low.  That adds another $15,500 to the value the employee receives, meaning that he receives $46,700 in pay and benefits.

Divide $13,125 by $46,700 and you get that Home Depot keeps 30% of the income the revenue each employee generates and the employee keeps 70%.  So, the company provides the facilities, provides the product line, provides the advertising, provides the training, and takes the risks and gets 30%.  The employee does what is asked and receives 70%.  Of course, many employees make substantially more than $15 per hour and the company makes an even lower percentage off of them.  These employees, however, should be generating more income from their presence than do the lower paid employees, so things probably tend to even out.  Perhaps each employee ends up keeping 80-85% of what they generate and Home Depot gets 15-20%.

Note that most people making this “greedy corporation” argument talk about the company as if they were the ones making the money.  Indeed, it is easy to demonize a company and picture a group of maybe five white men in suits and top hats that are making all of the money.  In actuality, however, corporations are owned by thousands of people, each getting a small part of the profits.  Some of these people are rich and own many shares, but there are also a lot of working people, many of whom own the shares through their retirement plans or mutual funds as well.  So how much do they get?

Well, the average return on a stock is about 12% per year.  This means that when you divide all of those $4.5 B in profits up, the stockholder will get about $120 per $1000 invested.  That is an average value – there are certainly many years when the stockholder loses money, but the employees are paid regardless of whether the company makes money unless the company loses money for long enough for them to be laid off.  Even in that case the stock holders would normally lose quite a bit of money as well.

So, the employees make back a good majority of the money that is made from their labor.  They take the least risk since they will be paid for the labor they do even if the company does not make a profit on their labor.  The owners who take the risk make an average of 12% on the money they invest.   It is because of their investment that the employees are able to earn money and they take the risk when there is a bad year.  They are also not making that much money from any one employee.  The reason that it seem like they are making so much money is that they have so many employees that the small amounts they make from each one add up to large sums.

Generally, providing jobs is seen as a good thing.  Everyone botes for the politician who promises lots of middleclass jobs.  Well, the more people a corporation employees, the more money they make.  Those that provide the most jobs, in general, make the most money.  Just as a business will make more money the more people whose needs they meet, a business will make more money the more employees they provide jobs to, provided that those employees are efficient enough to produce more than they are paid.

Still not convinced?  Well, there is nothing from keeping a Home Delpot employee from buying shares of Home Depot.  In fact they offer an employee stock purchase plan that, I believe, which allows their employees to buy shares at a discount to the market.  If they choose to invest, they could then receive a share of the profits and make more money on those record profit years.  Then again, holding shares in a company you work for is generally a bad idea since when their business declines you may well be out of a job and lose money on your investment.

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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.

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