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Crying wolf? A second look at the link between wage increases and profitability
Mar 18, 201632 views8 Likes0 Comments
(This article was originally published at http://decentwork.ca/2016/03/16/crying-wolf/?platform=hootsuite)
A recent article in the Report On Business magazine (March 2016, Profit versus the Proletariat), suggested that investors should be worried by a rise in workers’ wages in the US. But the author’s hasty conclusions sound a false alarm. I have just finished participating in a meeting of American institutional investors with assets of $2.5 trillion – yes, trillion – that take the opposite view. They have formed a coalition with the purpose of engaging with companies in their portfolios and emphasizing that strong human capital management is a critical component to company performance.
Human capital management refers to a broad range of corporate practices related to the management of workers, including compensation but also hiring and retention, engagement, training, fair labour practices, diversity and health and safety. Among the companies with which the coalition has spoken are four that have recently increased their wages – Gap Inc., Walmart, McDonalds and Costco. This group of investors interprets these recent wage increases as good news not just for workers but also for shareholders.
You see, pretty strong evidence shows that those companies that value and invest in their most important assets – their workers – are among the best investments out there. For example, research done by MIT professor Zeynep Ton finds that shifting the overall perception of workers as “assets” rather than “costs” and developing strategies to nurture employees and develop their skills has actually led to improved operational execution in the retail stores that she has studied and ultimately resulted in higher sales and profits. Similarly, a study by the Boston Consulting Group found that over a 10-year period, companies that appeared at least three times on the Fortune 100 Best Places to Work list outperformed the S&P 500 by 99 percentage points.
Source: From Capability to Profitability: Realizing the Value of People Management. Available at: http://www.greatplacetowork.co.uk/storage/documents/BCG_and_WFPMA_report_Practice_and_Profitability_2012.pdf.
So, the correlation that the ROB article puts forward between compensation of employees and corporate profits is probably inaccurate and most likely not helpful for investors. Even if one did cause the other, we could just as easily interpret the graph as showing that wage increases are a leading indicator of recoveries in subsequent years, that higher profits simply lag behind the positive effect of better wages.
So what would be helpful to investors? Well, lets look at a longer time horizon to get a more accurate picture of profit and wage trends. The graphs below show that after-tax corporate profits rose to a record of 10 percent of gross domestic product in 2013, while total compensation of employees slipped to a 65-year low. The trends in corporate tax rates also show an historic low.
Source: Corporate Profits Grow and Wages Slide. Available at: http://www.nytimes.com/2014/04/05/business/economy/corporate-profits-grow-ever-larger-as-slice-of-economy-as-wages-slide.html?_r=0
At a time when knowledge is recognized as an increasingly important driver of success and when income inequality is creating systemic risks in markets, investors need better information from companies on how they are investing in and managing their “most valuable assets” – their workers. An average company spends approximately 36% of revenue on human capital and yet almost no information is available from companies on how that money is spent and how it is contributing to business success. You can bet that if a company made a capital expenditure representing 36% of its revenue, pages of information would be provided to investors on how the investment will contribute to business success.
It is time for investors to demand more transparency from companies and better analysis from investment research houses on the contribution employees and high quality workplace practices make to the bottom line.
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Reid Hoffman Follow
Entrepreneurship is a fundamental human attribute. We need more of it.
Jun 25, 201618,654 views1,206 Likes40 Comments
It was an honor to speak to hundreds of entrepreneurs from around the world in the plenary session of the 2016 Global Entrepreneurship Summit, hosted by The White House and the State Department at Stanford University. This post is the extended version of my remarks.
Part I: Why is entrepreneurship important to society?
“All humans were born entrepreneurs.”
That’s a quote from Muhammad Yunus, the founder of Grameen Bank. It’s a quote I like so much I opened my first book with it, The Start-up of You.
It’s a quote that resonates here in Silicon Valley — because it positions entrepreneurship as a fundamental human attribute, a part of our DNA.
Entrepreneurs have always been crucial to human progress and well-being, but that’s especially true now. As we’ve moved from the Industrial Age to the Information Age and now to the Networked Age, dynamism has replaced stability. Businesses come and go faster than ever. Entire industries are replaced by new ones in shorter and shorter time frames. Adaptability is crucial in this new era. At their core, this what both The Start-up of You and my second book, The Alliance, are about. How do individuals and companies cultivate an adaptability mindset to succeed and thrive in the Networked Age?
Overall, the net impacts of our accelerating culture are positive. But the speed and dynamism of the Networked Age creates turmoil too. People are uncertain about their jobs moving forward – whether it’s competition from other countries, increasing automation, or just the continuous effort needed to maintain a set of skills and expertise that employers demand.
Entrepreneurship represents our best path forward. Entrepreneurs create the products and services that lead to new industries, new jobs, new opportunities. A society where entrepreneurship is flourishing is a society where workers have many opportunities to pursue meaning and livelihoods and governments have a revenue base that can support a wide range of services and infrastructure.
Not every entrepreneur cares as much about his employees as Hamdi Ulukaya, the Turkish immigrant who founded Chobani yogurt in 2005 and recently distributed a significant portion of his company’s stock to its 2000 employees. Not every entrepreneur is as socially committed as Celtel founder Mo Ibrahim, who has worked so hard to improve governance in Africa.
Some entrepreneurs simply want to make a buck for themselves. Others do it because they have a burning desire to advance new technologies, or simply because they can’t imagine doing anything else.
We should value entrepreneurs in all their different incarnations. They’re the ones who refuse to accept that the way things are today is the ways thing should always be.
In general, people crave stability and the familiar. That means the societies we create often up enshrining the past. In contrast, entrepreneurs are always seeking new possibilities and cultivating new opportunities. What could be done differently than the way things are done now? How do we push the world forward in ways that create new value and make the world better? Entrepreneurs dream up crazy, often controversial ideas that challenge the status quo and improve human prosperity and wellbeing. They push for change and progress. And it’s this adaptation that helps us not just to survive in the face of changing conditions –it helps us flourish.
Part II: What do entrepreneurs need to survive and thrive?
I often say that starting a company is like jumping off a cliff and assembling an aircraft on the way down.
The idea behind this analogy is that every new business effectively exists as the walking dead at launch. That’s your default state: You don’t have any customers. You’re burning capital. The clock is ticking and you’re falling fast. Until you have revenue on a solid trajectory to exceed costs, your business’s natural result is a crash.
So what do entrepreneurs need in order to fly?
Networks. Networks of capital. Networks of talent and expertise. Networks of customers and product distribution.
The networks that entrepreneurs can access have never been stronger, and that’s why there’s never been a better time for entrepreneurism.
For most of my career, I’ve developed networks that help entrepreneurs in one way or another. Obviously, there’s LinkedIn. There’s Kiva.org, where I’m a board member, which has helped more than 2 million micro-entrepreneurs obtain capital from a global network of more than 1.5 million lenders.
I’m also on the board of Endeavor, another organization that identifies and supports high-growth start-ups around the world — because it’s these high-growth companies that have the potential to create jobs at scale. Indeed, the companies Endeavor supports have created a net total of 587,000 jobs in 19 years.
Endeavor’s impact is about to get even bigger. This week, it’s announcing Catalyst II, a co-investment fund that will support high-growth companies across Latin, America, the Middle East, Africa, and Southeast Asia.
Endeavor has already proven the model has impact. Catalyst II is the successor of Catalyst I, a $20 million fund whose 35 portfolio companies have already created 10,000 jobs. And Catalyst II is going to be five times as big – a $100 million fund, which I myself am supporting with an investment of $10 million.
Organizations like Kiva and Endeavor steer entrepreneurs into the networks that help start-ups take flight. LinkedIn, in turn, is a platform where many of these key networks actually reside.
LinkedIn has always functioned as a trust-and-identity platform that individuals use to be the entrepreneurs of their own careers. But for entrepreneurs developing their own businesses, it’s a central network facilitator as well.
These days, even small businesses are often global businesses. A shop-owner in Kenya might be selling to a very small, localized market, but she gets financing from Kiva.org. A graphic designer located in Ohio might use Etsy and various global shippers to sell her letterpress greeting cards to the world.
At LinkedIn, we see the shift to a global, increasingly connected mindset first-hand. Three out of four new members are international ones. Organizations in more than 200 countries have created company profiles. LinkedIn’s vision is to create economic opportunity for every member of the global workforce – and to achieve this vision, we’re building the world’s first Economic Graph, to digitally map the global economy and connect talent with opportunity at a massive scale. In fact, today LinkedIn is providing data from its Economic Graph to over 40 of the White House Tech Hire cities in the US, which are designed to increase the number of individuals leveraging bootcamps and accelerators to develop in-demand tech skills.
In the evolving world of global connectedness, entrepreneurs aren’t confined to their own local markets or even countries to find the specific expertise, capital, and customers they need to make their businesses grow.
In the end, the Networked Age doesn’t just make connectedness easier – it turns connectedness into a key strategic edge that every individual must cultivate. Because as the world accelerates, as competition increases, the people who are most able to act on network intelligence, build alliances, and spot emerging opportunities, are the ones who will succeed.
It’s entrepreneurs like yourselves who must embrace this fact most fully. And that’s why we’re giving every GES entrepreneur a one-year free LinkedIn Premium Account, so you can continue to build your networks of talent, investors, and customers in the most productive way possible.
Part III: What role does government play?
Another key platform for entrepreneurship – and one we often completely overlook in this context – is government.
Here in the land of disruptive innovation, we tend to be big believers in the invisible hand and the power of self-organizing systems.
A summit on entrepreneurship, sponsored by the federal government, is not something you’d necessarily expect to pack an auditorium that’s a just a short drone flight to Sand Hill Road. In these parts, the government is often portrayed as working at cross-purposes with entrepreneurism, a force that ends up impeding innovation.
There’s serious truth in that. Political systems evolve in ways that favor incumbents over upstarts. And entrepreneurs are always the upstarts. They create the future that challenges the established order.
But to suggest that the government is fundamentally at odds with entrepreneurism is a classic mistake. Because entrepreneurism doesn’t just magically happen. Entrepreneurs need a platform on which to innovate and build new businesses. And government creates that platform.
Think about it. For great entrepreneurship to happen at scale, you need a talented workforce. That means an educated workforce. And for education at scale, where the majority of society receives in-depth instruction over the course of years, you need the resources of government. Governments can also support entrepreneurship by establishing — through policy — social safety nets that enable citizens to take entrepreneurial risk.
For great entrepreneurship to happen at scale, you also need reliable sources of capital. You need rule of law, and specific laws for the protection of property and the formation of businesses.
More generally, you need a culture of trust and predictability. Even under ideal scenarios, entrepreneurism is a risky endeavor. So if you’ve got a culture where entrepreneurs and investors have to worry about corruption, theft, and other forms of lawlessness and instability, entrepreneurism is not going to flourish the way it does in places where good governance creates a culture of trustworthy institutions and trustworthy citizens.
Put all these things together, and you’ve got a platform that entrepreneurs can build on. What government does, in other words, is give the invisible hand a stable and potentially productive space in which to operate.
And there is a bit of a virtuous cycle, as entrepreneurship ends up playing key roles in governance and diplomacy. Commerce, after all, is what provides the revenues that pay for social services and public infrastructure.
It also creates stability and security on a global level. When I created LinkedIn in 2003, I had a deep conviction about how it could transform individual lives and careers, but I hadn’t fully considered what impact it might have on the level of global relations. Over time, though, I’ve come to recognize the impact that increasing individual economic connectivity can have on improving global stability.
When individuals use entrepreneurship to create deeper connections with each other, greater communication and greater understanding follow. And when these connections have an economic component, prosperity follows too. New webs of mutual interdependence, collaboration, and innovation form, with both national and global impact.
Recognizing this, President Obama organized the first Global Entrepreneurial Summit in 2010. He understands the positive synergy that can exist between government and entrepreneurism – how their own mutual interdependence ends up creating benefits for both. And events like this Summit serve as important recognition of this fact. So I want to thank him for his efforts in this regard — and I also want to let him know that the offer for a LinkedIn Premium account extends to him as well — because I hear he’s contemplating a career shift.
Part IV: What can you learn from Silicon Valley during your time here?
Today, advances in technology are increasing both the speed and the force of what economist Joseph Schumpeter once called “the perennial gale of creative destruction.”
In the face of this gale, many people’s reflex is to want seek shelter, slow things down, protect the status quo, and effectively lock in the past. But when you do that, you’re locking in stagnation. You’re not innovating or moving forward in creative, productive ways.
Here in the U.S., there are great concerns about the future of the middle class, and how to ensure that a broad base of our citizens continues to have access to jobs that allow for a secure, autonomous, and fruitful life.
The way to do that is to harness dynamism and change, not reject it. We need to encourage innovation and bold new technologies and industries – everything from Airbnb to self-driving cars.
Of course, as we move forward, we must be conscious of the forces at work, and steer toward compassion and grace. How do we use the new technologies at our disposal to increase individual autonomy and empowerment? How do we smooth the transitions and dislocations that arise out of creative destruction?
As you might expect by now, my answer is networks. Networks create resilience by giving people faster access to more resources and more opportunities.
Think about how Silicon Valley functions. Over the last few decades, it has experienced booms and busts, all kinds of economic turmoil and disruption. Over the long term, though, Silicon Valley keeps growing stronger and more productive.
And that’s because it has mastered the art of leveraging networks. Networks of talent that grow out of Stanford University and UC Berkeley, the companies that already exist here, and aspiring entrepreneurs from across the planet. Networks of capital from the venture capital firms clustered on Sand Hill Road. Networks of open-source technology and resources.
Ultimately, the Valley’s connectedness makes it both incredibly generative and incredibly resilient.
Now, as long as you’ve watched even just one episode of HBO’s hit TV series Silicon Valley, then you know that the actual Silicon Valley is also incredibly generative when it comes to self-regard and smugness. Nowhere else, not even Hollywood, do people throw themselves million-dollar parties for democratizing pizza delivery.
But if we sometimes get too full of ourselves, or oversell our vision of the future, the same impulses that can lead to hubris also lead to breakthrough technologies and companies that do in fact change the world. To be a successful entrepreneur, you have to think boldly. You have to be unreasonably confident. You have to believe in your ability to create a future that most other people think is impossible, foolish, or crazy.
But ultimately entrepreneurs are the people who do end up creating our future. And if you take away just one truth from the time you spend in Silicon Valley this week, I hope it’s this: The consequences of our shift into the Networked Age are only just beginning.
We’re still just starting to understand what it means — on cultural, political, and economic levels — to have instant access to almost anyone in the world. To have all of humanity so tightly connected, in webs of knowledge, cooperation, competition, and sometimes outright conflict.
In the end, that’s what this summit is about: How do we use our new connectedness to create a world that is more harmonious, more secure, more abundant with opportunities for people to live productive and rewarding lives?
All across the planet, for the foreseeable future, entrepreneurs are going to be pursuing different answers to that question. I look forward to learning from you all.
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