Critical Numbers: Dear Presidential Candidates
If we want to raise the U.S. standard of living, we have to stop debating the issues of the last generation and start focusing on the issues of the next
Here we are in the home stretch of the campaign, and the issue of economic anxiety just won't go away. Funny about that. Economic anxiety is not exactly new, after all. Whenever I hear the term, I think about my first paper route and the time I threw a newspaper through my neighbor's screen window. And I think about my dad, who worked at International Harvester for 34 years. I doubt a day went by that he didn't feel economic anxiety.
So why is economic anxiety such a hot topic these days? Maybe it's because our leaders aren't focusing on the real economic issue we face as a nation, namely, how do we improve the living standards of average working Americans when businesses are being forced by global competition to keep wages low?
I know I'm not the only CEO who thinks about that question. Believe it or not, we who run businesses care about the people who work with us and for us. We care about our communities. We care about the world we will be leaving to our children and grandchildren. We know how tough their future will be if we don't come up with an answer.
Ultimately, the answer will have to come from the private sector. In fact, we have been making some progress. There are a lot of people out there who, over the past decade, have seen their standard of living rise much faster than their wages, and I don't mean just people with high-tech jobs. I'm talking about truck drivers, cashiers, secretaries, crankshaft grinders -- the very same people whose wages are in jeopardy in the new economy.
I believe their story is becoming the story of the American workforce, but it's not the story we've been hearing lately. It's not a story about economic anxiety and pessimism and a shrinking pie. It's about getting as many people as possible involved in baking a bigger pie. It's about making it easier for them to get -- and keep -- their own slices.
You could be telling us this story. You could be showing the way to a better future for us and for our children. But instead of focusing on the issues of the next generation, you keep debating the issues of the last one. You talk about an economy that doesn't exist anymore and wind up leading us away from the real challenges we face.
Take, for example, the famous wage gap. Politicians on both the left and the right have sounded an alarm about the growing disparity between wages paid for high-tech and nontech jobs, not to mention the widening chasm between workers' wages and the earnings of senior management.
The problem is that, in focusing on wages, politicians are drawing attention to the wrong issue. Yes, base wages used to play a significant role in determining the national standard of living. For most of this century, our living standards rose steadily because productivity improvements could be passed along to working people in the form of wage and salary increases that were more or less regular.
But the age of the 10% annual pay raise is over. Gone. Finished. It will never return. Why? Because we live in a global economy, and the vast majority of companies have to keep base wages at a level that reflects the cheap labor available in emerging nations.
That's not a matter of stinginess or greed. It's a consequence of the way business works. In a competitive marketplace, you get beaten on gross profit -- that is, the difference between what it costs you to make the product (the cost of goods sold) and what you can sell it for. If your cost of goods sold is too high, you become a sitting duck for low-cost competitors. Hourly wages are a major component of the cost of goods sold. When you're up against companies paying 30¢ an hour for labor, you have no choice but to hold the line on wages and figure out how to survive any way you can.
My point is that we can't expect wage increases to play the role they once did in raising the living standards of average working Americans. Businesses in the United States simply won't be able to afford large, across-the-board wage increases for many, many years -- at least until wage rates in the emerging nations catch up with ours. So if we're going to improve standards of living, we have to figure out how to do it outside of the cost of goods sold, which means we need to look at something other than wages.
What's the alternative? Variable compensation is part of it. I'm referring to the practice of keeping base wages at a level that allows you to compete (and provide a degree of job security), and then paying bonuses if the company does better. In effect, you use the bonuses to reward people for extraordinary performance, over and above what's required to be competitive.
But the bonuses should also help make the company more competitive in the future. You should pay them only up to the point at which they drive the economic value of the company. What's more, people have to see the connection and share in the rewards. They shouldn't just be working for a paycheck and a bonus. They should be trying to increase the stock price at the same time.
And that's how we can have a real impact on the standard of living -- by harnessing the power of the multiplier. I'm talking about equity. Stock and stock options. Ownership. I'm talking about helping people understand the real value of every additional dollar in after-tax profit they create. I'm talking about showing them how to turn that single dollar into $10, $20, or $30 in the equity markets and then making it possible for them to share the wealth. I'm talking about teaching people that the best investment they can make is in themselves.
Our company has done that, and so have many others. Thus, you find cashiers at Wal-Mart earning wages of $7.50 an hour -- and owning stock portfolios worth more than $250,000. Or take my friend Patrick Kelly, who has been sharing stock with employees ever since he started his company, Physician Sales & Service, in 1983. Today more than 150 of those employees have holdings worth $1 million or more, and many of them are truck drivers.
I know. Critics will say that stock values can go down as well as up. So can real estate values, but that didn't stop our parents' generation from building their net worth through home ownership. My dad sure didn't retire on the money he'd made working in factories. All he had was the equity in his home -- equity he himself had built with hard work, pride, and, yes, a bit of risk taking.
To keep our standard of living rising, we need to foster those same attitudes in the workplace. We need pride, self-esteem, a determination to build a better future. And we need to move beyond the issues that have divided us in the past.
For openers, let's break the gridlock on capital gains. We all know that Republicans favor a reduction in capital-gains taxes because it will help the economy, and Democrats oppose it because it will help the rich more than the poor. So why don't we just eliminate capital-gains taxes altogether for individuals and families with an annual income of, say, $50,000 or less. Instead of playing the haves against the have-nots, let's show the have-nots how to follow the haves' path.
The point, gentlemen, is that we need leadership here. Leaders face difficult situations head-on. We can't afford to set people against one another. It's going to take all of us to solve the problems that lie ahead. The first step is to raise the level of public discussion, to help people understand how the world has changed. We need to start a new dialogue that reflects the realities of the global economy.
If we don't, we run the risk of creating for our children precisely the future we all fear.
Jack Stack* * *
Jack Stack (reachable at email@example.com) is president and CEO of Springfield Remanufacturing Corp., in Springfield, Mo., and the author, with Bo Burlingham, of The Great Game of Business. His column, Critical Numbers, appears every other month.