Can Paying Employees More Help Investors? A Lesson from the Rise of American Industry

The rise of the American manufacturing economy is often tied to the story of the early years of Ford Motor Company. Some elements of this story have reverberated through the rise of the information economy, the gig economy, and likely the next few economies to come. The reasons are legion. Among them is a labor relations decision made by Ford in 1914, which now seems to read as a classic example of corporate decision-making based on optimizing the value of the firm for humankind.

In 1914, employees at the Ford plant in Detroit were offered $5 per day ($130 per day in $2020), which was more than double the prevailing wage for this kind of work. With this, Ford accomplished two things that any modern board room might envy: employee retention improved (this was intentional) and the number of people able to afford Ford vehicles increased (this was unintentional) (1). One can argue that Ford's decision increased its value to humankind because the total benefit to investors, employees, customers, and society-at-large increased.

The U.S. today, however, is seemingly not a U.S. where Ford's 1914 decision was prologue. The labor undertaken by manufacturing employees can create generational wealth for shareholders. But the frontline employees of companies who generate such large shareholder returns must too often take on multiple jobs and receive substantial government assistance just to eat and pay for basic healthcare, i.e. survive. (2) The eternally sobering statistic – that half of all Americans cannot afford the burden of a $400 emergency – becomes even more grim when considering that this is a pre-COVID statistic. (3) The investors' interests seem to clearly dwarf that of the workers'.

Extreme focus on investor profit is not a modern phenomenon; Ford had to contend with this a hundred years ago. After an attempt to end special dividends in favor of large investments in new plants, the company was sued in 1919 by two investors who held 10% of its equity. At the appeals level, the Michigan Supreme Court plainly decreed, "A business corporation is organized and carried on primarily for the profit of the stockholders." (4) The judiciary had rendered its judgment and so would markets. Despite historical proof that improved worker compensation had the power to increase profits, it seems that Ford's example still could not influence the subsequent century of American capitalism as much as the specter of appearing to be anti-shareholder would.

Today, a company can still choose to share more of their revenue as salary, wages, benefits, profit-sharing, or other co-ownership arrangements with its employees. However, judging a company only by investor profits may disincentivize choices that would treat workers equitably. Increasing employee value is good for the Humankind Value of a firm, and the Ford example suggests that it can also improve the traditional bottom line. In a world where spending as a percentage of income is greater for the labor class than for the investor class (as is the case in America today) (5), such decisions may even deliver value to other businesses as well as to society.

References

1. Cwiek, Sarah. The Middle Class Took Off 100 Years Ago ... Thanks To Henry Ford? NPR. [Online] January 27, 2014. [Cited: December 10, 2020.] https://www.npr.org/2014/01/27/267145552/the-middle-class-took-off-100-years-ago-thanks-to-henry-ford.

2. United States Government Accountability Office. Federal Social Safety Net Programs: Millions of Full-Time Employees Rely on Federal Health Care and Food Assistance Programs. 2020.

3. Board of Governors of the Federal Reserve System. Report on the Economic Well-Being of U.S. Households in 2017. 2018.

4. Ostrander. 204 Mich 459,: Supreme Court of Michigan, 1919.

5. Wealth Inequality in the United States Since 1913: Evidence from Capitalized Income Tax Data. Emmanuel Zucman, Gabriel Saez. s.l. : NBER Working Paper Series, 2014. 20625.

About the Author

Daniel Margul, Quantitative Equity Analyst at Humankind Investments, previously worked at BlackRock, where he served as a quantitative developer and supported their credit models and retirement analytics. He holds a PhD in Computational Chemistry from New York University.