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Value Creation Blog

Why We All Need The Middle Class

Posted by Josh Patrick

middle class1 resized 600We’ve been having a slow slide in the economic power of the United States for the past forty years.  Over this time period we’ve gone from being a net exporter to a net importer.  We’ve moved from being the envy of the world to a country where many including people in our own country are asking what went wrong?

I recently re-read Peter Drucker’s Management, Tasks and Responsibilities.  At one point in the book he mentions that in 1980 the average CEO pay in America was 10 to 20 times the average of a line worker.  That number has dramatically changed.  Today, that number is almost 350 times to one. 

Here’s the problem with this; when the CEO pays themselves this much, then the senior staff in the company are also paid in the level of 200 to 1.  Then the level below that might be paid at 150 to 1.  Then, the level below that is paid at 100 to 1.  What this causes is a huge amount of money concentrated at the top of the company with little flowing to rank and file workers.  According to Hedrick Smith in Who Stole the American Dream if we went back to the 1980 levels of income disparity the average middle class worker in public companies would get a $12,000 per year raise.

If we call the change in the difference of CEO pay trickle down economics, it just didn’t work.  There used to be a pact between senior management and workers of the company.  The workers would provide labor and effort and senior management would make sure the pie was split fairly.  Senior management seems to have forgotten their end of the bargain.

I’m not a bleeding heart who feels that workers have been treated unfairly.  I am very worried about the American way of life.  In the early 20th century Henry Ford started paying his production workers five dollars per day.  He didn’t have to pay them this much.  When asked he said, “I want to have the people who work here be able to afford to buy what we produce.”  This is the problem; we are losing people who have the ability to buy what we produce, if we produce it at all.

Gordon Gecko in the movie Wall Street famously said, “Greed is good.”  We’re learning that greed is not good.  We’ve had a financial meltdown over greed.  Few people who caused this problem were punished.  The middle class continues to shrink.  Walmart who claims to be the supporter of the middle class now teaches its suppliers how to import cheap goods from China:  Goods that used to be manufactured in this country.

Walmart is probably not the evil empire.  Their senior management seems to have lost sight of a very important principal.  If we don’t have a middle class and we don’t buy at least some products manufactured in America, there will be no one left to shop at their store.  It’s not just about cheap prices, it’s about supporting a system that rewards many who take too little in the way of risks and have rewards that are too dear.

This brings me back to the title of the post.  We don’t need to tax the rich to death.  This won’t solve the problem.  We need to have the pact between senior management and their workers put back in place.  We have to stop outsourcing everything, we need to not only worship at the altar of high profits, we need to remember that without the middle class there eventually will be nothing left for any. 

Private business owners get this principal of fairness.  I’ve worked with hundreds of private business owners over the years.  They have all been concerned about fairness.  They’ve been concerned with the ratio of their pay and the average workers’ pay in their company.  I can also say that none of them reach a paycheck that is twenty to one, much less 350 to 1.  We need to have public companies start thinking like private companies.  If we do so, the middle class can come roaring back.

At some point you might want to think about leaving your business.  We have a complimentary exit readiness report that will help you understand the value drivers in your business.  You can learn how an outside might look at your business.  To get this customized report, click on the button below and you can learn more about our salability report.

Securities and Investment Advisory Services offered through NFP Securities, Inc. (NFPSI), Member FINRA/SIPC. Stage 2 Planning Partners and NFPSI are not affiliated.

This article is published for residents of the United States only.  Registered Representatives and Investment Adviser Representatives of NFP Securities, Inc. may only conduct business with residents of the states and jurisdictions in which they are properly registered.  Therefore, a response to a request for information may be delayed.  Not all of the products and services referenced on this site are available in every state and through every representative or advisor listed.

This article is the opinion of Josh Patrick.  This is not the opinion of NFP Securities or other Associates at Stage 2 Planning Partners.

Topics: for business owners, Change, private business

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