Monday, April 14, 2014

What if McDonald's slashed its CEO's pay?

My fellow Purple Wisconsin blogger Jennifer Epps-Addison, in advocating for an increase in the minimum wage, suggests the following:

Here's an idea. McDonald's shareholders could pay their CEO $1,000 or $2,000 an hour instead of the $9,200 an hour he currently makes, and use that money to increase the middle class and boost our economy.

How would that work? Would it really "increase the middle class?" Would it even noticeably impact the salaries of McDonald's workers?

Let's find out.

McDonald's CEO Donald Thompson made $13,751,919 in total compensation for 2012. Not all of that was cash compensation available to be "re-directed" to other employees - his salary and bonus was $ 9,560,311. The rest were stock options but let's put that aside and assume that one could either grant options to the employees or sell stock and redistribute the money. Both are dubious assumptions but let's grab as much of Mr. Thompson's pay as we can.

Ms. Epps-Addison seems to want to take around 80-90% of his compensation. To do so, we would have to suspend reality. If McDonald's reduced CEO compensation by that amount, it'd be looking for a new CEO and, like it or not, the candidate pool would be seriously affected. You can't hire Aaron Rodgers for what you pay Matt Flynn. We understand that for sports and entertainment, but the same rules apply to the market for rare executive talent.

But let's wish that problem away and redistribute most of Mr. Thompson's pay to line workers. Here the analysis gets a little tricky.

Most people who work at McDonald's don't work for McDonald's. They work for franchisees who own and operate over 80% of the chain's stores. But McDonald's exercises a great deal of control over those stores and promoting the brand and business practices that make them successful is part of Mr. Thompson's responsibilities. In any event, I am sure that Ms. Epps-Addison does not want to limit this building of the middle class and improving of the economy to less than 20% of McDonalds' employees. (People who own franchises don't make Thompson money so there would be no honey pot for them.) Let's include all folks who work at franchisees.

But McDonald's is a global company and Thompson runs the whole thing. If we are going to scoop up his pay and dole it out to others, it seems a bit chauvinistic to limit the largess to American employees. But let's indulge our inner Ugly American and ignore that problem. Let's look at only US employees.

The National Employment Law Project estimated that McDonald's and its franchisees employed 859,978 people in 2011. That's the best number I can find quickly. If we reduce the CEO's salary by 90 % and give it to each of these employees, their average annual salary increase would be ... $ 14.40.

For a full time worker, the increase in these folk's hourly wage would be about three quarters of a penny.

A few caveats.

Not all 859,978 are low wage workers; much less employed at the minimum wage. But given the nature of McDonald's business, it is fair to assume that the overwhelming majority are. And even if they aren't - even if only half have sufficiently low incomes to be entitled to a chunk of Mr. Thompson's pay - the average hourly increase would be less than two cents per hour.

Nor do all McDonald's employees work full time. There is no way to figure out the average work week, but taking into account the part time nature of the work force would increase value of the hourly increase even if it wouldn't vault these part time workers into the middle class. For example, if the average worker works half time, the hourly increase - if allocated among half of McDonald's and franchisees' total employment, might reach about three cents per hour.

I'm sure there are some other tweaks and ways in which the data can be refined. But I think you get the idea.

Cross posted at Purple Wisconsin.


John Mitchell said...

Is her suggestion severely misguided? Of course. Does her ideas represent liberalism in its entirety? Most definitely not. Is her view extremist? One could reasonable argue yes.

The focus ought to be on those tax breaks provided to business owners. To what extent is that money actually being put back into the company? To what extent are businesses deducting interest earned from overseas lending? To what extent are corporations moving profits offshore to avoid paying American taxes on them?

Those are the questions she should be asking and demanding answers for.

jp said...

I suggest journalists should be asking the questions.

John Mitchell said...

"I suggest journalists should be asking the questions."

Don't know if this statement is directed toward me or the Professor.

Regardless, CITIZENS should be asking the questions.


Anonymous said...

@John Mitchell - Actually her idea DOES encompass liberalism in its entirety. There is no policy goal with her suggestion or attempt to actually identify a problem much less fix it. Her goal is to play class warfare in a "us against them" political game.

That is the only goal of her statement and currently the only goal of divide and conquer liberals these days.

John Mitchell said...

"Actually her idea DOES encompass liberalism in its entirety."

No, her proposal definitively does not cover it all of liberalism; her ideas fall upon the extreme side of the left. Liberalism, just like conservatism, is not "one brand", but "many flavors".