Sunday, November 25, 2012

Hostess and salaries

Mark pointed out that, in my Hostess and wages post, I only put in the previous wage cuts and not the new one that management was proposing.  The relevant passage:
Again, the 14-year Hostess bakery veteran: “Remember how I said I made $48,000 in 2005 and $34,000 last year? I would make $25,000 in five years if I took their offer. It will be hard to replace the job I had, but it will be easy to replace the job they were trying to give me.”
One thing that is easy to overlook in the discussion of did Unions show inflexibility is that a 50% wage cut over less than 10 years is an amazing drop in nominal wage (and the initial drop from 30,000 to 19,000 employees).  Mark's piece has pointed out that management was not doing any of the obvious moves to try save the business.  While the actual pattern of executive compensation is slightly more complicated than early reports indicated, it is pretty clear that huge (long term) wage cuts were not envisioned in the executive suite.

In some ways this links to a broader trend of firms being reluctant to actually pay workers.  This is linked to a reluctance to train workers, as well, but that only makes sense.  But here is where the whole story gets surreal to me.  Employees are assets as well as expenses.  We all seem to get that when we pay CEOs a lot of money -- we argue that it is not just an expense but also an investment in talent.  It is true that the modern world of corporate America has been very good at breaking down trust (few employees an informal promise at all anymore).

That is part of the issue with Hostess.  Not only were they trying to drop wages but the pattern of action on the part of the management team was to focus entirely on the easy target of salaries and ignore the hard targets of actually using information to reform the company into a more competitive shape.  Now maybe that was impossible (it seems unlikely but who knows).  But then we'd expect all of the bakers to be going under.

Nor is it impossible for firms to make highly creative moves to try and survive.  Notice how McDonald's and Starbucks (two companies that I consider well run) have quietly tried to sneak into each other's space.  Suddenly there is an egg sandwich at Starbucks (why go to two drive-thrus in the morning?).  And there are Latte's at McDonalds (why pay $5 for a Latte if you can't tell the difference).  Both firms are tougher, as a result, and -- as a pleasant side effect -- customers are better off.

But I want to go back to Mark's piece -- if you want to give management credit for a well run business strategy then you should be suspicious when failure is entirely blamed on the employees (who, t the union level, typically do not craft strategy).  

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