Wednesday, December 17, 2008

The Salary Gripe

CC Sabathia is a professional baseball player. He's a big, strong left-handed pitcher who can throw a baseball 100 miles per hour. More importantly, CC can throw that baseball accurately. So CC landed himself a huge contract that will guarantee him more than 20 million dollars per year over the next seven years.

A lot of people think that's ridiculous. Some even go so far as to say that it's unfair and believe that something should be done to limit those salaries. Then they look at Hollywood and hear about actors who make 20 million dollars per picture and say the same thing.

How can we, they lament, live in a world where a dumb jock makes millions while teachers get paid a pittance? They always bring up teachers. Well, I've met a few teachers in my life and I have to tell you that in spite of the fact that most of them were entrenched firmly in the middle of the middle class, a lot of them were overpaid. Growing up I had more teachers than I can count. You see, if so many of them hadn't been incompetent I might be able to count them, but most teachers are like most people. They do just enough to keep themselves employed and they live for the weekend. I had a couple of great teachers but I can count them on one hand. And because so many of my teachers were lousy, I actually have to count on my hands if I want to be remotely accurate.

I can see why people think actors and athletes make too much money, but the economics of entertainment dictates rates of pay and when you stop and look at how those salaries are determined you realize that they are fair. The reason CC Sabathia is going to make 23 million dollars a year for the next 7 years is because there are only one or two people in the world who can do what he does. Most people can't throw a ball 60 feet and 6 inches with any sort of accuracy let along break 90hMPH on a regular basis. CC is going to do that about 90 times every time he starts. More important he is going to be asked, not to throw the ball over the plate, but to work the edges of the plate. You see, that's the difference between a Major League Pitcher and the guy you knew in high school who spent four years playing minor league ball. You don't throw the ball through a window known as the strike zone, you throw the ball at various places on the window frame. It's not easy.

I don't even find it offensive that professional athletes are getting paid so well in spite of the economic problems we're seeing around the world. It's not like I would turn down a raise in pay or a better opportunity because other people are out of work so I'm not going to begrudge CC getting his. I do take issue with the economy of baseball but only because I think that Major League Baseball is doing its fans a disservice by making it impossible for smaller market teams to remain competitive when teams like the Yankees and the Red Sox can absorb so much payroll. But that's a different discussion for a different time.

I enjoy professional sports but I rarely spring for tickets. It's too expensive to attend games and I don't feel that I get enough entertainment out of the experience to justify the cost. So by not buying tickets I am making my point. When more people reach that squeal point teams will have to evaluate what they must do to increase ticket revenue. If they have to lower prices to sell tickets and improve volume at the gate, so be it. That's when teams will have to make adjustment in what they pay players. That's how the economy of professional sports works. It's all about ticket sales and it's fair. Sports are all about the relationship between the fans and the players. We're drawn to professional sports because those athletes do it better than we can. That's why arenas around the country sell out when LeBron James comes to town but nobody's at the Y watching the pickup basketball games.

Movies are no different. The reason certain actors and actresses make 20 million bucks to star in a movie is because they will generate that much money in ticket sales. Will Smith is a hot commodity in Hollywood right now because people buy tickets to see him. They don't care if the movie is any good. His name alone will draw an audience. After the first week the quality of the movie will dictate whether or not sales remain strong but big stars generate big money in the opening week. So production companies are willing to spend a lot of money to ensure that a big star will be attached to the picture in order to make sure that the venture makes a profit in that first week.

I'm not going to lie. I pay attention to the cast of a movie. If a movies can afford a big star they probably didn't spare any expense on the rest of the production. That doesn't always mean the movie will be good but it helps. Big stars also understand that their credibility is important so most aren't willing to risk squandering their marketability on a lousy movie just because there's a big paycheck attached to it. We've seen plenty of big stars fall from the heavens because they let themselves get cast in a couple of crappy pictures.

I'll agree with people who say that doctors are more important than actors but a doctor isn't going to draw $350 million on opening weekend. I really don't know what comparison people are trying to make here. Are they suggesting that doctors should charge more for their services, or would they rather have the government step in and dictate salaries?

There's not much in life that's fair, especially when the economy has finished circling the bowl and left streaks on the way down. Some people deserve to make more money for what they do and other people deserve less. That's the way it works. The one place salaries are fair is in the entertainment business. Those salaries are dictated by the free market and it's the one industry where a person can actually make what they are worth. It's also a place where people are actually held accountable for poor performance.

Tuesday, December 09, 2008

Bail Out? Not so fast...

The American automotive industry isn’t in as much trouble as people think. While it’s true that the so-called “Big Three” are in serious trouble, people forget that many of the foreign makes are manufactured right here in the United States. Honda has been cranking out cars in Central Ohio since 1982 and other companies such as Toyota and Subaru build cars domestically as well.

The economy is taking a toll on all everybody but it’s the American companies that need the American consumer to float them a loan. Why is that?

Conservatives are quick to point the finger at the unions. They, the conservatives say, bled the industry dry. That’s not entirely accurate. Those executives who went to Washington to beg for money didn’t hitchhike and share a room at Motel 6; they flew in on private jets and stayed in luxurious penthouse suites. It’s likely they ate $50 steaks and drank single malt scotch by the bottle. There’s no question that UAW workers are overpaid for the simple task of working on an assembly line but somehow the corporate suits have always managed to find enough money for country club dues and six figure quarterly bonuses. Perhaps the American consumer got the shaft in the way of inferior vehicles, but everybody is getting their money.

The reason the bottom fell out of the market is because gas prices spiked and sent the economy into a tailspin. Now Americans are unemployed in record numbers and the handful of people who are in the market for a new car are still shell-shocked by the $4 per gallon prices at the pump this summer. So the demand is for smaller cars that get better mileage and that has never been something the “Big Three” was any good at.

In fact, Ford, GM and Daimler-Chrysler force-fed trucks on the American public. Trucks are simply more profitable to manufacture. Engineers don’t have to worry a much about emissions controls, fuel economy or crash safety when they build trucks so Detroit invested heavily into building bigger and flashier trucks while they farmed out the manufacture of compact and subcompact vehicles to the lowest bidder.

It was fine and dandy as long as gas prices were low. American consumers didn’t see the need to worry about getting 8 miles per gallon when gas was cheap. Then prices started to rise and when the national average went over $3, people started parking those trucks. Suddenly the demand was for hybrids and dealers couldn’t give away trucks.

Honda and Toyota offered trucks and SUVs, but they didn’t base their entire business around it. They could have stopped making high-quality compact cars and offered 30 variations on their full-sized truck, but they didn’t compromise their vision. Rather than looking for loopholes the Japanese-based companies exceeded regulatory standards and continued to offer the best vehicles they could build at a fair price.

Somehow the Japanese-based companies have also managed to avoid unions. In a stroke of brilliance, these companies actually treat their workers with respect and offer fair compensation. It took a while for the two cultures to adjust but after 26 years in Central Ohio both Honda of America and Honda employees seem to be quite happy with the arrangement. Central Ohio endured a tremendous labor shortage in the late 1990’s but s Honda managed to retain and recruit great employees.

The “Big Three” have always been at odds with their employees. Unions were formed in the early 1900s to help mistreated workers take a stand against powerful companies. As badly as unions are maligned, with conservatives comparing union labor to socialism, there’s really nothing more American than disadvantaged people standing together to effect change. That’s what unions do and to this day most unions are respectable and fair.

The problems occur when the corporation fosters an adversarial relationship with the union. For years the “Big Three” automakers worked together to undermine the United Automotive Workers union. The companies would tell the union that they couldn’t offer raises or increase medical coverage for workers only to hand their CEOs a multimillion dollar bonus when share prices increased. So the UAW fought back and eventually the corporations caved.

The same situation occurred when the steel industry hit rock bottom. Steel companies insisted that they were running out of money but the unions didn’t believe them. Finally, after years of fighting back and forth the steel companies open their books to the unions and showed them the truth. There was no money. The unions quickly agreed to roll back wages and benefits in order to keep the industry afloat but it was too little, too late. Foreign steel was too cheap, and wouldn’t you know? It was companies like Ford, General Motors, and Chysler that were all too happy to buy it. That’s greed.

The Japanese-based companies are greedy too, but not in the short-sighted manner that the “Big Three” have been. The Japanese companies operate with a global view in mind and anticipate market changes. Every elementary school student knows that oil is a non-renewable resource and that means that it is going to run out. So the Japanese-based companies didn’t balk when oil prices stayed so low in the US for so long. They understood that the market would correct itself and they were positioned to thrive in that market.

It was that sort of thinking that brought those factories to the US in the first place. It would be much cheaper to manufacture Civics and Accords in Mexico but back in 1982, when the American manufacturers were trying to find the cheapest source of labor Honda wondered who would buy their cars if Americans weren’t earning good wages. So they made a long term investment in the American consumer.

It wasn’t altruistic of them…this was not a charity case. It made good business sense in the long term. By investing more money up front, Honda would realize long term rewards. It was much more expensive to build the Marysville factory than it would have been to put that same facility in Mexico and Mexican workers would happily accept a fraction of the wages American workers required. But Honda was also able to avoid import tariffs and they brokered tax abatements to offset initial costs and in the 26 years since that plant opened Honda has become one of the most successful companies in the world.

When you contrast that with what the American automotive companies have done you have to wonder why anybody would want to give them money. What investments have they made in this country over the past 20 years?

When you look at all the facts, this country would be better off if the “Big Three” went away. In the sort term the impact of losing those companies would be severe but when you take a look at the big picture it’s hard to see what we’d be missing.