“The biggest issue for entrepreneurs, for capitalists, for those of us who are successful is, if someone is only going to be paid by the hour…they’re always going to fall behind,” Cuban told Recode Decode with Kara Swisher at the 2019 SALT Conference in Las Vegas. “And income distribution is … [the] disparity is going to get wider and wider.”
So, said Cuban, “We as entrepreneurs have got to make a point to give stock to everybody that works for us. Period. End of story. No exceptions, because that’s the only way people are going to get any type of equity appreciation.”
This is from Catherine Clifford, “Mark Cuban: Workers paid by the hour are ‘always going to fall behind,’ making wealth inequality worse,” CNBC.com, June 3, 2019.
Let’s think through that. Start with Cuban’s first sentence. If you get paid by the hour and never save and invest, then, sure, the odds are high that you’ll fall behind others who do invest. But the answer is to invest. I’ve never had any employer who gave me stock. But I own lots of stock. I bought it. I saved 12 to 17 percent of my gross income per year from about 1987 to about 2017. And I put a huge precent of it in stock index funds. I didn’t fall behind, to put it mildly.
Now to his next paragraph. He wants entrepreneurs to give stock to all employees. What’s left unsaid is that, presumably, he wants entrepreneurs to pay their employees less in wages and salaries. But how does he know what they would prefer? Maybe they’re building a family and would like the higher wage or salary to buy a house. Giving them stock doesn’t help them much unless they sell the stock. But then why give them stock in the first place? And notice another problem. I’m guessing that Cuban wants entrepreneurs to give employees stock in the company they work for. So for employees who don’t sell that stock, they would be even less diversified financially. Now both their wages/salaries and their financial portfolio would depend on the company doing well.
You might argue that Cuban simply wants entrepreneurs to keep wages and salaries constant and pay workers more. I doubt that because I see Cuban on TV every Sunday night on Shark Tank showing that he understands tradeoffs. And even if he doesn’t understand, the entrepreneurs he’s advising probably do. But if he wants them to pay more, then why not suggest paying higher wages and salaries so that they can choose whether or how to invest in stocks?
One caveat: It’s possible that what Cuban has in mind is really a way for employers and employees to get around some of the payroll tax, Social Security and Medicare, which, together, and including the employer portion, sum to a marginal tax rate of 15.3 percent for well over 80 percent of employees. I don’t know enough to know how those two tax regimes hit compensation in the form of stock. If it is a way around those payroll taxes, then it could make sense. Thus the “probably” rather than “certainly” in the title.
READER COMMENTS
Alan Goldhammer
Jan 8 2020 at 2:54pm
David – I think you are reading things into Cuban’s statement that are not there. Certainly, if employees in start ups do not receive stock the answer to this question is Cuban is correct. Of course this assumes that company is successful (I know lots of people who worked in the biotech industry, got stock that ultimately was worthless as the companies went out of business; similarly in other tech areas this is true as well).
His statement also pretty much applies to entrepreneurial companies and not the mainline ones where there are lots of minimum or just above wage jobs. Those employees likely don’t have any discretionary money to buy stock of any kind. You need to caveat your experience as a college professor with someone working at a lower income producing job.
David Henderson
Jan 8 2020 at 3:09pm
You write:
How so?
You write:
Exactly. That gets to my point about diversifying risk.
You write:
But there’s still a tradeoff. Some might want higher wages and no stock.
Alan Goldhammer
Jan 9 2020 at 8:35am
Cuban uses he term “entrepreneurial” and I take this to mean start up. This is what my answer focused on. I am not arguing that receiving stock being a concentrated investment; of course it is. Entrepreneurial companies can provide additional incentive/compensation with stock issuance. This is not dilutional from an accounting perspective if the company remains private which is usually the case for startups. It also doesn’t matter at all if there is venture capital money invested. Dilution is of concern only for broad stockholders of publicly held companies (aside: I vote against issuance of new shares on many occasions during proxy season for exactly this reason!!!).
I think if you look at this way, assuming this is what Cuban means, the issues you raise are not quite correct.
David Henderson
Jan 9 2020 at 8:38am
I don’t think so. Notice that he talks about wage earners being left behind. One doesn’t get the impression from that that he has in mind high-income employees of startups.
Mark Bahner
Jan 8 2020 at 9:45pm
Yes, as David Henderson points out, getting both a salary and stock in the shares from a single company really concentrates risk. Public companies tend to lay off people exactly when their stocks have low values. Very risky!
Mark Z
Jan 8 2020 at 3:19pm
I don’t think Cuban considers the possibility (well, actually, certainty) that workers prefer being paid in money to being paid in stock, because they’re generally more risk averse than investors, and the risk premium for stock returns isn’t enough to convince them to give up the ‘sure thing’ that is a fixed cash wage. This is why ‘stakeholder’ models aren’t common unless mandated by law: workers prefer less risky cash compensation. Maybe Cuban views that preference as irrational? I don’t think it is though. Especially when you can take the cash and put in a mutual or money market fund; that’s much safer than having a large fraction of your working/middle class net worth tier up in stock in one company. That seems like under-diversification.
David Henderson
Jan 8 2020 at 4:56pm
Well said. I did cover the diversification part in my post, but I hadn’t mentioned your other point, which I think is true, about risk aversion.
Mark Z
Jan 9 2020 at 2:27pm
Thanks. Like Vivian I missed that on my first skim through. Very good point though; some employees would even end up with most of their wealth invested in one company. If the company goes under, they lose their job and their savings. I think I’ll take a vanguard money market account over that.
Henri Hein
Jan 8 2020 at 3:27pm
There is a difference in who is paying. The company is paying the wages. Stockholders are paying the stock through dilution, because stocks used for compensation are usually issued, not bought from the market. That can be an advantage for companies with good long-term prospects and low short-term cash flow. Many startups fit the category.
If you think that stock holders are generally wealthier than wage earners – and yes, a Venn diagram of the two would have a large intersection, but they are still two different groups of people – then I can see why using stock as compensation is an attractive redistribution scheme.
I am not sure that makes Cuban right, but I don’t think “the employees can buy the stock themselves out of their wages” is a counter-point, because then the company would be paying for the stock indirectly, instead of the stockholders.
Christophe Biocca
Jan 8 2020 at 7:59pm
But shareholders (as I understand it), have to approve such dilution, right? And if they’re on board with it they could just as easily approve of a plan for the company to issue more shares to raise funds to pay employees with.
In practice small start ups do both:
They have a (shareholder approved) stock options pool with which they compensate employees.
Most of the funds they raise (by issuing and selling stock) goes towards paying employees.
Henri Hein
Jan 9 2020 at 12:47pm
It is true shareholders have to approve of the compensation packages. It is also true startup equity is used in the way you describe. It may also be true that shareholders can just as easily raise the money on the market, assuming a post-IPO company, and use the funds to increase wages, but shareholders probably don’t think so. First, since they are holding their stock and not selling it, they consider the stock worth more than the equivalent cash at the market prices. Second, there is a delayed effect with the compensation stock, since they are usually vested on a schedule, not immediately. Many employees also hold on to the stock past vesting. Thirdly, just as educated people can fall prey to the money illusion, even reasonable investors tend to discount the effect of dilution, since it is opaque and hard to measure. These may sound like marginal differences, but since stock compensation is common and selling stock to increase wages is not, they must add up to something substantial. At least in stockholders minds.
nobody.really
Jan 8 2020 at 3:34pm
I find this a more persuasive critique than the one leveled against Gates. Henderson hits all the right notes regarding compensation packages, and the importance of diversifying your labor income from your capital income.
Now, maybe Cuban favors compensating employees with stock as a nudge to begin the practice of equity investments. But in that case, it would be wiser to give them shares in a mutual fund, not in any one company.
More generally, I’m not impressed with the idea that we should attack the social problem of income inequality on a firm-by-firm basis. I favor efficient labor markets. That means that if you’re a coder working at a really successful firm, you should earn … roughly as much as a comparable coder at a less successful firm. If anything, employees at less successful firms should earn a premium for bearing the heightened risk that their employer might go bust. But in general, employees should expect to be paid for the value of the service they provide, regardless of the firm they provide it to.
This libertarian attitude of “I created a successful business through individual initiative, ergo I can do ANYTHING through individual initiative!” is endearing, but it seems to evidence a lack of insight.
Josh
Jan 8 2020 at 3:41pm
I wonder if paternalism is the root of his statement. As in “if I pay these workers in cash, they’ll just blow it on junk. But if I pay them in stock, they’ll be encouraged to save it (with decent returns).”
In some ways it’s like the “nudge” to make investing the max amount in a 401k the default. As in “you should be saving X% of your income in the stock market, so I’ll pay you X% in stock as a default, and if you want to save less, you can just sell the stock for cash.”
I actually think paying workers partially in stock might make them a little better off by making it slightly easier to save their money and slightly harder to spend it.
I’m not sure if that’s his thinking, but I could imagine Cuban having a paternalistic streak that would influence his position on stuff like this.
David Henderson
Jan 8 2020 at 4:59pm
Yes, I wondered about that as I was writing, but then I thought, “Wait, if you wanted to nudge them, you would give them stock in a wide range of companies, kind of like my Vanguard Total Market Index, not in this one company.” Unless, that is, you wanted to nudge them to do really risky things.
Jacob Egner
Jan 8 2020 at 5:41pm
Mark Cuban has also said stuff like “buy and hold is a crock of [deleted]” and “diversifications, that’s for idiots”. Perhaps these sorts of thoughts are the source of our disagreement with Mark Cuban. Perhaps Mark thinks well of the masses making big concentrated risks and thinks poorly of the DavidHenderson/Boglehead approach…and well, that seems misguided to me.
My experience is employees vastly prefer the relative reliability of wages over equity. Also, employees really should diversify away from their employer; it’s silly to have your paycheck and portfolio both depend on the same company.
XVO
Jan 8 2020 at 4:51pm
It might be a decent way to incentivize employees to have more buy in at the company they work for? Not really his argument though.
Jeff G.
Jan 8 2020 at 8:38pm
Let’s assume that total worker compensation doesn’t change and the “nudge” works, so that people at the bottom of the income distribution end up saving more. Then wealth inequality will reduce but consumption inequality will increase. This effect is magnified if wealthier people also respond by saving less. I wonder if this is the result Cuban wanted? File this under reason #114 why wealth inequality isn’t important.
Phil H
Jan 8 2020 at 10:42pm
I agree with David Henderson! How intolerable…
To put the most positive possible spin on Cuban’s idea, is it possible that this is right:
Startups are not like stocks and shares – not just anyone can buy into a startup, it’s a closed shop, usually only open to rich investors like him.
Software engineers who work in startups are interested in this sector, and would perhaps like the opportunity to invest in it. But most of them are not rich “angels” and don’t have the opportunity.
At the margin, giving them options in their own company is the best way to enable some level of investment in startups for ordinary codemonkeys.
Maybe? I think I’m clutching at straws, because H’s point about diversification is surely right. But this is the best justification I can think of.
David Henderson
Jan 9 2020 at 12:10am
LOL.
Jens
Jan 9 2020 at 6:46am
I also doubt that Cuban thought of it. But in fact i think that’s a very good argument for mandatory partial payment in shares. The fact that startups are closed for too long seems to be becoming an ever bigger problem. It doesn’t seem too difficult to distribute the knowledge that the shares should be diversified as soon as possible, which creates liquidity and availability.
https://slatestarcodex.com/2019/02/25/wage-stagnation-much-more-than-you-wanted-to-know/#comment-725509
This increases the chance that the general public will also have access to these start-ups shares.
Vivian Darkbloom
Jan 9 2020 at 3:08am
Regarding the taxation of options, the answer is “it depends”.
There are three major types of stock compensation: restricted stock options (RSO), non-qualified stock options (NQO) and incentive stock options (ISO).
Without getting into too many details, exceptions and possible elections, the first two would be subject to social security and medicare taxes and income from ISO’s would not. Also, if ISO’s are sold outside a required holding period, the income is taxed as a LTCG. However, the trade-off of the ISO is no corporate income tax deduction and ISO’s are subject to an annual grant limit of $100K (value of stock subject to the option at grant date). The latter restriction probably would not be an issue for the normal hourly wage employee.
Depending on how the option is financed by the corporation (re-purchased stock or newly-issued stock) it is possible the arrangement might save the corporation cash (at the cost of shareholder dilution).
It is not clear which type of option Cuban would have in mind.
A major problem with Cuban’s recommendation is that the employee would not be diversified in his (stock) investments. A simpler and safer and more tax efficient way for a company to reward an employee with equity would be to increase the employer’s 401(k) match.
David Henderson
Jan 9 2020 at 7:54am
Thanks, Vivian.
Re diversification, notice that I made that point in my post.
Vivian Darkbloom
Jan 9 2020 at 8:29am
“….I made that point in my post”.
Yes, and I missed it. But, the point is worth repeating!
David Henderson
Jan 9 2020 at 8:37am
True.
robc
Jan 9 2020 at 8:07am
You missed a 4th major one: Restricted Stock Units, where you are receiving stock, not a stock option. It has the major downside of counting as income upon vesting and requiring withholding at that point, which generally requires selling ~35% of the shares immediately to handle withholding.
Guess which one I receive?
robc
Jan 9 2020 at 8:09am
If you really want to encourage it, don’t match, do the employer 401k portion without a match requirement. I think that is a “safe haven” 401k?
Thaomas
Jan 9 2020 at 4:32am
I agree with your economic analysis. At a meta level, maybe he means or ought to mean that firms ought (on “nudge” grounds) give part of their compensation in the form of pension contributions. Macro-politically, it would be better if asset ownership were more widely and equally distributed.
zeke5123
Jan 9 2020 at 12:29pm
I think there is a Straussian reading of Cuban. He is discussing employee stock in terms of benefits to the workers, but I suspect Cuban is actually thinking about a better incentive package for companies.
It reminds me of Dodge . Ford Motor Co. Prima facie, Ford benevolently increased wages for employees. While Ford couched the raises in terms apropos of labor movements, it appears his real motivation was to reduce competition (i.e., long-term profit maximization for Ford).
In the same way, Cuban might be saying that equity is being provided to employees for their benefit, when in reality Cuban believes that providing equity to employees (i) aligns their interests more long-term with the company, (ii) motivates them better than merely wage compensation, and (iii) locks employees into the company in a way that might reduce future compensation growth. That is to say, Cuban might believe that firms that provide equity compensation to employees will be outperform firms that do not (or at least not materially) use equity compensation.
I don’t have any explicit textual support besides the fact that Cuban is very smart and understands these incentives.
Floccina
Jan 9 2020 at 3:47pm
Well and you should generally avoid investing much in the company you work for. Invest in those index funds.
David Seltzer
Jan 9 2020 at 5:13pm
Actually, unless there is evidence to the contrary, Wage earners may not be less risk averse than entrepreneurs. One point in the data set. My father a high school dropout, earned wages working for Inland Steel from 1939 to 1952. Every year he dedicated 20% of his after tax earnings to randomly selected stock purchases. In 1952 he sold some of that equity and purchased a hardware store in East Chicago Indiana for $10,000. Of course there was no guarantee of success especially when forgoing the safety of employment. When he passed away, his business had grown so well, he left an estate in excess of three million dollars. As for me, I worked as a commissioned broker for Paine Webber in Chicago. I saved $15,000, after taxes, in 23 months. I took that money and rented a seat, membership, on the CBOE. As for buy and hold, there is very little evidence that even the smartest money manager outperforms markets.
Don H
Jan 9 2020 at 7:46pm
You hear these stories of, for example, the janitor who left an $8 million fortune to charity, or Grace Groner, a secretary who left $7 million to her alma mater. It is certainly possible for an ordinary person to acquire a very large fortune from nothing but their own wages. That it is rare to me says more about human nature than forms of compensation. I don’t think most people have the desire to live as frugally as such people. Sure, they want the millions, but they don’t want to pay the opportunity cost.
David Seltzer
Jan 10 2020 at 11:22am
I take your point. By what degree do you men rare. Wage earners have become wealthy via IRA’s, 401k’s and pension funds. Most of which assume market risk.
Lars Bagman
Jan 12 2020 at 12:24pm
I can only offer anecdotal evidence on the subject but as a supervisor I had the task of promoting participation in the company’s 401k program. They offered a 100% match paid in company stock for every dollar of contribution by the employees up to 6% of pay. So basically a 100% return on investment from the start. There were a number of employees who were not interested in participating no matter what I said.
As an example, one fellow had his eyes set on a new bass fishing boat with a powerful engine; he could race to the best spots ahead of his friends. Once he got that boat, he still didn’t want to put anything in a 401k; by this time there were even more powerful motors that might shave another minute or two off his race to a favorite fishing spot ahead of his friends.
For me, I could just use an old row boat to get to a mediocre fishing spot and drop a weighted quarter stick of dynamite into the water; using a dip net, I could haul in a day’s catch in a few minutes. Then leisurely row back to the dock. My money went into my 401k and I retired comfortably in my mid-50s.
Where we end up in life is largely governed by the choices we make along the way. Something called freedom of choice.
Same issue with the “women are paid only 80% of what men are paid.” True statistic but no one would be surprised if we said people with brown eyes choose to be petroleum engineers 87% of the time with a mid career salary of $160,000 while people with blue eyes choose to work in a child and family counseling practice 99% of the time with a mid career salary of $37,200. Would anyone other than the village idiot be surprised that brown eyed people made a far more money than blue eyed people?
But change “brown eyes” to male and “blue eyes” to female and politicians have a field day shouting income inequality. Want to fix that inequality? Easy to do; just say “sorry, I know you had your heart set on studying child and family studies, but you are going to be a petroleum engineer; we have to fill a 50% quota. Also sorry dude, I know you want to be a petroleum engineer but you are going to enroll in child and family studies because we only have a 1% enrollment of your type and we have to meet the 50% quota. How else are we going to achieve the lofty goal of income equality?” Freedom of choice be damned.
I’ll leave it to someone else to comment on the effect this “beat to fit, paint to match” approach would have on the quality of petroleum engineers and those ministering to children and families.
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