All the hand-wringing about how the government has to step in and create jobs makes it pretty clear that neither our chattering classes nor our leadership elites have any clue how businesses operate.
Vince Lombardi, late coach of the Green Bay Packers, enjoyed considerable success in a highly competitive business. He was a great believer in fundamentals. When his team played unacceptably, he'd often say, "Gentlemen, you played poorly. Let's get back to fundamentals. This," and he'd hold one up, "is a football."
In that spirit, let us consider two fundamental axioms of capitalism and of making money. An axiom is defined as self-evident truth, something so obvious that you don't need proof once you hear it, but which you probably won't figure out on your own.
These business axioms were taught me by my first boss. I was extraordinarily blessed to have a boss who could explain these facts of economic life so clearly. I've tried to base my work on these two simple ideas ever since, and these axioms have contributed mightily to whatever success I've enjoyed.
My business enlightenment happened one morning in 1966 shortly after I started work at IBM in Poughkeepsie. I asked a question that indicated global ignorance as new employees often do. My question showed that I had no idea what was going on, so my boss said, "Come in my office, there's something I must explain to you," and in we went.
Please remember that this five-minute explanation of what life's all about which has served me so very well since 1966 came about because of three things:
There's nothing wrong with asking questions on the job. The more you learn, the more you can help, and most bosses realize that. Just remember the answers so you don't ask the same question over and over, that gets annoying.
Anyway, my boss sat me down on one side of his desk and he sat down on the other side. He leaned toward me and opened his eyes wide and said "Young fellow, why doesn't your paycheck bounce?"
Talk about getting my attention! There was nothing he could have asked that could have gotten me more interested-he was talking about my pay! For you bosses who have to answer questions or sometimes give information when your people haven't asked, remember that it's good to tie information about the job to payroll if you can-talking about money is always interesting.
My boss answered my question with a question. That made me think and helped me remember. This is good rabbinical teaching technique; Jesus did it. When a man asked, "What shall I do to inherit eternal life?" Jesus replied "What is written in the Law?" (Luke 10:25-26)
I knew you needed money in your bank before you can write checks. When my boss asked why my paycheck didn't bounce, he was asking me to explain how IBM got money, and I didn't know. How did IBM get money?
I stammered something, and he said, "It's like this. IBM isn't the government; we can't print money or force people to give us tax money at gunpoint, we have to earn it. Your paycheck doesn't bounce because our customers send us checks that don't bounce. As a matter of company policy, we want customers to send us money because they sincerely feel we earned the money by helping them make money, not just because the contract says they gotta send money. We want only happy money here at IBM. If a customer's not happy with our product, we return the money, no matter how bad it hurts."
He went on to explain, "Look, our salesmen don't call on companies that don't have money, that's a waste of time. Our prospects have money, we check that before we go. The trick is to persuade them that they want our products more than they want the money. If they want the money more, they keep the money, we lose the sale, and you're out of a job. But if they want our computer more than the money, they give us the money and we can pay you. That's hard because everybody likes money a whole lot. Being more wonderful than money isn't easy, but that's what we have to do to eat."
I began to understand. Light was shining through the cracks! Enlightenment felt so wonderful that I remember everything he said. "Let's talk about you. We hired you because we want the work you do more than we want the money we pay you. If we didn't want your work more than we want your pay, we'd keep the money, we wouldn't pay you, and you'd be out of a job. Your challenge is to be sure that your work is more wonderful to us than the money we pay you every single day.
"Do you want to get paid more? Of course you do. That's easy - all you have to do is make your work more wonderful to IBM, and IBM will take care of you, I promise you."
"Let me tell you how to make your work more wonderful. We design computers that are so wonderful customers will want them more than money. We want you to help us make our products more wonderful so we can raise the price and get more money. I don't mean raise the price through stealing, I mean raise the price because the product's really better. Help us get more money from our customers. You take care of customers, customers take care of IBM, and IBM can afford to take care of you. It's really that simple."
The clouds rolled back, the sun shone through, I understood capitalism. IBM didn't pay me, customers paid me, IBM just handled the money. Remember, employees, your boss doesn't pay you, customers pay you, the boss does you the favor of collecting the money.
I also understood that nothing happens unless it's more wonderful than money. When you buy anything, you want it more than you want the money; if it were not more wonderful to you than the money, you'd keep the money and nothing would happen.
People buy houses from builders because they want the houses more than they want the money. People buy Big Macs because they want the burgers more than they want the money.
Hard times are when there isn't much money. That makes money more wonderful so people hang onto it. In tough times, McDonald's has to drop prices to keep their burgers more wonderful than the money.
If you want to earn a million bucks, I'll tell you how. If you can make burgers more wonderful so McDonald's can raise prices just a nickel in every store without losing sales, that'll be worth millions to McDonald's, and they'll take care of you, they really will.
Remember the twin blade razor? Gillette sold a few, earned a buck or two? The man who invented that razor works for Gillette. They gave him a raise and told him he could keep his job forever even if he never did another lick of work, he'd paid his dues. He'd been so wonderful they didn't need any more work from him ever again.
That's the secret of getting paid a lot-be worth a lot. You're worth a lot if you bring your boss a lot of money. [The AIG traders were paid big bonuses because they'd earned their bosses a lot of money - ed] I've always tried to make the most money for my boss I could. I have to add value to survive and if I want to prosper, I have to add a lot of value.
What are the axioms? Everything must be worth more than money, and you better make sure that the money you take in is happy money. If you aren't worth more than your pay, you're gone. If you don't keep your boss happy to pay you, you may be gone even if you're worth your pay. So here are the axioms, write 'em down, they'll serve you well:
What's that go to do with the lack of job creation? It's simple-our government is making it harder and harder for employees to be wonderful enough to cover the cost of having them on the payroll.
Scragged recently discussed Sally who works at Bogen Communications in New Jersey. Sally thinks of her cost to Bogen in terms of her salary which is $59,000. She thinks that if she can generate $59,000 worth of wonderfulness, Bogen will be happy to keep her on the payroll, but she's wrong.
As Mr. Fleischer, the President of Bogen, explained, it costs Bogen $74,214 in direct costs to keep Suzy on the payroll - 1/3 of which is government-imposed costs which makes it that much harder for Sally to generate enough value to stay employed. Instead of $59,000 worth of wonderfulness, Sally's on the hook for $74,214. But that's not all.
There's her share of the rent, utilities, and other costs of having an office. That usually runs between 10% and 20%, call it 15%. If we add that in as her boss does, Sally has to be worth more than $85,000 just to break even.
That's not enough: Sally also has to help generate a profit. The only way Sally can generate wonderfulness is to help Bogen sell more.
In any profitable business, everybody has to help generate sales. The only real product of any business is collectible invoices; every activity, including cleaning toilets, mopping floors, manufacturing, research, bagging groceries, and handling accounts payable must be organized toward the goal of generating as many collectible invoices as possible.
Bogen has 44% gross margin. That means that for every dollar they take in, making the goods cost 56 cents, leaving 44 cents out of every sales dollar with which to meet other expenses and hopefully give stockholders a profit.
Sally has to generate $85,000 worth of wonderfulness to stay on the payroll. Given that each dollar of sales gives Bogen 44 cents with which to cover indirect costs, Sally has to be responsible for generating more than $193,000 worth of sales just to break even.
If her presence means that Bogen can sell $193,000 worth of product that they couldn't sell without her, she's covered her costs ($193,000 times .44 is $85,000). Unless she facilitates more sales than that, she's gone.
That's how bosses who expect to stay in business think about hiring - can this person generate enough wonderfulness, that is, new sales, to be worth more than the total cost of having him or her around? Alternatively, can this employee cut costs elsewhere enough to cover the same amount? If so, a job is created; if not, it isn't.
It's not quite that simple, of course, in that the accounts payable clerk isn't directly connected to sales, but if vendors don't get paid, the factory runs out of parts and sales stop. Accounts payable is an essential function for facilitating sales and the accounts payable staff had better do their part.
This is how bosses think. It also explains why the A/P clerk usually gets paid less than a salesman: yes, the job has to get done, but as long as it does get done, it may as well be as cheaply as possible.
The Obama administration plans to increase energy costs, payroll taxes, the cost of providing health care, increase regulation, and do any number of other things which will increase the cost of doing business. Anything that increases business costs means that employees have to be more and more wonderful to keep their jobs.
Given that bosses have no way to gauge how wonderful a new employee will have to be, how can they make sensible hiring decisions? They can't, so they don't hire.