I saw this posted in r/LateStateCapitalism today. And I found this comment a little ways down the thread:

iowaboy
55 points ·
59 minutes ago

Here’s the deal: I don’t think it’s worthwhile to criticize executive compensation. Instead, we should criticize stock dividends. This is for two reasons: (1) executive pay is a very small cost for any major company while dividends are a huge portion of how the company “spends” its profits, even if we redistribute it to other workers, it would result in minuscule raises; (2) executives actually add value to the company (meaning, they provide work–even if you think they are overpaid, you can’t deny the do something, compared to stockholders who just lend their money).

Take Walmart for example. Their CEO makes about $24 million a year. That’s a ton more than the average wage Walmart pays its employees (average wage is $14.26, or estimated full-time income of $30,000/year). Walmart employs about 2.2 million people, so if you redistribute the CEO’s salary to them all, it would only give employees a raise of about $12/year.

However, in 2018, Walmart paid its stockholders about $6.26 billion in dividends (meaning, Walmart cut a check for $6.26 billion). If you redistributed this to the workers, it would result in a bonus of $2,845 per worker.

It is clear that the payments to stockholders is a much bigger drain than anything else. We should focus on that inequality first.

This is the kind of thing that boggles my mind about people who want to redistribute other people’s money. It’s the complete lack of understanding of how people respond to incentives.

So let’s say iowaboy’s idea is implemented and dividends are eliminated with the money being sent back to the workers. OK, so let’s think one or maybe two steps into the future.

Dividends are eliminated, and the stock price drops. Why? Because the major pricing function of stocks is the discounted future cash flow model. If the cash flow from dividends is eliminated, then that pricing factor is eliminated, demand for the stock is eliminated, and the stock drops. The only potential cash out in a model like that is an acquisition.

“So what?” the young communist says. Well, so lots of things. The people who we holding the stock for the income in their accounts now have to figure out something else to do with that money to obtain income. Lots of these people are retirees. If dividends as a class of income is eliminated, then they will have to figure something else out in a hurry.

Also, so company ownership is a form of compensation to attract talent. The idea being that you want to reward those talented workers with not only something that has value (the price of the stock), but also to incentivize them to stick around and increase the value of the company (the ownership of the company). No dividends? Stock is much less attractive. Stock is much less attractive? Stock as incentive is much less powerful.

But the young communist probably doesn’t care about any of these people. Only “the worker” matters here. So then we have to see what is unseen.

Let’s think about what happens next. Less talented people are brought into the company. The management and decisions made are of a lower quality than previously. Walmart makes less money. Walmart growth slows, stops, or reverses. Walmart hires fewer people or starts laying people off. And all of a sudden the workers are losing their jobs or having their standards of living cut.

But let’s think one step further. Walmart is already a gigantic enterprise. It might be able to survive all this. But what about the next Walmart? What about that company that can’t be created because the person or team that is trying to create the next thing to serve people can’t attract the funding to do it. You can finance new ventures with debt or equity. Without a potential dividend payment in the future, equity is out. So that leaves debt. Any idea how much debt is available to a brand new company with just an idea? Very little.

So that is what is unseen. The idea of rewarding the low-end workers with what used to be dividends ends up costing all of us in the future because those jobs that would have been created will not exist. Those better/cheaper/faster goods and services that would have made our lives subjectively better (because that’s what sells in a free market) vanish from this timeline.

It’s this incentive destruction that really ends up destroying communist societies even more than the calculation problem.

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