A Concrete Example of Inequality

I’ve been investing in the stock market in individual companies since 2011, and one of the first companies I bought was John Deere. I only bought a little, but I still own it and it's increased in value quite a bit. They send out a nice annual report every year, and attempting to be the diligent investor, I’ve read most of it. One thing that caught my attention years ago was the major ownership. As of the 2018 annual report which was just sent out in January 2019, there is an organization called Cascade Investment L.L.C. that owns 9.8% of John Deere on page 22 of the annual meeting and proxy statement. Turns out, it’s one of Bill Gates investment firms. 

Bill Gates owns 9.8% of John Deere

So Bill Gates owns owns 31,423,573 shares. In 2018 Deere paid $2.58 in dividends per share of stock. That comes to $81,072,818.34 that Bill Gates made in dividends just for owning such a large share of the company. To the best of my knowledge, he’s basically all hands off and doesn’t really direct the company at all. However, I’m pretty sure that somewhere up the ladder phone conversations happen, and Microsoft will be used at Deere indefinitely. 

The CEO, who does a good job, made $18,525,667 from employment in 2018. In other words, the CEO who works hard, certainly ends up answering calls and emails on the weekends and at night, made less than 1/4 of what Bill Gates made, just for owning such a large portion of the company. That’s inequality! I’ll call that inequality #1 for the day. 

Top Five Employees Pay

Inequality #2 is between the CEO and the next four highest paid officers. The next four people made between $4,273,996 and $4,633,762. That’s less than a quarter of what the CEO makes. I am 100% a fan of CEOs being paid well, but is it really appropriate for the CEO to make over four times as much as the division directors? I mean, 50% more or double would still be a huge step up. I mean, for the average person, if they had a salary making $1.5 million a month I don’t think they would last very long, probably only a number of months, at the most a couple years. I just don’t really know what you do with that kind of money.

An aside, if the CEO was fired, for cause, meaning he did something wrong, he would still get over $42 million dollars. 

Inequality #3 is for the board of directors. While they certainly serve an important function, basically keeping the CEO and senior leadership from going off track, it is a part time job, something that probably takes 2-4 days per month on average. Let’s just say that it takes a total of two months of full time work per year. For the members that served a full year, they were paid $270,160 to $329,928. Hands down, I want that kind of job! You could sit on one or two boards, make half a million dollars a year, and work less than six months a year. 

I want to be on a board of directors!

The final inequality, #4, is between the median employee and the CEO. The median employee was a US based employee who made $76,083. That’s 1/243rd of what the CEO made. In other words, the CEO is doing the work of 243 median employees. What is interesting about this, is that as Deere expands outside the USA the current ratio of 29,152 employees in the USA and 42,946 outside the USA will become even more lopsided. Eventually the median employee may very well be an engineer in India, at which point the salary will be somewhat less than $76,083. As I’ve thought about financial inequality probably over a thousand hours I can’t see the reasoning to pay any one person more than 10 times any other person. Ten times the median USA income is a pretty large income. You can afford to fly first class wherever you go. You could live in a million dollar home. You could buy that fancy sports car. You could buy a vacation home. I don't see how you can really justify an income above $10,000,000 per year on a value added basis. I will say, I do think that founders of companies, like Steve Jobs and Bill Gates and Jeff Bezos deserve outsized rewards for the disruption and innovation they implemented. However, there is a difference between being a manager and being a founder. A manager likely took the safe route, at an established company and worked his or her way up. A founder risked going bankrupt to corner a market that likely didn't really exist when the company was started.

Median Pay to CEO Pay

In closing, Bill gates was paid by John Deere 1,065 times as much in dividends alone, not counting stock price appreciation, as the median employee and more than four times as much as the CEO at John Deere, simply because he owns the stock and not because he worked on those Saturdays when production was behind schedule, or did any work at all actually relating to Deere. That is inequality. 

Again, I am a shareholder of John Deere. I think Sam Allen is doing a really good job. Bill Gates is donating more money to charity than probably anyone in the world, which is great. I do think people in corporations responsible for making big decisions should be paid very well. I think founders of companies like Microsoft should be rewarded for their innovation. As for my politics, I'm a registered unaffiliated voter, I like to think I'm independent. I just look at these numbers and get frustrated, and want to go into politics to revise the tax code and lower the price of healthcare or at least make the prices more transparent. I'm privileged. My parents gave me opportunities when I was young, helped pay for a chunk of my college expenses, and (along with my extended family) bailed me out in 2010 when I couldn't find an engineering job. I'm good at what I do. I'm not the best configuration engineer in the world yet, but I'm good. Still, I expect that I will only make $3-5 million dollars in my entire working career. There are thousands of people that stand to inherit more than that. And my income is above the median and above the average, for whole households! So when I struggle to save money and pay all the medical bills after having a broken leg and pulmonary embolism in six months, how is the median person or family supposed to afford a safe place to live, a car, food on the table, and a little entertainment in this country?!