As far as I know, there is no generalization that is always true. But, for the vast majority of those in the wealthy region EXCEPT for BORN WEALTHY their wealth was only achieved via the labor and skills of many, many other people. Even the born wealthy rely on the labor and skills of others to maintain their level of wealth. Some recognize and remember this. Others seem to develop amnesia, or lose cognitive powers, as they become wealthier.
From the Start
At the beginning of any enterprise, there are only a few involved. Perhaps only one, perhaps a dozen. But not a lot. There is an idea and a plan. Perhaps this was the breakthrough of one person, maybe it was done as the result of collaboration of the entire group. The plan, if done well, will allow for growth unless, of course, no growth is desired. Even in a no-growth situation, a constant review of status and needs is required.
Even at this stage, people are relied upon. A phone network, or internet structure, is needed for communication and research. That requires the efforts of many people. People will be moving from place to place and they may require potential, and actual, customers to move from place to place. The transportation networks require many people. The reality is that people are not isolated from the community and they are unable to do much that affects the community, including their own place within that community, without relying upon its resources.
There are many legends of where and how economic successes began. Hewlett and Packard in their garage. For that matter, Jeff Bezos started in his garage. Garages seem to have been favorite incubation locations for businesses. This makes sense because, without cars within them, garages are basically extra living spaces away from the main flow of the residence. Other ones also exist. But do you know of a single beginning story that started within the midst of a forest on a hike? An idea, perhaps, but not the beginning of an enterprise.
There are histories of people who have bootstrapped themselves. Carl, of Carl’s Jr fame, started with a hot dog cart. Patagonia was started out of a blacksmithing/climbing-gear side business. In both (and other) cases, the general model was scalable. They could test marketability by starting from a small basis and then growing. Catering businesses and Bezos’ garage bookstore are other examples. They make use of what is often called “sweat equity”.
In other situations, it was a matter of family financing. Bill Gates came from a wealthy family as did Elon Musk.
There are as many instances as there are companies but, in each case, as they grew they either re-invested earnings (particularly via “sweat equity”) or gathered outside investment (familial or venture capital). As they grew, others invested their own time, labor, and savings. An idea may start from the thoughts of one person but the implementation takes the resources of the community and the involvement of the labor and skills of many people.
Growth and Profits
As is true in the beginning, it is still true at all stages of growth and development of an enterprise. It requires use of a greater number of people with their labor and skills. And, here is where paths of companies diverge with much of the required guidelines based upon the rules and regulations established.
Let’s have an arbitrary example. A “mom and pop” business starts a business with two people. The business grows to make $350,000/year gross income. Perhaps their overhead, and cost of sales, is $200,000/year. This leaves (yes, lots of little details being left out here) $150,000/year profit for perhaps 70 hours/week from 2 people. (Starting businesses often require very long hours. My business partner and I worked an average of 75 hours/week for the first couple of years after we started out company.) Part of that profit is used for childcare, and neither of them wants to continue to work so many hours per week, so the couple decides that the father should stay home with the kids and they should hire another two people allowing the mother to reduce her hours to 45 hours/week.
(This is an arbitrary example with arbitrary numbers but the general scenario came from a family with a Falafel quick-stop back in Colorado.) As the business continued to expand, they opened up a second location with the mother overseeing one of the businesses and the oldest son looking after the second one. They now have six employees (not including mother and son) and a gross income (for the two stores) of $800,000/year with $250,000/year difference between gross income and the overhead/cost of sales. How is this $250,000 distributed? The family needs, and deserves, some. The six workers need, and deserve, some.
We have now come to the dilemma of how to portion capital versus labor. The mother and son deserve some of the profit for their labor. The family deserves some for their original concept and hard work to establish the business. Yet, the stores would not be as large as they are, nor produce as much money/profit as they do, without the active time, labor, and skills of the six people. They deserve some.
The allocation of profits is determined by many things.
Determination of wages
The distribution of profits is an art and a challenge. It depends on many, many things and it is possible that no configuration exists which appears “fair” to all of the people involved. What are the factors involved?
Replaceability of the workers. What are the skillsets needed? Include all of the skillsets needed. For this example of the falafel stores, “soft skills” are very important. In the case of a worker for a company where only a few people encounter customers, “soft skills” may not be as mandatory (though they still may help the interior workings of the company a lot).
Availability of workers with adequate skills. Is the skillset such that “anybody” could do the job? Do you have a choice from 100 people for each position that you have in your company? Or are there only a few people qualified with strong competition among similar companies for their work and skills?
Cost of finding, and training, replacement workers. How much does it cost to find a person willing to fill a position with the pay/benefits alloted to the position? How many hours of training are needed to bring the new employee to an overall useful point of behavior?
Rules and regulations. What do the local laws indicate is the least you can pay? A livable wage SHOULD be the minimum but not many governments (national or local) understand the helpfulness of setting a common baseline for companies within an area of business. They may allow the businesses to dictate to the governments rather than the governments acting as servants to the people.
Flexibility of the amount to be charged for products. You want to pay your employees an extra $1/hour? Great, you have two wide areas of possibility (without reducing profits) — raise the price of the services or have the employees generate more sales (which can happen spontaneously with a positive corporate culture).
Personal philosophies of the people who have legal charge of, and responsibility for, the business. Some people in charge have the attitude of “pay them as little as we can get away with”. Others have the attitude of “we wouldn’t make any money without them, so spread the profits as much as possible to optimize employee pay/benefits”.
Existence, or non-existence, of outside finances (stockholders/investors). If people have invested in your company, they WILL expect a “return” on their money. In your calculations, you cam include this ROI as part of the overhead/cost-of-sales.
You can find examples of many types of distribution of profits. One argument that is often given is that paying a living wage will decrease profits. This is almost never true unless the flexibility for charging is zero. And that flexibility could be zero only if the rules do not exist for ALL of the competing businesses. Even then, a company with happy, friendly employees who are paid living wages will do better in the market than a company with unhappy, exhausted and uninvolved employees who are paid just enough to exist but where every day is a challenge and potential disaster.
Rules and Regulations level the playing field.
Most companies (I believe this but I cannot give proof for it) want to be a good community neighbor. They don’t want to pollute. They want to pay good wages. They want to give good benefits (or support policies that give everyone good benefits). They want the children of the community to have good educations and be great future employees.
But they also want/need to make profits in this capitalistic society. This is even more true for publicly traded (with stockholders) companies. I don’t want to pollute, but non polluting adds to my overhead placing me at a disadvantage in competition. So, reluctantly (but not reluctantly enough to not do it), I pollute and stay competitive. IF there are (enforced) rules and regulations, then all companies are required to not pollute and an innately well-behaved company is not penalized.
I want to pay my employees a living wage at the minimum. But, there is no living wage mandated and my competitors can pay starvation wages because there are a lot of people needing jobs. If the law says that THIS level of pay is the minimum I can pay and it allows employees to live then I can pay them that and be competitive.
Companies who want to do the “right” thing for their employees and community SHOULD welcome fair and enforced rules and regulations. They don’t always do such.
Determination of distribution
The owners need, and deserve, some amount (these include stockholders). The employees need, and deserve, some amount for the work and skills. The company infrastructure needs re-investment for maintenance and expansion.
In some of the high-tech or high profit businesses with a smaller potential employee pool and greater competition for workers, they “reverse engineer” wages and benefits. They take the gross income of the company and divided by the number of workers. This gives a number that indicates the average contribution to the company of the workers’ work and skills. They decide on the profit level desired and the overhead allocated to the worker from the company needs as well as benefits associated with each worker. This leaves a number which indicates average wages.
For example, take a company that earns one billion dollars per year ($1,000,000,000). They have 2500 employees. This means each employee contributes an average of $400,000 per person. A desired profit margin is 25%. This is now $300,000 per person. The overhead is another $100,000 per person. We are now down to $200,000 per person. Benefits, FICA, unemployment, health insurance, and other benefits reduces that amount to $125,000 per person available as the AVERAGE wage for people working at the company. These general numbers are often calculable for various companies in the same general field which verifies competitivity for workers. Benefits, overhead, and profit margin may be jiggled a bit to make their company attractive to potential employees.
Possibly the goal is to maximize profits. If so, the amount will be calculated from the “bottom up”. Minimum wage plus minimum benefits and overhead give net costs. The desired gross amount is created from net costs. If the desired gross amount is not high enough, due to market demand or competition, benefits are reduced. We saw something of this nature used within the “mom and pop” example.
Much depends on the philosophies of the controllers of capital. That philosophy may also depend on the reliability of memory and recognition of contribution for both the employees and the community. But a large spectrum of wages, benefits, and profits is possible.
Union leverage
The workers recognize their contribution. There isn’t always transparency, however, on other factors towards profitability of the company. While it SHOULD be the object of the company to work towards that subjective goal of fairness, final control of capital and determination of profit margin and average wages/benefits is in the hands of the controllers of capital according to the general outlines of a capitalist society. What if (hopefully not, but often so) the recognition of contribution and value of the work and skill is NOT kept at a solid conscious level?
Unions represent the workers. They force the controllers of capital to be aware of the contributions of the workers. They struggle, in a “tug of war”, to make allocations recognize the contributions, and needs, of the workers. Strikes (which damages the workers as well as the controllers) are the largest tool available for use by the unions.
Conclusion
The contribution of labor, skills, and community always exist at all stages. The controller of capital needs awareness, and appreciation, of this. Sometimes it is necessary for unions to form to force this awareness. Rules and regulations created by outside bodies (often government) level out the playing field between companies. Out of all of this comes a distribution of profits which is unlikely to be subjectively considered to be “fair” to all but it should be the goal.
