Many years ago, I was in my first management job as a senior managing economist. The problem was that I was under 30, so I wasn’t very senior, and I also didn’t manage anyone.
| By Eric Fruits |
Pay me what I’m worth, or else
Many years ago, I was in my first management job as a senior managing economist. The problem was that I was under 30, so I wasn’t very senior, and I also didn’t manage anyone (and I certainly didn’t manage any other economists). So I asked my boss what sort of management activities I could take on. Ten minutes later, I was managing a group of approximately 10 research analysts — mostly 20-somethings just out of college.
It just so happened that my new duties coincided with the beginning of the annual review process. The first thing I learned was that every 20-something knows precisely how much his or her peers are being paid. There are no secrets. The next thing I learned was that everybody believes they deserve a raise. The justifications are many:
“I had a 4.0 in college.”
“The other analyst is getting a raise.”
“Our competitor pays more.”
“I’m the only analyst who can do statistics.”
After about two weeks of relentless badgering about raises, I sought advice from my boss, an economist through and through: “What do you say to an analyst who wants a raise?”
His response: “I’d say ‘Hold me hostage!’”
When he saw the confused look on my face he explained that if someone has a hard-to-find skill or exceptional expertise, you want to keep that person. That person adds the most value to the business and should be first in line for a raise.
Economic logic dictates that those who add the most value to the firm ultimately get paid more. In my field, it’s tough to find someone who can do statistics. Someone with such rare skills has a lot more leverage than someone merely with good grades.
Economics tells us that sometimes it’s optimal to hold your customers hostage or to be held hostage by your employees. Unique skills benefit a business because the company’s competitors can’t duplicate the products or services it provides the market. Just as an employee with unique skills has leverage over his employer, a firm with unique products or services has leverage over the market. This leverage produces more sales or lower costs. Either way, it improves the bottom line.
Take a look at some of the better-performing Oregon companies. What sets them apart? In most cases they provide unique or highly specialized offerings that are in high demand. For example, Portland’s Precision Castparts has seen its stock price approximately double in the past year. It provides complex metal components and products for the aerospace and industrial gas turbine industries. The booming world economy has, in turn, led to a boom in aerospace. The nation’s search for more — and cleaner — sources of electricity has led to a boom in the construction of gas-fired generation plants. The complexity of Precision Castparts products means that competitors cannot easily duplicate them. This buffers the company from the intense competition faced by those who produce dime-a-dozen products.
Seattle-based Starbucks, on the other hand, can’t buffer itself from increasing competition. Consequently, it’s seen its stock price drop by about 20% in the past year. Starbucks has always faced competition from other specialty coffee shops. Recently, though, everyone seems to be getting into the good-strong-coffee game. McDonald’s is the most recent high-profile entrant. It gave its test kitchen and market research team the task of making the “best” cup of coffee.
As a result, the company made headlines when Consumer Reports announced McDonald’s won its taste test. Will people stop going to Starbucks because McDonalds makes a better drip coffee? No. But this battle showed that anyone could make a good cup of coffee. And when anyone can make a good cup of coffee, Starbucks’ leverage erodes. On the other hand, Starbucks has a defensible brand — no one goes to McDonald’s to take in the music and ambience.
Beaverton-based Nike is perhaps the quintessential Oregon company that has used branding as a way to gain leverage over the market. The Nike brand adds value to otherwise mundane sportswear. This leverage has been translated into stock returns. Since going public, Nike has vastly outperformed the S&P 500.
Branding, however, is not the easiest path to outperforming the market. Both Starbucks and Nike have spent decades building their brands. The dot-com bust is littered with the corporate carcasses of companies that thought they could build a brand in weeks rather than years. (Exhibit A: Pets.com.)
Many business books are about team building. And many career books are about self-esteem. But most of the books that aren’t about team building or self-esteem are, in fact, about hostage-taking. They tell businesses to produce the product, develop the service and find the niche in which your business has some leverage in the market. They tell individuals to learn the skills and develop the network that give you leverage in the workplace.
In an economic version of the Stockholm syndrome, customers don’t mind being taken hostage if they are getting something special. Similarly, employers don’t mind being taken hostage if they are getting added value. There is no king’s ransom with competition: You get what you pay for and you pay for what you get.
Eric Fruits is a senior economist at Portland consulting firm ECONorthwest and an adjunct professor at Portland State University.
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