Have a quick look at yesterday’s post: Wedbush: Cheap as a Fox.

There was a robust discussion in comments — and the general take that resonated with me was summed up thusly: Being judicious about expenses is one thing, but being ultra cheap can be counter-productive and myopic when you figure in the opportunity costs.

The truth of that statement made me recall an incident from earlier in my career, where I worked in the research department of a Sell Side firm. I was employed for a perfectly fine shop with a few billion under management and about 1,000 employees. The CEO was a nice guy, but a cheap sunuvabitch. He was formerly of Bear Stearns (from decades prior), where he must have caught that cheapness bug.

It manifested itself in all manners of counter-productive ways. There were lots of little monetary annoyances, and it affected their recruitment and retention of talent. Bonuses were insultingly punk — that’s why I ultimately left. Mind you, this was during a relative boom period, and not during a recession or crisis.

But here’s what I recall most about where being notoriously cheap hurt them: Like many Wall Street firms, they had an override system in place for recruiting. I brought in a new department — a sharp group of distressed asset buyers. They were wildly profitable for many years (though they did get hurt in the 2008 collapse).

Getting paid on it was always a headache — constantly a day late and a dollar short. “They aren’t profitible yet, the start up costs are big” was the common cry. All the other excuses were similarly annoying, but when senior execs were taking home millions, it was utterly unacceptable. I asked around the more senior guys, and the most common answer was SOP: Standard Operating Procedure.

The cheapness was almost a running gag — but it had a pernicious impact. When employees sense that the firm is not a two way street, that “favors” only run one way, it leaves an impression. The takeaway message was don’t bother recruiting, ’cause you won’t get paid on it.

Mind you, all of this was early in my ramp up in the media. Soon after this event occurred, I was getting lots of inquiries from many people who were either seeing me on Kudlow or hearing me on Bloomberg radio or reading quotes in the WSJ. Big institutional sales traders and RIA/Brokers — nice books, lots of AUM, large trailing 12s. (That’s street speak for big producers).

Whenever I got one of these inquiries, I could not have been nicer. I was nothing if not honest to a fault with the inquiries:

Hey these are really nice guys but truth be told, they are super cheap motherfuckers. Terrific guys to have a beer with, but tight-assed as all shit. Money isn’t everything, and if you want a great home with nice guys, this is a great place. But I would be lying if I did not tell you the bonuses suck. I am happy to introduce you to them, but you can do much better comp-wise elsewhere. Do you know Joe XXXX at XXX ?

I kept a running total of how many of them I simply sent elsewhere. Following the lack of payment on the departmental recruitment, I tracked about $25M in gross annual revenues that had reached out to me. We would never have signed all of them, but even a fraction of that was a lot of revenue. I got no money for steering this cash flow to other firms that paid nice bonuses. I’m sure the new hire and his boss must have thought ‘I was swell,’ but that was not my motivation. I was going to be damned if I was going to generate one excess dollar in revenue for the owners and not get compensated for it.

The crap bonus during our biggest year ever was the last straw. Truth be told, that was the beginning of the end — and I couldn’t bring new guys in if in my mind I knew had a foot out the door. I left the first day in January, and never looked back.

This one comment summed it up:

“Being in the tech industry, I am of the view that the “cheap as a fox” approach to running a company is ultimately inferior to providing your workers with the proper tools and resources they need to perform at a high level. I’ve found that people/companies who have a cheap approach towards infrastructure/operating expenses also tend to be cheap when it comes to acquiring the best people, which in technology (and I suspect in other fields), is ultimately a losing game.”

Its hard to find fault in that analysis.

But I wonder: How many employees behave similarly? How much money is management leaving on the table because of how cheap they are with their employees? Not just new talent, but new ideas, costs savings, innovations, new business lines? I am an unusually vindictive prick, or is that pretty normal human response?

I wonder how many start ups have been formed because people said “Up yours” to their former employers?


UPDATE  November 20, 2010 4:52pm

Postscript: One of the people who traded with this division as a counter-party emails me:

Hey B

Do you recall the conversation we had at Bobby Vans about XXXXXX and his group back in 2006? You laid out for me why they were going to blow up — too much leverage, too much RMBS exposure too much structured junk. You scared me out of some of my positions, and for a few months, I cursed you for it (then I had the best P&L on the desk for a year).

I asked you if you were going to warn XXXXX about the group’s exposure, and I recall your exact words: “I never got paid one dollar on this group or any of their transactions, so my ex-firm and I have no fiduciary relationship about this. That is lawyer speak for ‘They can go fuck themselves.’ ”

I still trade with them occasionally. In case you don’t know, the group left the firm some time ago, after racking up 100s of millions in losses. I would wager they gave back the past decade’s profits and then some.

It cost them a whole lot more than mere missed commissions and assets. It definitely left a mark.


Heh heh — that quote does sound like me

A little Karma goes a long way  . . .

Category: Analysts, Corporate Management, Wages & Income

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

51 Responses to “Tight Employers: Frugal or Counter-Productive?”

  1. blueoysterjoe says:

    In the software industry, where I work, cheapness is death.

    Our processes are elaborate systems of collaboration that rely on efficiency and speed to get things done. If you go cheap, you’re clogging up that system, and the effects can be pernicious.

    Same thing with the hiring process. If you hire an idiot for cheap, you are doomed. His mistakes will ruin you.

  2. “…it affected their recruitment and retention of talent…”

    ‘retention’, is, equally, as huge of an issue..

    and, BR, with this: “But I wonder: How many employees behave similarly? How much money is management leaving on the table because of how cheap they are with their employees? Not just new talent, but new ideas, costs savings, innovations, new business lines?

    I wonder how many start ups have been formed because people said “Up yours” to their former employers?”

    you are, definitely, right to wonder..

    because, even, before ‘retention’ becomes an issue, ‘productivity’ (as you begin to delineate) suffer..

    that lost enthusiam, those shelved efforts, are, easily, ‘straight to the Bottom Line’ (forgone) Marginal Profits..

  3. Tarkus says:

    Companies tend to take on the personalities of the guy(s) in charge. That is no surprise when the structure is usually a paternalistic hierarchy. It’s often not about what you did – it’s about what you did for your immediate supervisor (who will then take the credit for your work).

    Most CEO’s are highly-paid baby-sitters with a large staff of wet-nurses under them. Their focus is to get fat sucking on the company’s teet by working the existing pump system. In some cases, you just have to be sitting in the chair and the pre-established machinery will make you fat.

    The entrepreneur is different. He/she doesn’t fit that mold. Assuming he/she is positively productive (not throwing off negative externalities) without cheating/thieving, that is the person who deserves the big payoff.

    But I don’t think success that way makes you different. It’s like booze – just makes you more of what you already are. If you are an a-hole, you just get to be a rich a-hole until they dump 6 feet of dirt on you.

  4. eightnine2718281828mu5 says:

    The pattern I see in tech is that budgets will be cut, problems will be ignored, and when a system/organizational failure occurs an official scapegoat will be identified and shown the door or be made miserable enough to leave of their own volition. Then a new body will be promoted or brought in, and they will meet the same set of restrictions, and most likely the same end.

    On the third go round, when the new sacrificial lamb starts bleating the same tune, management will be forced to pay attention because the paper trail has become so thick that they can’t deny the underlying problem. Since a third failure would likely mean the firing of someone up the food chain, the problem will be fixed by axing someone else’s department or budget.

    Wash, rinse, repeat.

  5. dead hobo says:

    I’ve worked with smart people who knew how to stretch a buck and idiots with money who ran their company into the ground. This kind of correlation isn’t as simplistic as the premise of the main post. And yes, I’ve also worked for idiots who only screwed themselves when they thought they screwed me over. At one company my time was billable and a couple of times I was shortchanged out of a bonus for by being assigned to non-billable work by management. After that, I only exceeded the bonus minimum hours by accident since I got paid the same whether or not I hit that hour limit. The company lost over 100 hours a year for a couple of years by dicking me out of a tiny bonus.

  6. tradeking13 says:

    I was at a luncheon for my company this week and sat at a table with a bunch of our sales people. One of their big gripes was that there was a cap placed on the amount of commissions they could earn in a given year. I was completely dumbfounded. What kind of moron in upper management would place this kind of sales disincentive in the name of cost cutting? BTW, our sales are “unexpectedly” down for the year.


    BR: Wasn’t that this week’s episode of The Office?

  7. dead hobo says:

    The consistent thing I’ve seen over time that has killed more businesses is over-expansion during a period of optimism and plenty. By being tighter with a buck, they would have had different futures when the downturn arrived. Fixed costs will kill you if you don’t watch out.

  8. Jojo says:

    I’ve worked for too many companies that are “penny wise and pound foolish”. They kill employee moral by micro-managing the pennies.

    There is an old saying that “no company ever saved its way to success”. You’ve got to spend money to make money.

  9. MikeG says:

    There are too many managers who ideologically enjoy the flexing of power for its own sake – basically, bullies. They get a charge out of intimidating their subordinates or cheating them in petty ways, seemingly with impunity. They are too wrapped up in their own ego to see how it bites them in the butt with all the employees who stop striving, because they feel like dupes working hard for someone who is consciously cheating them. Because so much of ‘good work’ and diligence that makes the world run is never noticed or measured by management and not rewarded except psychically, you’d better make sure your employees feel fulfilled doing the company work. Karma.

  10. nyet says:

    I don’t think cheapness is the kiss of death in IT – not by a long shot. That’s exactly why the field has been decimated by outsourcing. That is driven by cost, pure and simple. Cost despite drags of inefficiency, productivity and expertise loss, and more.

    These decisions are driven by a philosophy of share holder value which leads to short termism and an unwillingness to invest in labor. Labor is a stake holder whose interests can run counter to shareholder value. Undermining labor has become part of the deep structure of American business and management practices. That is why many of the decisions made seem so dumb – for example, HP slashing HP Labs by 75%. Yes, they are dumb decisions. But they come from the dominant paradigm (shareholder value) and until that is replaced we are going to continue to suffer the effects.

  11. Tarkus says:

    What exacerbates the animosity of employees is seeing the upper “good ol boys” tier reward themselves while being cheap with the rest of the workers.

    But seeing as there was a recent story of executive pay being even more decoupled from performance, why shouldn’t they rob their employees at the same time they rob their shareholders.

    Love him or hate him, Steve Jobs is where he is by making Apple produce legitimate product that enough people want. He gets like $1.00 a year officially as pay, I think. The rest is sink or swim with the company’s bottom line. And he does it without committing fraud too.

  12. MaxMax says:

    I used to work for a large mining firm, 50k employees worldwide. They paid the senior executives peanuts, granting them stock options instead. Mining is cyclical, and the share price isn’t rising against the cycle, so the senior executives ended up with not much compared to the industry – the good ones left, the so so stayed, and they couldn’t attract top talent. The company went down and down – in the 7 years I was there they didn’t develop one new property, and got repeatedly taken to the cleaners buying in to existing projects. The company no longer exists, it got bought out and ‘rationalised’. When I started there it was a cash cow, and when I left it was a dog, and I don’t think it was my fault. Cheap management has cheap ideas. There’s a big difference between cost control and pinching pennies.

  13. kcowan says:

    There is no hard and fast rule. I have worked for companies run by book-keepers who ran a tight ship and ones run by marketing guys who were fast and loose. Some were good and some were bad but it never tracked consistently one way or the other.

    I enjoyed working for the marketing guys. But that is another story.

  14. Economic synergy is a two way street.

    There are definitely economic principles in what you are writing about. Killing morale kills business and building morale lifts it up.

    There is a reason goodwill is accounted for in the numbers and some of it has to do with internal company workings and not external

    The intangibles make an impact on wetware

  15. dwkunkel says:

    In the early 70′s I started working as a truck driver for an outfit in Chicago and was paid by the mile. I made 6 trips in a row to Los Angeles and calculated that they were shorting me about 100 miles per trip. I found out later that this was common practice in the industry at the time.

    On the next trip to Los Angeles I called the dispatch office when I got to Barstow and told them I had run out of miles. They asked what I meant and I said that I had driven the same number of miles that they had paid me for on each of the last trips to LA, but I wasn’t there yet.

    After they wired me the money they owed me for the previous trips, I went ahead and delivered the load. I was never shorted on miles again for the remaining year and a half that I worked for that company.

  16. Ian Welsh says:

    Yeah, I’m a vindictive son of a bitch about such things. I cost one employer millions for making me work without overtime when I was just an hourly employee. Shouldn’t screw with the people who spend all day talking to independent brokers.

  17. Malachi says:

    I worked for a small company as head of a small sales team of 5. We had a dramatically higher target that I set for the team and it took us almost a year to achieve it. We were a great team and had a lot of fun working together.

    Initially there had been all sorts of talk of bonuses but I was dumb and young and had nothing in writing. Anyway we hit our target and there was no bonuses. But here was the kicker. I asked for some money to take the team out to a celebration dinner and was met with delays and no clear response.

    Finally, I took the team out on my own dime. I left a few months later and a lot of talent walked out the door after me. The company I left were great at recruiting enthusiastic young people and training them well so they had a revolving door of low paid people. But when I think of the talent that they have lost I have no doubt that there opportunity cost has been enormous.

  18. on the Tangent:

    Via: Technofascism Blog:

    Since the technocracy needs to reduce everyone to a controllable, predictable material entity, it obviously favors a worldview that considers human beings to be nothing but trousered apes. To be properly denigrated, humans must be reduced to nothing more intrinsically important than a temporary, biological cog in the giant mega-machine’s creeking march toward greater progress and control over nature.

    Unfortunately, to the dismay of the apostles of technocratic nihilism, this summer two findings, largely ignored by the mainstram media, were published that dealt devastating blows to the materialist philosophies that justify the technocracy’s agenda: 1) the conclusive evidence that Carbon-14 and other radiometric dating methods are invalid; and 2) strong evidence that the once universal and finely-tuned physical constants now actually vary throughout the universe.

    The implications of one of these findings alone is enough to rewrite history and our place in the universe. But taken together, they seem to be almost a beacon from a lighthouse outside of time and space cautioning us not to venture further into the rocky crags of materialist philosophy…”

  19. Tarkus says:

    formerlawyer Says:
    November 20th, 2010 at 8:01 pm


    You mean like this:


    Yes, I agree that Apple/Jobs has done the same stock scam as others.

    I was only using Jobs’ pay/performance link as an example of what corporations should be doing if the CEO actually had shareholder interest in mind.

    The fact they are generally going in the opposite direction just shows that many are going to rip-off the company they run even if they perform like crap, and they are so smug they don’t give a damn if you know it.

    How many CEO’s are confident enough in themselves to offer tying their pay directly into their company’s performance?

  20. I don’t have a problem with someone who got options at $36 selling them at over $300 (that’s more patience than most would show). I don’t know why there was no prosecution on backdating – break the law get prosecuted is my motto.

    As to the head honcho comp: Can anyone really question Steve Jobs contributions to Apple vs his compensation?

    The very viability of the company was in question prior to his return; he turned them into the 2nd most valuable company in the world. If he were to ask his shareholders for their 17 year old daughters as part of his CEO comp, most of them would gladly pony up . . .

  21. Tarkus says:


    refresh your memory..


    Thanks. But how many CEO’s are getting bigger bonuses this year while having a company that is in reality insolvent?

  22. Captain Jack says:

    The utter short-sightedness in the business world, both public and private, can still be breathtaking at times. As Lily Tomlin once said: “No matter how cynical you get, it’s impossible to keep up.”

    It would seem obvious by now that start-ups — and dynamic, growing businesses of any size or shape — are not zero sum games. When the name of the game is growing the pie, you succeed by leveraging energy and talent to make the pie bigger.

    There are certain business models where controlling costs is the be-all end-all. These are the types of businesses Warren Buffett likes to buy, where you get in cheap and squeeze blood from a stone until the business finally dies or fades away. By the time it does, you count coup based on ROI from your original minimal capital investment and move on.

    But this is not the growth model or anywhere close to it. If anything call it the ‘sunset’ model. CEOs in ostensibly growth-oriented businesses who constantly pinch pennies should have their heads examined. The very concept of ‘growth’ implies putting capital to work with an aim of leveraged compound returns in the first place — and in the right circumstances, human capital is the best capital of all.

    So why do so many still act so foolishly, shooting themselves in the foot with a machine gun by alienating or marginalizing talent? As a fairly talented individual who went through a string of ‘bad bosses’ early in their career (before finally becoming my own boss), I have pondered that question for years. Why are these people so willing to rob themselves of profit? Why are they so blind to the power of leveraged opportunity that is, literally, standing right in front of them?

    No satisfactory answer has yet come to light. Perhaps they are just stupid?

  23. GeorgeBurnsWasRight says:

    Captain Jack-

    One possible answer to your closing question: perhaps people are often no smarter than the fabled dog which sees the reflection in the water of itself holding a bone, and then loses that bone when it tries to take the “other dog’s” bone. Greed is usually self-defeating in the long run.

  24. CB says:

    …fixed costs will kill you if you don’t watch out.

    Good point and ultimately crucial – yet finding a good balance between controlling fixed costs and providing incentives for variable costs/ increased performance is not as easy as it would seem. Extreme frugality can be a default behavioral characteristic for some people such that any type of waste is painful and any type of thrift and efficiency is pleasurable – regardless of rational cost/benefit analysis. Humans are really not very logical creatures.

  25. willid3 says:

    you can be cheap but you better take care of the employees. my wife used to work for an airline. its been the most profitable airline in the last 30 or so years. the previous CEO had a philosophy that taking care of employees would take care of customers. and they don’t have the ‘normal’ standard of the customers is always right.

    seems to have for 30 or so years with always making a profit every quarter. and they have no trouble at all in recruiting new employees. they may not pay the most but they do include options for regular employees. a lot of them have gotten rich that way.

    today a lot of company have the short view of management. its why there really hasn’t been much in the way of new inventions. lots of ‘innovations’ by just improving some thing that already exists. it also explains the big scam of exporting jobs (and customers too) to other countries. to cut labor costs. it has killed a lot of professions. IT for one. its working on lots of others (legal for one, medical for another). lots of companies not only send their call centers off shore but also legal work (might explain that big problem in foreclosure gate). and lots of x-rays etc are sent offshore too.

  26. Captain Jack says:


    Yep — greed, ego and insecurity the old culprits…

    But as your analogy suggests, one would think people smarter than dogs, or at least more attuned to logically maximizing their own interests. “Long term greedy” is the point of growth in the first place.

  27. Michael Gat says:

    I worked for Intel in the Andy Grove era. Everybody flew coach. You got a compact car when you traveled (employees traveling together could share a bigger car, but even this was a cost-saving approach: a couple bucks more to upgrade the car was a lot cheaper than renting two cars). Everybody in a cubicle. We weren’t top of the scale in terms of salary, but everybody got options.

    I remember one time flying between Portland and San Jose. Alaska Airlines offered me a $10 upgrade offer. It was a 6am flight, I was going there and back in one day, and I figured I’d spend the money. Only when I sat down did I see Grove one row behind me in coach. Despite the fact that he must have been offered the same upgrade, he did the right thing showing leadership to the other Intel employees who were regularly on that flight. I never did that again.

    Our CFO at the time regularly would show up in the crappiest and smallest rental car. Again, leadership. He was eligible to rent the same Ford Escort I was, yet he went even cheaper, saving a buck or two.

    At an employee orientation I attended, which Grove presided over — senior execs routinely did this — one new guy laid into him about Intel’s “open parking” policy with no assigned spaces. He seemed to have a million reasons why certain people should have pre-assigned parking. Grove stared him down (despite being a tiny guy, he could be quite menacing in his own way), and answered simply: “I always get the same parking spot right by the door. If you want it, it’s yours. All you have to do is get here before me.” Grove rarely got to the office after 7am, and usually much earlier.

    But the frugality only went so far. Intel was focused on what mattered and didn’t let the BS fluff get in the way. They knew that the company at it’s core was driven by engineering and were very focused on making it an open, flat, non-hierarchical kind of place. The kind of place where great engineers thrive. For some people it would have been hell. Intel knew they didn’t want those people. I’d argue that Intel’s decline started around the time you saw more and more perks, titles, etc.

    That kind of environment most likely would not have worked at other companies, or in other industries. And that’s the point. Fast growing companies can’t afford to not spend money on what matters, but also can’t afford to spend money on things that don’t matter. Intel in those days made the point of strongly differentiating the two. You never had to argue much about project dollars. Rarely would you have issues getting any training you needed. Equipment was always available if you could justify the need. First class travel? Not necessary. Not even for the CEO.

    Wall Street and Hollywood primadonnas probably would not have put up with that kind of environment no matter what money was coming their way. “Open and egalitarian” works for engineers, but not for them. Just not the norm, and not the kind of thing that’s going to be inspiring to the folks who go into those businesses. The key, of course is to realize who the critical people are, and what you have to do to retain them. Being cheap on the things that matter to your people is a bad move. Being frugal about the ones that nobody cares much about can be a rallying cry.

  28. Tarkus says:

    Michael Gat Says:
    November 20th, 2010 at 11:59 pm

    ….I always get the same parking spot right by the door. If you want it, it’s yours. All you have to do is get here before me.” …
    What Grove was adhering to and advocating was a meritocracy. What is practiced in many firms is closer to aristocracy (the perks of “kings” who are kings regardless of performance).

  29. Michael Gat:
    Thanks for the story. Grove seems like a very interesting guy. Wasn’t Grove the guy who wrote the piece last year saying we needed to stop off-shoring all our jobs?

  30. foxorrabbit says:

    Good article. I was wondering what had prompted that prior post. I don’t think you’re an unusually vindictive prick at all, and it’s to your credit that you’re objectively objectively asking what others think. This appears to me a philosophical issue: What is justice? Perhaps: Everyone should be compensated a fair share of the value he/she creates. The problem is that such “justice” is impossible to measure, and there’s way too much room for abuse or for emotions to skew the calculation. Your calculation showed an injustice on their part, and so you withheld additional value that you could have created. The whole thing is a race to the bottom if you let it get a foothold, and moving on was probably a very healthy move. What’s more, your current success is evidence that it was probably them, not you, who calculated incorrectly. (As for corporate cultures overall, people tend to make these calculations more as part of a global worldview than on a case-by-case basis.)

  31. foxorrabbit says:

    PS —
    I think the loss from this struggle is huge, an output gap that is easily 5% of GDP.
    And tons of companies have been started as a result of it. At the end of the day, the ability to successfully start a competitive company provides a decisive limit to one end of this debate.

  32. CJ & the 13th,

    see: “…New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called “Start-Ups, Not Bailouts.” His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups.

    Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

    The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.

    What Went Wrong? …”
    from July 1, 2010, 5:00PM EST
    additionally http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Andy+Grove+Only+the+Paranoid+Survive
    re: your 21:17
    I’m not, exactly, sure how to adjust, for Inflation, the ol’ Adage, but: “Three Wrongs don’t make a Right”.
    also, “The Loyalty Effect” ( findable, here http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Reichheld+The+Loyalty+Effect ) is an excellent book that speaks to many of the ideas hit upon, in this thread..

  33. Earl says:

    Longtime reader, first time commenter

    I worked for cheap bastards, and it led to litigation: I began on Wall Street 25 years ago at Merrill Lynch. Back then, mother Merrill had a wonderful broker training program. Their issue then wasn’t cheapness — it was all bureaucracy. 20,000+ brokers, and nearly as many rules. After 15 years with the thundering herd, I moved to a smaller shop with a better payout. They appeared to be big spenders — wining & dining, first class travel, tons of money blown at Scores (strip clubs). It wasn’t until I was there for a while that I learned how cheap they were with everyone but themselves. Very petty in terms of reimbursments for travel, entertianment etc.

    I signed a 6 year deal with them, I left after 3 long years. I paid back my advance pro rata — a chunk of money — after taking out the T&E expenses I was owed. On a check for over $300k, my accountant deducted less than 10% for expenses (fully detailed with receipts). They sued over the shortfall, breach of contract but also filed a slander lawsuit against me. Not an arbitration, but actual litigation, because I had repeatedly called them “Miserably cheap bastards” to other employees and clients. Which was true, and I thought that would be my defense.

    We had a close friend of the family who was a killer attorney. His brilliant tactic: Depose their entire senior staff, including house counsel, but not about our case. They thought the deposition was about the T&E and libel, but we were looking to nail them with SEC/NASD/IRS violations, of which there plenty. It wasn’t what they were prepared for. In defending their own case, they made many revealing admissions, under oath. Nothing was shielded by arbitration laws, or private agreements.

    They hung themselves pretty good. We turned the depos over to NASD (this was pre-FINRA) and SEC counsel. They were fined a few million dollars.

    The best part: We saved the most damning depositions about their tax issues as an insurance policy — (hey IRS!). After the fines, we let their outside counsel know this. They never messed with me again.

    All this over less than $30k in travel expenses. Cheap and dumb is a bad combination.

  34. mathman says:

    The human dilemma seems to stem from two opposing attitudes: ME FIRST vs cooperation or, as the Japanese used to demonstrate: individualism vs the group (the whole, the company, the family). For example, when a company incurred losses due to anything, the first people to take the hit in the (Demming) Japanese model, were the top tier management. That would incentivise creativity/problem solving and demonstrate to the lower tier people leadership and that they were next if things didn’t turn around.

    Here it’s rule by fear (of losing ones’ job) and has led to our demise. Corporations are dinosaurs that should have long since died off but continue to be propped up by their cronies in government, to the detriment of us all. Corporations don’t care about anything but the bottom line, which is why the environment, the economy, employment, health care costs, (and on and on) are being sacrificed. It’s suicide for the whole for the benefit of the few and will end badly.

  35. ToNYC says:

    Capitalism shines by rewarding risk-takers who dare to build what is first only in their mind, not risk-avoiders. Prudent risk-takers who assemble people smarter than themselves and give them equity in the enterprise. Government is not a risk-taker. The growth of six-figure jobs in Government in the teeth of credit collapse for risk-takes displays the bankruptcy of the Federal Reserve-engineered economy. The longer they are in control, the longer the Capitalism is out of control.

  36. number2son says:

    Friedman is wrong.

    Few have been more wrong, more often, for such a long time.

  37. Bill W says:

    Mark E. Hoffer,

    I love the stories about Andy Grove. A leader actually leading by example. That value seems to be dead these days. I wonder how often our elected officials fly first class on our dime.

    I work for a tech company, and I recently had to take a trip that was about 20 hours in both directions. My company’s policy is coach for everyone. When I got back for the trip they gave me a small bonus for my trouble. Which I thought was a nice gesture as money is tight these days, even though it came nowhere close to compensating me for the extra time that I put in.

    I think there is a big difference between being cheap and being frugal. To me, an example of frugal is learning to cook at home and eating at restaurants on special occasions. An example of being cheap is eating out twice every weekend and stiffing the waiter on every occasion.

    The book “Predictably Irrational” has a great chapter on “Social Norms” versus “Market Norms” that I think is relevant to this thread.

  38. number2son says:

    Michael Gat, I enjoyed your story about the meritocracy at Intel. Microsoft is also famous for its parsimony on things like travel (not sure if Balmer also flies coach, however).

    I happen to work as a software developer at a large health care corporation. We started life as a start-up and were acquired several years ago. We have been on a steady growth path and have had decent support from the parent — specifically, they have not tried to impose their culture (too stringently) on us. We maintain separate offices and have little day-to-day contact with our corporate overlords.


    Immediately after the 2008 crash, corporate management used that opportunity to eliminate raises for the next year. “Non-essential” business travel was suspended. And the annual Christmas party was cancelled. In the meantime, the company went on to have one of its best years in 2009. The CEO of the company, whose perks include use of a private jet (no coach for him!), received over $10M in compensation.

    Maybe someone got word up the org chart that many of us weren’t pleased with this double-standard. In any case the compensation program was reinstated the next year.

    For our group, the compensation system is still problematic. It works like this: our development group is allocated a pile of money every year and it is up to middle managers to slice the pie using raises in a range of x-y%. As someone involved in the evaluation process, I know how the dough is distributed across the group. The idea, of course, is to reward top performers with a bigger slice. In practice, however, it doesn’t always work out that way, not the least of which is the subjective nature of evaluating engineers.

    Disparities persist. This is particularly true for those who are H1 and have been with the group for several years. While it is well established that companies have sought to contain costs by sending development jobs overseas (with very mixed results), there is also a substantial population of foreign workers in the U.S. Two assumptions have persisted with respect to foreign workers: first, that they will work for less money than their U.S. counterparts. A second assumption was actually voiced directly to me by a colleague to the effect that we should favor hiring H1 because they would be more loyal because they cannot change jobs easily. Acting on either assumption violates both the spirit and intent of U.S. law.

    What I am seeing as I continue to screen and interview candidates is that the pool of qualified candidates is disproportionately foreign-born. This reflects the reality of the job market for software engineers in 2010. I am also seeing that the salary demands of foreign workers are finally comparable to U.S. candidates – they will no longer work at a steep discount to their U.S. peers.

    That results in a situation where I will hire a new software engineer at a salary that will be higher than someone who has been working with us for many years, who is more valuable to the group and whose value cannot be adequately adjusted using our compensation system.

  39. xatta says:

    This reminds me of an interesting, though implausible, experiment from the “prospect theory” camp.

    Suppose you are sitting next to a stranger on the subway, or bus, or some other place. And someone approaches the two of you and offers to give you $100 to share. The stranger will decide how to split the money. You can accept those terms, or you can reject it and both of you get nothing.

    Economic theory says you should accept anything, even if you are on the 1 end of a 99/1 split. Hey, it’s a buck more than you had when you sat down.

    What would you do if the stranger decided to keep $90 for themselves and you could have $10? Would you take the $10, or would you tell the stranger to go fuck themselves?

  40. ToNYC says:

    Economic theory says you got $10 and the stranger got you done better off than the $1 end of the 99/1 split. You had nothing but the ride before someone came..and you are lucky when the stranger decides. In the next car however, a lurker bent on a quick cash heist sees the trade through the car end window and follows the winner of the $90. The Unintended Consequences of Feeding the Birds can haunt your waking hours.

  41. Bill W says:

    I used to work for a company tried to have it both ways on this issue. They wanted you to work more hours, because “that’s what we need to do for the company.” When benefits are got cut back they said, “that’s what is going on in the market.” They wanted to be cheap with the money, but they wanted you to be generous with your time.

    Capitalism is a two way street. If companies want to be cheap with money, they can’t expect to have their cake and eat it too. That only generates resentment from employees. It’s counterproductive to lecture people on values like hard work and loyalty, while you forget the virtue of generosity.

  42. patient renter says:

    I see different trends that represent the appreciation and lack of appreciation for the value of people.

    Recently, bigger tech companies have been acquiring smaller companies and startups purely for their people, with the products being secondary. On the other side, many startups come about after a company doesn’t take care of its people, opening the door for them to put their ideas and talent to work for themselves.

  43. Captain Jack says:

    The prospect theory experiment overlooks an important aspect of biology — humans have an innate sense of fairness. Dogs and monkeys have also been shown to have it. (If you give one capuchin a grape and the other a less desirable piece of cucumber, the one getting the cucumber will be upset.)

    The built-in fairness instinct makes sense as a naturally evolved competitive mechanism among socially cooperative species. The group with natural instinct to “weed out” takers and freeloaders has better odds of thriving as a group on the whole. Thus, way back when, human groups in which fairness was not prized had lower odds of succeeding than the groups where all pitched in; the fairness instinct thus slowly became ubiquitous or nearly so.

    Another problem with the prospect theory experiment is the trivial dollar amounts involved. For small amounts, i.e. anything of $100 or less, it is quite possible that “preserving one’s pride” has greater economic value than making a buck. Consider if a stranger offered you a five dollar bill for the simple task of briefly sticking your finger up your nose in a public setting. You probably wouldn’t do it (or at least many people wouldn’t).

    Now imagine the prospect theory experiment under more meaningful conditions — funded by a crazy billionaire with half a million dollars. If the same guy on the subway said “I keep $450K and you keep $50,000,” or even “I keep $490K and you keep $10,000,” would the average individual really be so quick to say no? I don’t think so.

    In their worship of logic and rationality, economists are amusingly short-sighted and irrational.

  44. MotownMichael says:

    My god does this post hit home- we sold our company to a European firm, wanting to enter our market, and I am 1.5 years into a 3 year contract. As an owner prior to the takeover, we paid pretty much the highest in the business, and were never stingy on expenses, in fact I used to pad them as a little bonus for the team that always did a great job. In 10 years, we never had any turnover for key positions, which is unheard of in our field. In some cases we even gave bigger bonuses to certain employees than ourselves, as they did an outstanding job. Now we are in a position where the new, European management is cheap with employees, it is entirely cash-flow driven, (This is hard for me as I rely on a lot of contractors, we went from paying them weekly to now net-30 days for their wages, the word is on the street that we suck now), and we lost 7 key persons. Instead of people going above and beyond, finding new and profitable ventures, they simply do as they are told, and are micro-managed. It is like a plantation mentality , and what is amazing is they said they purchased us, so “they could be more like us, entrepreneurial, and quick reacting to customers needs. Funny, I never thought of my employees as a way of increasing profits, rather they increased profits for us-nobody got greedy, and we all befitted nicely. We were frugal with certain things (where it made sense), but looked for a value as opposed to being cheap. Other things we spent absolute top dollar on, top make our operations as efficient as possible. But we were never, ever greedy with the people that put money in our pockets. Of course we know how this will end for the new management team.

  45. Jim67545 says:

    Some of the seemingly obscene compensation packages boards of large companies have awarded, at what point are these Boards going to consider whether the funds come from undercompensating the masses below, outsourcing, offshoring, failing to take advantage of opportunities (taking risks), etc. Have these executives created the wealth or squeezed the wealth from the lifeblood of the company and its employees, depleted its goodwill?
    Worked for a company where the top execs were disinclined to make decisions except when it came to maneuvering getting more for themselves and giving less to the job. The Corporate Boards have to step up. Don’t wait until you are on the brink before doing your job. Stockholders are not served by this nonesense.

  46. [...] Tight Employers: Frugal or Counter-Productive? (Ritholtz) [...]

  47. Lugnut says:

    Tradeking – “I was at a luncheon for my company this week and sat at a table with a bunch of our sales people. One of their big gripes was that there was a cap placed on the amount of commissions they could earn in a given year. I was completely dumbfounded. ”

    I used to work at a IT tech VAR in the late 90s duringthe height of the tech boom that was pretty progressive on sales pay. They had 2 plans, one you got a modest base salary and 25% of the gross margin of what you sold (products and professional services). Try to get that type of payout today. The 2nd plan was simply no base salary, but a 40% cut of the gross. They attracted a few rainmakers who made a killing on that plan. Company sold a ton too. The top 3 sales people made more than the President of the company, by a good stretch.

  48. formerlawyer says:

    @Captain Jack
    That may be true in WEIRD societies but not necessarily true in other societies.

  49. Kim Kaufman says:

    “I wonder how many start ups have been formed because people said “Up yours” to their former employers?”

    I’m in AA. We say: all you need to start a new meeting is a resentment and a coffee pot.