If you still haven’t heard this during your life, brace yourself: employees never make as much as their employers. Some people choose to point out the most extreme examples of massive CEO salaries compared to the newly hired janitor. Those are usually skewed figures, but the average CEO still makes 5 times more than his average workers. That’s how pay compensation is designed. The person with the most responsibility and risk exposure gets paid the most. So you’re just going to work really hard until you’re the CEO, right? Statistically speaking, you aren’t.
Without defining any particular company as a pyramid scheme, it’s easy to notice an ever-narrowing structure in all companies. A small group of owners appoints a slightly larger group of managing directors, who work over a larger middle-management group, which is finally over a mass of people executing on trickle-down orders. The money flows up the pyramid and the mundane tasks flow down it. I’m going to play the realist/pessimist when I tell you that you aren’t likely to work your way up beyond middle management in your lifetime. The potential for any one person to become a CEO is on par with gambling, just based on the numbers. Unless you start your own company, you shouldn’t bet on becoming CEO. If you think middle management is a great place to end up, breeze through the heaps of research identifying the wage stagnation over the past decades. Employees aren’t in a position to get ahead in life.
Companies Don’t Invest in Employees
Corporate profits have rebounded since the Recession, yet those haven’t translated into better pay for the average worker. That’s largely due to corporate stock buybacks. Companies would rather buy back their own stock and reinvest in themselves than spend more on employees. Owners and CEO’s are largely paid in stock options and buybacks keep stock values higher. It seems cruel from the employee’s perspective, but if you or I owned a company, we would prefer to use profits as effectively as possible to benefit ourselves. That rarely includes shelling out more to bottom-tier and middle-tier workers. So how can someone who is just an average working stiff get ahead if their wages aren’t going up and they aren’t likely to run the company they work for?
Emulate the Success of Others
You may not be in a position to start your own business or become CEO where you work, but nothing is holding you back from investing. Each of us can find a way to allocate some capital towards investing. You might have to start packing your own lunch or pick up some side work for a while, but you can and should invest. Company owners are the ones getting ahead, and buying stock makes you part owner in the companies you buy.
But then there is the question of which investments. Which stocks should you buy? For starters, everyone should buy into the S&P 500. Standard and Poor’s index of 500 Large-Cap corporations is the bellwether of the US economy. It also happens to be outperforming wage growth by leaps and bounds. What does that mean for the average worker buying into an S&P 500 index fund? It means they can put their money to better use by growing it in an investment than by waiting for their next raise. But most people feel like they are strapped for cash with their stagnant wages. What’s the average person to do?
Here’s my most common suggestion for people who feel they have “no money to invest”. Stop going out to lunch with colleagues because a book told you it’s a great way to schmooze your way to the top. It’s a waste of money. Replace $20 “networking” lunches with $2 sandwiches and veggies each day and you’ll have $90 to invest each work week. Invest that $90 each week in the S&P 500 for 48 work weeks and in one year you’ll have invested over $4,000. The S&P 500 is currently yielding an earnings growth rate of 12.28%. The average wage growth rate is 2%, if you get that raise. Going to lunch with peers or your direct manager every day for one work year will not get you a 12.28% raise. If you have already been bringing your own lunch, take a moment to evaluate your lifestyle. Find the wasted dollars and invest them. Remember, your boss won’t pay you a cent more than he has to for your work. You won’t start winning until you’ve put your money to work in an investment.