On, October 2nd, 2018, the following headline appeared on Amazon’s blog:
The internet went nuts at the announcement. As is fitting in today’s social networked world, Amazon Senior Vice President of Operations Dave Clark posted a video to Twitter showing the announcement as it was made at an Amazon Distribution center. See below:
Shared the new Amazon $15 minimum wage with the team here at LGB3 early this morning! Best All Hands Ever!!! 👊😃 pic.twitter.com/RqkvHQuomO
— Dave Clark (@davehclark) October 2, 2018
It’s particularly heartwarming when the employees erupt in cheer. A few of them start high-fiving each other; most have little, or no reaction at all.
Amazon goes on in the blog post to declare itself the new lobby for labor; it announces its support and leadership in the push to hike the federal minimum wage to $15/hour. With this declaration, Amazon paints itself brilliantly as the caregiver of its employees, and a proponent for all who work for an hourly living. It paints the federal minimum wage as preposterously low, thereby turning the tables on the politicians who have recently criticized Amazon for not sharing it’s success with employees.
On the face of it, these actions are nothing short of loving, corporate paternalism.
Except that face value is never the entire story.
The push to hike the minimum wage nationally is not a new one; it wasn’t started by Amazon. The Populist movement known as Fight for $15 began in 2012. Six years later, it’s gaining strength, rapidly. The move by Amazon simply shows it has taken notice.
Fight for $15 was originally started by a few hundred fast food workers in New York City. They were unionized, and subsequently vilified. According to the Fight for $15 website, the movement has now grown to 300 cities on 6 continents. Today, home health aides, child care teachers, airport workers, adjunct professors, and retail employees are also in its ranks.
If that is not a diverse set of careers, I don’t know what is.
On Fight for Fifteen’s Twitter feed, activist Shaun King posted the following after the Amazon announcement:
Jeff Bezos admitted a real degree of failure here and openly stated that the critics were right and he was wrong.
He surprised many of us by not only granting full time employees the $15 per hour wage, but part time and season employees as well.
Whole Foods employees too. https://t.co/hdQYEOp10b
— Shaun King (@shaunking) October 2, 2018
Clearly, among the socialists, a victory lap is being taken. The Amazon minimum wage hikes will not take effect until November 1st, just in time for the holiday shopping season’s peak. As we will talk about later, there’s no doubt this move by Amazon will impact wages across retail. That may not be a good thing given the recent fragility and the cyclical nature of the retail sector.
There are a few points of concern regarding this move by Amazon, in addition to its impact on the rest of the retail sector.
First, the following from the Amazon press release:
This is very vague. It doesn’t say how employees who already earn more than $15/hour will be affected. There’s good reason for that. A little later, we’ll see that current, experienced employees of Amazon are not the main beneficiaries of the raises. Existing employees will only get a $1.00-$2.00/hour raise, meaning some experienced employees will be paid the same as new employees. Those who make the current federal minimum wage ($7.25/hour) at Amazon, will see their pay double! For those who make $14/hour, a 7% raise and entry-level pay will be all they see. That is a recipe for some disgruntled employees.
It’s possible that no one was making $7.25/hour at Amazon before this announcement was made. It’s possible that everyone at Amazon was already making closer to $15/hour. Why do I say that? Because upon further investigation, I stumbled across this article in the New York Times from 2016. In the following excerpt, we see that including bonuses and stock awards (RSU program), the average worker at the Middletwon, Deleware Amazon facility was already making in excess of $15/hour. From the New York Times:
“…pay at the Middletown warehouse starts around $13 an hour and health care and parental leave benefits are the same for warehouse workers as they are for senior executives at Amazon. The company said full-time workers at the facility made, on average, over $15 an hour in overall compensation when including base pay, bonuses and stock awards.”
Given the above information, the pay raises for most existing Amazon employees probably average somewhere around 7%, and no where near the 100%+ implied by the doubling of the minimum wage.
Thanks to the Dodd-Frank Law passed after the financial crisis, large public companies are required to disclose median annual pay figures. 2018 is the first year that this requirement took effect. You can read more about it here.
The Wall Street Journal also has a cool site here where you can actually compare your pay to the median pay at other companies.
Amazon’s median pay has been widely made public. It is $28,446 per year! According to the WSJ, that’s about 14% of the median pay at Google, which is $203,185.
If you don’t know what median salary is, it’s the salary of the person who sits right in the middle of the pay pyramid. That is to say, half of the people at Amazon and Google make more than the respective median number, and half make less.
Median salary is not the same as average salary. I would imagine that the average salary at Amazon is actually higher than $28,446, probably much higher; this is because of the huge disparity in income between management/white collar jobs, and the blue collar jobs that are hourly pay.
What is the hourly rate implied by the $28,446 per year? We can calculate that with the following formula:
It comes out to $13.68/hour. This number does not include bonuses and compensation in stocks offered by the Amazon RSU program, both of which are being removed from hourly employee compensation. In a recent New York Time article, an example of how bonus compensation adds to hourly pay is given. From the New York Times:
“…her bonus amounted to $1.28 an hour in August. In the three months around the holidays, that could be more than $2.50 an hour, far more than the $1-an-hour increase in base pay she’s getting.”
If we take the average of $1.28/hour and $2.50/hour, we can come up with a generous estimate for how bonuses impact hourly wages on average over the course of a year. Adding $1.89/hour to $13.68 gives a hourly rate plus bonus payout of $15.57/hour. So already, this exceeds the $15/hour new minimum wage.
How about stock RSU payouts? According to the New York Times, experienced employees, those with 2+ years with the company, were receiving 2 shares per year in compensation. At current Amazon share prices, this comes out to ~$3,500/year. How does this add to hourly wage? Let’s do the math:
It comes out to $1.68/hour. Adding this onto the wage and bonus total of $15.57/hourly comes out to $17.25/hour!
So what does this tell us? First, it confirms the 2016 New York Times excerpt above that employees already make more than $15/hour. Second, it means that the MEDIAN worker at Amazon, the guy who sits right in the middle of the pay pyramid, WAS making $17.25/hour when factoring in bonuses and stock compensation. If Amazon is true to form when it says that all workers will see a boost in total compensation, the new median wage, with the new minimum wage in place, would have to be at least $17.25/hour.
A little side note: why does it not make any sense to look at average salary? In other words, why do we consider median salary instead of average salary? The problem with looking at average salary at Amazon is that a very small portion of the employees skew the average salary much higher than where most employees actually fall. That is to say, a small number of people make orders of magnitude more money than the rest of the employees, skewing the average very high.
For example, if Jeff Bezos is CEO, and he makes $1 Trillion/year, and he has 10 employees, and they each make $30,000/year, the average salary would be $90,909,118,181. The problem is that nobody makes $90.9 Billion/year. That makes the average salary a useless statistic on its own. The median salary would be $30,000/year, because there are 11 total employees, and 5 make more than 30K, while 5 make less. The median is more accurate in depicting the “middle” salary.
The example above may seem unrealistic, but its actually not. Reducing Jeff Bezos salary to 1 Billion, which is accurate, would still leave the average a useless number. The bigger the gap between the average salary and the median salary, the bigger the wealth/income inequality. The fact that the average salary is a useless statistic is evidence that there is a wealth disparity problem in the United States: nobody makes the average; everyone either makes way less, or way more, and the concentration is definitely in the former.
The pyramid structure in capitalist corporate structure implies that, at the bottom, a lot of people each make a little money, while at the top, very few people each make a lot of money.
This fact by itself does not necessarily guarantee wealth inequality. The reason why wealth inequality has become a problem is because the people at the top, the sum of their salaries, is far larger than the salaries of all the people at the bottom put together.
Employees at Amazon Web Services (AWS), for example, easily make 6-figure salaries. According to Business Insider, a Senior Content Acquisition Manager at Amazon makes $164,495.
A Quality Assurance manager (QA manager) at Amazon makes the same amount, but has a salary of $137,898. The rest of a QA manager’s compensation comes from stock payout and bonuses. That type of variable compensation is a huge selling point for employees working at Amazon, and staying at Amazon. That type of compensation is also far more expensive for companies like Amazon.
Why you ask? The answer to that lies in understanding Restricted Share Units, the program by which Amazon awards stock to employees. Amazon requires that employees are vested before the shares are given to them.
That means employees don’t own the shares the day they are given to them. There is a vesting period between the day they are compensated, and the day they are paid out. Buzzfeed is incorrect below when it says,
“…Amazon employees, like many tech employees, receive options to purchase a certain number of shares in the company in addition to their base salaries.”
Restricted Share Units (RSU) are not stock options, and the employees do not have to purchase the shares. They are given the shares. This is an important things to point out, to realize that RSUs are not stock options.
With that said, the vesting period helps Amazon actually avoid paying a lot of compensation. How? Because employees who do not stick around for the entire vesting period, do not get their shares. At a company like Amazon where the employee turnover is extremely high, this works to their advantage.
RSUs also require Amazon to dilute their existing shareholders. What does that mean? It means that when an employee becomes vested, Amazon provides the employee with new shares. New shares means that the number of outstanding shares increases. When the number of outstanding, or floated, shares increases, it means that there are more shares in the market. When there are more shares in the market, the value of the company is diluted across a larger number of shares, meaning each share is worth less, all else equal. Existing shareholders don’t like this.
Think of shareholders as the owners of Amazon; they own the company. The fewer shares outstanding, the more concentrated the ownership of the company becomes. Adding more shares and giving them to new owners, means value is diluted. Again, existing shareholders don’t like that. The face Amazon removed the RSU program when they raised the minimum wage shows that there was a give, but also a take. The below is directly from the Amazon blog posting where the raise to $15 minimum wage was announced.
The spin that Amazon puts on it is that workers prefer to get their compensation now, without having to “vest”. This may be true in some cases, but not all. The “direct stock purchase plan” that is mentioned above is exactly what existing shareholders would want Amazon to implement. That plan means employees would simply be buying existing shares in the market, just as anyone would buy shares in the market. The key is that no new shares have to be issued, and therefore no dilution of existing shareholders occurs.
Notice also that the “RSU grant program for stock which would vest in 2020 and 2021” is being phased out. According to BuzzFeed,
“…5% of Amazon employees’ shares vest in the first year of their employment, 15% in the second year, 40% in their third, and the final 40% in their fourth year.”
So putting the two together, anyone who has 1-2 years left (today is October 2018, so 2020 and 2021 are about 1-2 years from today) to become fully vested, will get screwed. Why? Because in the last 2 years of the vesting period is when employees get the most number of shares awarded to them. It’s entirely possible that Amazon was aware of this. It’s also entirely possible that maybe, as a result of the huge recent returns in Amazon stock, turnover has actually gone down over the past few years, meaning more employees than normal were to become vested in 2020 and 2021. If a large number of new shares would have to be issued, existing shareholders could be diluted substantially.
Basically, there is an argument to be made that the elimination of the RSU program was a way for Amazon to get ahead of a large vesting obligation coming due in 2020 and 2021, and the minimum wage increase was simply a way to offset the flak they would otherwise get from the elimination of the program.
There is also an argument to be made that the magnificent rally in Amazon’s stock is a big driver behind the elimination of the RSU program. The chart below shows that in January of 2015, Amazon’s stock price was ~$300. Today, October 10, 2018, even after a massive sell-off in the market, the stock is trading over $1,700 per share; it was trading over $2,000 per share a week ago. That is a 600% in a little less than 4 years. Quite frankly, amazing.
With that said, much of the rally in Amazon stock was due to cheap money; because interest rates have been so low, investors have bought the entire market, not just Amazon, in search of yield. The cheap money environment, as communicated by the Federal Reserve, is now over. That means there is a substantial potential for stock market valuations to come down quite a bit; Amazon would not be immune to this. Today’s market sell-off may be just the start.
So what’s the point? Diluting existing shareholders during a rising rate environment is a double whammy; shareholders lose money on declining stock market valuations due to rising interest rates, and then they also lose money on the RSU program when new shareholders are issued shares, diluting valuations.
There is also a third potential effect; if new shareholders get their shares at a time when the market is in decline, new shareholders may immediately sell to protect their compensation and avoid losses. Amazon could perform a share buyback in response, to take those shares out of the market immediately, but the share buyback would mean using profits from the business, or borrowing money, to conduct the buyback. In a rising interest rate and declining stock market environment, using cash or loans in this way is bad, especially when there’s a simple way to avoid it all: discontinue the RSU program.
And that’s exactly what they did.
By the way, the RSU program is only being eliminated for hourly employees. They are the “weak hands”, i.e. shareholders most likely to see in a market decline. How many of them does Amazon employ? 250,000! Let’s say on average Amazon had to issue 0.5 shares per hourly employee as part of the RSU program. That means adding 125,000 shares to the outstanding float every year!!! That is some serious dilution!
Macrotrends provides us with the following data on Amazon outstanding share count for the past few years:
- Amazon shares outstanding for the quarter ending June 30, 2018 were 0.500B, a 1.63% increase year-over-year.
- Amazon 2017 shares outstanding were 0.493B, a 1.86% increase from 2016.
- Amazon 2016 shares outstanding were 0.484B, a 1.47% increase from 2015.
- Amazon 2015 shares outstanding were 0.477B, a 3.25% increase from 2014.
Clearly, the increasing number of outstanding shares at Amazon has been an issue, as evidenced in the above.
Amazon is considered a Consumer Cyclical company. Cyclical means the business goes up and down with the business cycle and economic conditions. The short of it is that when unemployment is low, wages are stable, and corporate profits are high, consumer cyclical stocks make a lot of money.
Examples of such stocks are automotive, housing, and retail stocks. Amazon is a retail stock primarily, although recently it has experienced explosive growth in web services (cloud computing) and advertising.
With that said, the 250,000 employees we mentioned earlier, most of them, possibly almost all of them, work in Amazon’s retail business. It is safe to say that the business cycle in the US is turning; the business cycle is correlated with interest rates. The Federal Reserve is making an attempt to cool off the economy, and higher interest rates will turn the business cycle, which will hurt Amazon’s retail business.
The conclusion? Removing the RSU program for these hourly employees makes sense if the business cycle is turning to the downside. Consumer cyclical stocks will see reduced valuations.
Jeff Bezos, the founder and CEO, has never disputed that Amazon is a low paying place to work. He’s been actually quite candid about that fact. This probably has to do with the very modest origins of Amazon. There’s a great 60 Minutes piece below that is worth a watch to get an idea exactly how modest Amazon’s origins actually are.
Amazon has caught a lot of flak over the past few years because of how it has devastated the competition in the retail space. Many accuse it of being a monopoly in the retail space. Amazon benefited for a long time from the fact that it did not have to charge sales tax. In my state of Illinois, Amazon was not incorporated, therefore, I never paid tax on any purchases. Consequently, I bought everything off Amazon; other retailers had to cut prices to compete, and many to the point they had to shut their doors (anyone remember Borders Books?)
For a long time, Amazon simply served as a broker of products, a place sellers could place their products for sale. That meant it didn’t even have to warehouse most stuff sold on its site. As Amazon grew, and sucked retailers into its platform, it began to offer logistics, warehousing, and shipping, to its sellers.
When this happened, it began building warehouses all over the country to make sure products were available all the time. It charged sellers for this service, and therefore it was able to keep prices low, at the expense of sellers. Sellers of course, found that there was nowhere else they could go to get the same customer reach; quite simply, Amazon monopolized the consumer and the producer to its retail platform.
The below chart shows the extent of that monopoly; traffic to Amazon.com is larger than Walmart.com by 57%, and larger than Ebay.com and Target.com combined!
For a long time, Amazon very rarely made a profit. In the below chart, you can see that net income at Amazon only recently exploded higher, much of it thanks to advertising and Amazon Web Services (cloud computing).
The reason why Amazon’s advertising revenue has exploded is because of the traffic it’s getting to its site. Amazon has become formidable competition to Facebook and Google, on the advertising front, because of the traffic it has diverted away from other retailers, and to Amazon.com. To get an idea just how explosive the growth in advertising has been recently, check out the following graph from Recode.
So how does this relate to the hike to $15 at Amazon? Well, as the Wall Street Journal recently noted, world-wide, Amazon has 575,700 full time employees. WSJ notes that’s 4 times the size of Microsoft, Apple, and Oracle. Quite frankly, when you employ that many people, it makes sense to try and make them as happy as possible. Populism in itself makes it so politicians feel compelled to attack companies like Amazon. Bernie Sanders especially made it a point to attack Jeff Bezos at every turn. Recall that Bernie Sanders was a powerful force in the 2016 Democratic primaries. Some say corruption within the Democratic party was the only reason Hillary Clinton and not he, got the nomination. Bernie Sanders is a populist candidate; his tweets certainly should concern Jeff Bezos.
Here’s a Bernie Sanders tweet prior to the announcement of the Amazon minimum wage raise:
This is what oligarchy looks like. This is what greed is doing to our country.
Amazon (whose CEO, Jeff Bezos, is the richest person in the world) used its enormous power to kill a modest tax designed to address the affordable housing crisis in Seattle.https://t.co/n0esx7VlsJ
— Bernie Sanders (@SenSanders) June 13, 2018
And then after the hike, and a response by Jeff Bezos:
Thank you @SenSanders. We’re excited about this, and also hope others will join in. https://t.co/kasWkkOhWo
— Jeff Bezos (@JeffBezos) October 2, 2018
It’s not a surprise that many people are calling for and trying to organize Amazon employees; community organizers and labor unions realize the power of numbers. Amazon wants to avoid unionization at all cost. They don’t want to deal with potential union strikes. UPS nearly experienced one over the summer; in that case, a strike could have done serious damage to UPS going into the holiday season. Amazon and UPS are in similar businesses in terms of logistics; Amazon wants to avoid unions like the plague.
The New York Times reported back in 2016 that unions have not been able to penetrate Amazon, yet. When that article was written, Amazon employed 90,000 people. Today, it employs nearly triple that, and most of them work in the warehouses and distribution centers where unionization would be most effective.
Amazon needed the optics of Senator Bernie Sanders congratulating Jeff Bezos. It needed to take the focus off its success! That in itself was reason enough for increasing the minimum wage to $15. Amazon also needs to get ahead, today and in the future, of any labor issues, pay included. In the ever tightening labor market (we’ll talk about that next), Amazon will give a little, so that it can continue to make a lot.
Record Low Unemployment
The AVERAGE hourly wage for workers in the United States is $22.73 / hour. We can see that from the below chart. We can also see that average hourly wages have been rising.
The fact that hourly wages have been rising means that wage inflation is real, and here to stay in the near future.
The market for jobs is extremely tight today, in October 2018, going into the holiday season. The most recent unemployment report released by the government put unemployment at 3.7%. In order to attract temporary employees for the holiday season, the Amazon raises made sense.
In this article by Gizmodo, a leaked email by the Whole Foods CEO shows that experienced Whole Foods employees would see nowhere near the benefits from the raises, as would new employees. At most, for supervisors, the raise would be $2/hour, and for anyone making $14/hour, their raise would be $1. Another article by Bloomberg seems to confirm that information, although Bloomberg claims some workers would see a raise of $1.25. According to Gizmodo, one employee said that,
“…veterans of the company are the ones feeling shafted. “This means that I will make only a dollar more than new team members and I’ve been promoted 5 times while being here almost 6 years,” a current Whole Foods employee told Gizmodo via email. “I’d like to hear from John Mackey why my years of work and dedication under their constant missteps is worth only a dollar more than a new team member.”
There is no doubt that new employees will feel the raises far more than experienced employees, given that the US Federal minimum wage is currently $7.25/hour. This is further proof that Amazon’s intent is to attract new workers; retaining experienced employees seems to not be the priority, especially since the departure of experienced employees in protest will save Amazon lots of money on RSU payments.