Leave it to an ex-literature major to read his annual Social Security statement as a life narrative. But that’s exactly what I did. You see, my driver’s license expired just after the COVID-19 pandemic broke out, and I’m only now able to schedule an appointment at the DMV to renew it. New York State is now issuing enhanced REAL ID licenses, however, which require you to prove your very existence to the nice ladies behind the plexiglass. Fortunately, the state provides a handy checklist of items to bring to your appointment, including passport, bank statement, and, unexpectedly, a Social Security statement. I mean, damn, if they already issued me a driver’s license, why all this extra checking? But I digress.
In any case, before I paper-clipped all those materials together for my DMV visit later this month, I took a gander at my earnings history. And, let me tell you, it was totally fascinating—and a little humbling. First of all, I don’t know how I even ate during my first year of graduate school when my earnings totaled $4,067—that’s $339 per month. My wife, who happened to be my roommate back then, jokes how we subsisted on Top Ramen and pilfered toilet paper from the UVA bathrooms; and now I remember why. The next year saw a stratospheric increase to $10,956, after I graduated and took a full-time job. I remember feeling pretty flush that year. What really struck me about the report, though, was how little dough I earned even when I owned a business and enjoyed total discretion in setting my salary. In fact, my earnings were downright pathetic until 1998—seven years after I set out on my own, by which time company revenues were in the millions. And the only reason I took a pay increase that year was because my volunteer board of directors said, Jim, you really aren’t paying yourself enough. After that meeting, I remember discussing their recommendation with my CFO, almost as if I were asking his permission to take home more of the kitty.
Chef Eats Last
From that point on, my board kept an eye on my salary and encouraged me at various points to adjust it based on the company’s financials. About the same time, I got more scientific in how we paid bonuses to our staff; my CFO and I developed a sliding scale that awarded year-end bonuses based on achieving certain individual and collective targets. We also considered the company’s cash-flow needs and any capital investments we planned to make in the coming year. After those factors were taken into account, the CFO and I would decide what a prudent bonus for myself would be. In other words, the chef ate last, which is how I’ve always thought businesses should be run. That’s not to say I short-changed myself, but I certainly didn’t get rich that way, either. I felt strongly that one of the key markers of a successful business was how well one’s staff get along in life—whether they can afford to buy homes, take relaxing vacations, tend to their health care needs, and generally make a comfortable wage. In fact, I took greater pride in those “human” benchmarks than in the company’s net profit margin. I’d always taken the view that one should work to live, not live to work.
When the time came to sell my business, that point of view worked against me. Rather than try to wring as much profit out of the business as I could—which looks good to prospective buyers—I settled for ho-hum profit margins. And only by projecting legitimate EBITDA add-backs and prudent reductions in SG&A could I justify a reasonable sale price. Fortunately, I found a buyer who saw the value in our business and was able to realize the savings I projected. Undoubtedly, though, I could have walked away with 25 to 50 percent more cash had I been ruthless in slashing payroll and overhead costs to plump up profits. But that wasn’t my style.
Is Earning a Profit Moral?
So, it was puzzling to me when a social media detractor and ex-employee remarked, as if she were unmasking a financial villain, that I was in business for the money. When I saw the comment I laughed, because anyone who knows me well understands how ludicrous such a statement is. But I also found myself exploring the question her comment raises by implication: Is it okay to be in it for the money? These days, that question takes on a fiercer urgency because millennial employees increasingly demand that their employers have a moral conscience and deploy their profits in a way that improves society. And I’ve long been interested in the convergence of business and moral purpose, so this was more than a casual investigation for me.
One of the ways we shared our profits—and a useful benchmark for a company’s attitude toward its people—was in the form of bonuses to staff. Our bonus model roughly followed these rules: After we calculated net profits for the year, we allocated roughly one-third to employee bonuses. Then we set aside funds for capital investments like furniture, upgrades to enterprise software, and so forth. And of course, we retained some portion of earnings to ensure we had enough cash on the balance sheet for a rainy day. After all that, I would pay myself a variable portion of the remainder. Obviously some years were better than others. If we blew our projections out of the water, I had a great year end. If we fell short, not so much. Recently, when I researched what is typical for a company to bonus out to employees, I couldn’t find a reliable rule of thumb. It varies by position and industry, though 2.5 to 7.5 percent of payroll (and occasionally as high as 15 percent) seems to be the norm (that from Salary.com). By any of the standards I found, we were very generous—perhaps too generous because, ironically, by investing some of that bonus money in growth, we could have created more jobs.
Business As Social Good
These days, it’s popular, almost de rigueur, for businesses to present themselves as purpose-driven, to align themselves with a particular cause and funnel some portion of profits in that direction. A well known example is Bombas socks (my favorite footwear brand) that donates one pair of socks to the homeless community for every pair sold. Simple formula, simple purpose. As of April 2020, they had donated a stunning 35 million pairs of socks. It’s a wonderful story, but it’s also important to remember that Bombas couldn’t produce, sell, or donate a single pair of socks unless its business runs properly and generates a healthy self-sustaining profit. Only then can its stated social purpose be fulfilled. So, if Bombas never donated a single sock, does it still serve a social good? The answer is, of course, yes. In fact, at their best, businesses serve the most powerful economic good of all: providing people with jobs and health care benefits so they can lead productive, happy lives.
As I write this, unemployment sits at 11.1 percent, up from 3.5 percent in February, 2020—before COVID-19 barged into our lives. That’s a lot of people struggling to pay rent and make mortgage payments. As all these businesses struggle to get back on track, I find myself rooting for them. And, of course, I hope the many purpose-driven businesses can stay committed to their social causes. We need that kind of conscious capitalism now more than ever. But I also hope these businesses can just earn enough cash to stay afloat—to serve their greatest social function of all, paying their employees, providing benefits, and reinvesting in their communities.
The Right Questions to Ask
So what did my Social Security statement tell me about my practices as a business owner? And what response do I make to my disgruntled ex-employee? You’re damn right I was in it for the money. Because at its apex, our company provided a livelihood for 50-plus fabulous, dedicated people. And the bonuses we paid with that filthy lucre funded vacations and college educations, kayaks and camping gear, televisions and laptops. The question for employers should not be whether they’re in it for the money, but how ethically they invest the money they earn. Do they compensate their employees fairly? Are their benefits packages competitive? Do they provide a safe, open-minded, and ennobling work environment? Do they reinvest in their community? Do they fund philanthropic causes?
As for me, my greatest point of pride as a company owner was not the service we provided, nor our client retention rate, nor even our year-over-year revenue growth. It was always that we helped a group of great people build their lives. We got a million things wrong along the way—that’s just part of building a business—but if we helped pay for just one kid’s college diploma, I can sleep at night.