I write this at the end of the second round of the National College Athletic Association’s Men’s Basketball tournament, also known as “March Madness.” (The tournament is now done, of course.) As part of this college tournament, 64 college basketball teams compete to be the champion of college basketball. Per NCAA rules, each team can have up to 13 players on the roster on scholarship. That makes 800+ student athletes, who in exchange for their scholarships, but otherwise don’t get paid, sell out arenas so their schools, NCAA, and television networks can make a lot of money. Now being out of college for nearly a decade, I now firmly believe that college athletes, specifically those in revenue sports (football and basketball), should be paid. Here’s my argument, in part.

What’s that scholarship worth?

One of the perennial schools in the NCAA tournament is the University of Kansas Jay Hawks. What’s the cost to attend Kansas for one year? $25,000 for in-state students, and $41,000 for out-of-state students. Given that student athletes have restrictions on working jobs outside of school, out-of-state tuition and the cost of living, that translates to about $21/hour, which, I’ll admit, looking at any other job for an 18- to 21-year old, isn’t terrible. Certainly well above minimum wage.

The problem is that the student athletes aren’t the only people in this system. There are also NCAA executives and basketball coaches.

Let’s look at the NCAA and the tournament specifically. In 2016, the NCAA made $1,000,000,000 ($1B) off the tournament. Of course, they need to pay a lot of people to run the tournament, rent venues, everything, but that’s still a lot of money, and none of it going to the 800+ players.

I think the NBA is a good reference point: pursuant to the NBA player’s association union contract, the players get 50% of the league’s revenues. Applied to the NCAA tournament, that’s $500M split between the 832 scholarship players, or just about $600,000/player. That’s a lot more than a $41,000 scholarship. Where does that money go instead?

Mark Emmert, the President of the NCAA, made more than $2,400,000 in 2016, or 58x more than the value of one year of scholarship at one of the best basketball schools in the country. That may be relatively small compare to the other executives I’ve looked at on this blog, and I’m sure he has a range of responsibilities, but if you’re a college basketball fan – did you know Mark Emmert’s name? How about the star player on your college basketball team? Do you watch college basketball because of the efforts of Mr. Emmert? Or do you watch because of the actual players playing the game?

Well what about the a man you may know if you were a Jay Hawk basketball fan? Bill Self, head coach of the U. of Kansas men’s basketball team, made over $4 Million this year, or almost 100x more than the value of one year of scholarship.

You might say, well, all those student athletes (a) get a college degree out of it and (b) have a chance to make it in the NBA and make real money.

(a) Of the 15 players on the Kansas team, at the time of writing of this, 10 had not declared a major and 1’s school website biography didn’t even speak to his major. THIS ISN’T A KNOCK ON THE PLAYERS. It’s not a secret that athletic departments steer athletes to less rigorous majors. When I was in college, the joke major that would appear on ESPN when any one football player was highlighted was “General Studies”. So to say that players are getting the best-in-class education their peers are getting, is just not true.

(b) 60 players get drafted to the NBA per year. Of those 800+ players playing the in NCAA tournament, that’s less than 10%. If you’re a professional, can you imagine if only 10% of your class got jobs after graduation? I thought my law school’s 50% employment rate at the bottom of the recession was bad.

And that’s only for the teams and players featured in the tournament. Less than half of Division 1 college teams make the playoffs, which makes that promotion percentage less than 5%. Put another way 95%+ of college basketball players don’t make NBA money.

In my eyes, these players are taken advantage of. Not all, but certainly some of these players do not come from wealthy, or middle class families, and $600K would make a significant difference in their and their families’ lives. I think what the NCAA does is terrible, and while this won’t ever be the case, if I’m ever in a position to change the way this system specifically works, I hope I help to make that change.

Pay your people,
The Anxious, Amateur Economist

I know a few people who have Type 1 Diabetes. Diabetes is a metabolic disorder that results from the pancreas’ inability to produce enough insulin. One way to treat diabetes is with insulin analog, which was developed in the 1940s. Left untreated, diabetes can be deadly. Today, a few pharmaceutical companies make insulin analog, one of them being Eli Lilly. Lilly produces a family of products under the name Humalog. Lilly has also been accused of increasing the cost of its insulin products, making it untenable for some of those with diabetes to manage their disease.

What I’m getting at it, is that diabetics are effectively a captive consumer base. They need insulin to live. Humalog specifically was approved in 1996. That year, a vial was $21. In 2017, a one month supply was $275. That’s a 1300% increase over a 21-year period. (For reference, inflation over that same time period was just 56.2%). My opinion: that’s a gross thing to do when it’s seriously impacting people’s health.

Having reviewed Lilly’s 2017 annual report, there are three things I want to discuss. (1) executive compensation and Lilly’s profits (big surprise); (2) their marketing budget; and (3) Cialis.

Executive Compensation.
First, some quick hits:
1. CEO, David A. Ricks, made $15.8M in 2017.
2. Total executive compensation for 2017 for 5 executives = $46.7M.
3. Lilly posted $2,737M ($2.7B) in income in 2016.
4. Humalog’s revenues in 2016 were $2.7B.
5. Lilly’s margin on pharmaceuticals in 2016 was 73.4% (meaning the cost of actually making the product is only 26.6% of the price).
5. In 2017, Lilly issued a dividend to its shareholders of $2.25/share (or $590M).
Conclusion/Editor’s Note: Lilly’s executives could have: (a) dropped the cost of Humalog by 20% instead of issuing their dividend or (b) halved the cost of their insulin products and still posted an $1.3B in income in 2016, but instead chose otherwise.

Marketing Budget. Lilly spent $6.5B on their marketing budget in 2016, more than double their revenues from Humalog. Going back to their insulin product – what if they just sold Humalog at-cost, or at 26.6% of the actual price (assuming the average margin)? If they took all lost revenue out of their marketing budget, they’d still be doing $4.5B in marketing. But instead, charged $275 for medically necessary insulin. With a captive consumer base for their biggest drug, what is it that they need to market?

Cialis. Lilly doesn’t just produce insulin. They also produce Cialis, which, if you don’t know, is for the treatment of erectile dysfunction. Lilly’s 2016 revenues from Cialis? $2.4B. How much would Lilly have to increase the cost of Cialis to be able to offer Humalog at cost? 82.5%. Is saving people’s lives worth the cost of paying twice the amount for an erection?
Editor’s Note: YES!

This had nothing to do with employee pay, but I think highlights the business practices of Corporate America, and I think something worth paying attention to. Is this what we want? Are you an owner of Lilly stock, and thus an owner of this company? Is this what you support?

I don’t want this.

Pay your people and try not to kill them,
The Anxious, Amateur Economist

Amazon was in the news last month.  Amazon paid $0 in federal income taxes last year (2018), despite making record profits of $11.2 BILLION.

This whole thing makes better sense if we answer the question: why do we, the general public and corporations pay taxes? The short answer is that we benefit from having a government, and that government has bills to pay. 

The benefits of a government? The short list: (1) infrastructure (e.g., roads and airports); (2) defense (e.g., army); and (3) rules (e.g., courts and enforcement agencies to make sure everyone plays by the rules, i.e., stability). 

The cost of any one of those things is too great for any one person or company to invest in and see a justifiable return; but when we all invest a portion, the return is/should be worth it.

Back to Amazon. Over 2018, Amazon’s stock increased from $1,229/share on January 5, 2018 to $1,539 on January 2, 2019.  That’s a 25% increase in value (compare that US Dept of Treasury rates on 10-Year Treasury Notes, a proxy for what you could be getting on your savings account balance, which went between 2.4% and 3.2% in 2018).  Amazon was a WINNER in 2018.  A winner that made it in the U.S. economy. And yet, they paid nothing towards the system.

Well they created a lot of jobs? Okay.  In their 2017 Annual Report, reports 560,000 employees (compare to 140,000 Boeing employees, or x4 as much).  They actually go on to claim having added more than 130,000 jobs (Page 4 of CEO Jeff Bezos letter to shareholders).

But are those 130K jobs good jobs? In their pay ratio disclosure, Amazon discloses that their media compensated employee made $28,446 in 2017.  (Compare that to Boeing, whose median employee made $100K+, or about x4 more.) 
Put another way: HALF OF AMAZON’S EMPLOYEES MADE LESS THAN $29K IN 2017.  That translates to less than $14/hour (assuming 40-hour weeks, 52 weeks/year).

How does that compare to their CEO compensation? Jeff Bezos – arguably the most visible executive at Amazon – is reported to have been compensated $1,681,840 ($1,600,000 of that being for “security arrangements”).  Mr. Bezos has taken a ceremonial pay freeze and only drew a salary of $81,840 in 2017.  That results in a reported pay ratio of just 1-to-59 (compare to the 1-to-166 at Boeing).  Mr. Bezos’s compensation isn’t what caught my attention though. 

Jeffrey Wilke, CEO of Worldwide Consumer had reported compensation in 2016 of $32,958,114.   

The public company reporting requirements only require a statement on the CEO-to-median-employee ratio. So what was Mr. Wilke’s pay ratio compare to 2017 median employee salary?  1-to-1,158! (I can’t find their media employee compensation report for 2016).  Even considering that his stock compensation is only vested (paid) every three years, that’s still a 1-to-386 ratio.

Looking back at the previous blog post, that arrived at a baseline of 1-to-80: EDITORIAL: W.T.F.!

So: (1) one of the most “winning” companies in the country paid nothing for working within the government; and (2) it felt one its executives brought enough value to be paid more than 1,000 times more than its median employee.  What else could there be?

In 2015, the “living wage” (or what the “working poor” would need “to achieve financial independence while maintaining housing and food security”) was $15.12/hour ($1 more/hour than half of Amazon’s workforce) or $31,449/year ($3K/year more than half of Amazon’s workforce).  What happens when someone doesn’t make a living wage? They get government assistance, e.g., housing assistance or food stamps.  And that actually happened with Amazon’s employees.

What does that mean? You and me, friend, whose reading this – our taxes effectively subsidized Amazon’s business and shareholders. 

Also, $15.12/hour is a national number.  Amazon has a registered address in Seattle, Washington.  The living wage in Seattle? $34.46/hour.  More than double.

EDITORIAL: W.T.F.!

Let’s look at some trade offs.

1. What if in 2017, Amazon only had a 14% increase in stock value instead of 25%? How many employees could they have given $1K/month ($12K/year) raises to?  Amazon’s market capitalization on 1/3/2017 = $369B.  Amazon’s market capitalization on 12/29/17 was $576B.  If they had only seen a 14% increase = $420B maket cap.  The difference? $156B.  Divided by $12K discounted at 5% rate to account for future value (an effective value of $240K)?  650K employees (more than its workforce) could have received a $1,000/month raise, and Amazon could still have had a 14% annual increase in stock value.  Put another way – it could have given +$24K/year to the bottom half of its employee base.
2. What if, instead of $32M, their CEO of Worldwide Consumer made $10M? How many employees could they have given $1K/month ($12K/year) raises to?  $22M divided by $12K = 1,833 employees.

So who determines what CEOs get paid? Shareholders and the board of directors.  Amazon reported 9 independent directors (all independent except Bezos) in the same proxy where Mr. Wilke was paid $32M: (1) Tom Alberg; (2) John Seely Brown; (3) Jamie Gorelick; (4) Daniel Huttenlocher; (5) Judith McGrath; (6) Jonathan Rubinstein; (7) Thomas Ryder; (8) Patricia Stonesifer; and (9) Wendell Weeks.  Huttonlocher, McGrath, and Rubinstein are on the “Leadership Development and Compensation Committee”.  The Board recommended a vote “for” approval of their executive compensation structure.

EDITORIAL: What the hell, guys?

This was all in the name of “long-term shareholder value.” Which will be for another post.

Again, I ask – is this really how we want to be valuing people?  Such that an executive can make x1000 more than another company employee?  Are you an Amazon shareholder that supported this executive compensation?

PAY YOUR PEOPLE,
The Anxious, Amateur Economist

Thanks for joining me!

Good company in a journey makes the way seem shorter. — Izaak Walton