Is Capital or Labor Winning at Your Favorite Company? Introducing the Marx Ratio
Posted May 21, 2018 8:39 p.m. EDT
Who benefits the most when a company is successful: Its shareholders or its employees? Capital or labor?
It is a question that speaks to some of the oldest debates in economics. But now, thanks to a minor provision in the 2010 Dodd-Frank financial reform law, we have a tool for measuring, in rough terms at least, how much any given publicly traded firm rewards its shareholders relative to its rank-and-file employees.
Behold, the Marx Ratio. We named it for the 19th-century economist and philosopher Karl Marx, who argued that the interests of capital and labor are inherently in tension. His intellectual adversaries argued that those interests are in fact aligned, as successful companies inevitably reward both capital and labor.
We take no stand in that debate. But we have come up with a simple way of calculating how the fruits of any given company’s success are distributed.
The Marx Ratio captures the relationship between a company’s profits — the return to capital, on a per-employee basis — and how much its median employee is compensated, a rough proxy for the return to labor.
Companies with high Marx Ratios offer particularly strong rewards to their shareholders relative to workers. For example, the pharmaceutical company Pfizer had a Marx Ratio of 2.64, meaning the per-employee earnings captured by shareholders were about 2.6 times as high as the compensation a typical employee received. Numbers below 1 signal the reverse: a more favorable return to labor. The Marx Ratio of 0.498 for the health insurer Aetna means that it earned only half as much per worker for its shareholders as it paid its median employee.
Companies with high Marx Ratios also included the tobacco giants Altria and Philip Morris International; consumer products companies like Kraft-Heinz and Colgate-Palmolive; fast food giants McDonald’s and Yum Brands (parent of KFC, Taco Bell and Pizza Hut); and almost all real estate investment trusts.
Those that favored workers more tended to be in labor-intensive industries. They included the huge retailers Walmart and Amazon, hotel companies like Marriott and Hilton, and both Coca-Cola and PepsiCo.
Companies that record a net loss consequently have a negative Marx Ratio. For those companies, which in 2017 included General Electric and Citigroup, shareholders lost money while workers still got paid.
Of the 394 companies in the Standard & Poor’s 500 that had reported their median compensation number by May 3, the median Marx Ratio was 0.82, meaning at a typical company the median pay was higher than the profit generated per worker. Beginning this year, the Dodd-Frank Act requires publicly traded companies in the United States to disclose their median employee compensation: how much pay the person in the middle of their distribution receives. The research firm MyLogIQ compiled the data; the remaining companies have more time because of the dates of their fiscal year.
Median compensation is an imprecise measurement of how much of a company’s returns flow to labor. Among other things, it can be distorted by companies’ use of contract and part-time labor, and a median pay number inherently fails to capture the full range of how a company’s workers are paid.
Given those flaws, the Marx Ratio is not some definitive measure of how a company affects the economy and society. Rather, it is a tool for understanding the differences between companies and industries. In particular, the more a company’s ability to generate profits is driven by things shareholders own — patents, a well-known brand or capital goods like machines and real estate — the higher its Marx Ratio will tend to be.
To see how the Marx Ratio can help you understand the competitive dynamics and economic structure of an industry, consider how the numbers vary across well-known companies in some prominent industries.
Wall Street: Leverage Counts
Wall Street may be the ultimate bastion of capitalism. But some of the highest Marx Ratios in the financial industry are not found at the companies stocked with cutthroat traders and deal-makers. Rather, the business of commercial banking — accepting deposits and making loans from branches around the United States — features a higher return to capital relative to labor.
So for example, Wells Fargo has a Marx Ratio of 1.4, and JPMorgan Chase came in at 1.2. By contrast, Goldman Sachs’ number was only 0.9 and Morgan Stanley’s was 0.8.
In effect, the profitability of those commercial banks is driven by things the company controls: their network of branches, their information technology systems, their brand reputation. Their employees, who include lots of bank tellers and loan officers, have little leverage with which to demand high pay; the median compensation at Wells Fargo was around $60,000.
By contrast, the investment banks employ a lot more highly compensated, highly sought-after professionals, who in turn can demand premium salaries. The median compensation at Goldman was about $135,000. Those workers were more successful at claiming the value the organization created.
BlackRock, the giant asset management company, pays Goldman-esque salaries (median compensation: $141,987) but manages to have a higher Marx Ratio than either commercial or investment banks, as it is able to manage a huge $6.3 trillion with a lean 13,900 workers.
Big Tech: A Profit Divide
You see similar divides among the most powerful giants of the technology industry.
Facebook is wildly profitable, generating almost $635,000 in earnings per employee for shareholders. It also pays those employees extremely well, with median compensation of $240,340, for a Marx Ratio of 2.64.
More of Facebook’s success accrued to capital — to the company’s owners — than to labor. Its profits are driven by the network effects that keep both users and advertisers wedded to it, which are owned by shareholders. Rank-and-file software developers and advertising sales workers have less ability to extract a big chunk of the value being created.
By contrast, Amazon is not very profitable — it is plowing most of the earnings from its mature businesses into longer-term investments in emerging ones. And its core retail business has low profit margins and requires vast armies in distribution centers and, with the acquisition of Whole Foods, grocery stores.
With earnings per employee of only $5,359 and median compensation of about $28,000, Amazon has a Marx Ratio that is a mere 0.19. So far, neither the median Amazon worker nor Amazon shareholders are being rewarded very handsomely.
Other prominent tech companies are somewhere in between. Alphabet, the parent company of Google, generates a healthy $158,000 in profit per employee, but like Facebook has a high median pay of $197,000. That’s good for a Marx Ratio of 0.8. Other notable tech companies like Apple and Microsoft have not yet reported a median compensation number, but are also likely to end up in that middle ground once they do — Apple had earnings per employee in the most recent fiscal year of $393,100, and Microsoft came in at $171,000.
The Extremes: Size and Risk
The highest Marx Ratios were found at real estate investment trusts: companies with a favorable tax structure devised to invest in real estate. Publicly traded REITs in the sample had a median Marx Ratio of 4.13, higher than any other category of companies.
This makes sense, as these companies work more as vehicles through which to deploy capital toward real estate than as conventional operating businesses. The highest Marx Ratio, for example, at 38, was for Duke Realty, an Indianapolis-based company that manages $6.2 billion worth of industrial real estate with a mere 400 employees (who, we might add, are well compensated, with median pay of $109,695).
Some of the highest Marx Ratios — as well as some of the lowest — are to be found at oil- and gas-related businesses. This also makes sense. Energy companies are making huge bets, often with borrowed money, the success of which depends on the future market price and on their ability to extract petroleum.
That explains how EQT Corp., a Pittsburgh-based natural gas producer, had one of the highest Marx Ratios among non-REITS (7.1), while Houston-based oil giant Marathon Oil had the lowest in the sample (-18.9). Marathon’s $5.7 billion loss was due mainly to the sale of a Canadian oil sands business.
Low oil and gas prices were bad news for many energy shareholders. Overall, the energy sector accounted for four of the five lowest Marx Ratios, a list that also included Hess, Noble Energy and NRG Energy.
It is a good business for shareholders to be in when things are going well, but the risk they are taking on is real.