2017/10/18

America's Richest Sports Team Owners 2017


Entry to the Forbes 400 is harder than ever, with a minimum net worth of $2 billion needed to crack the list of richest Americans. The bar for entry is up 18% from last year thanks to a booming stock market. The world of sports is well represented, with more than 10% of the 400 owning a major sports team.
Franchise owners are profiting from a media landscape in which they can command blockbuster contracts from broadcasters for the rights to televise live sports at a time when more and more Americans are streaming ad-free content on demand or recording it for playback on commercial-skipping DVRs. There are 87 sports teams worldwide worth at least $1 billion.
Los Angeles Clippers owner Steve Ballmer. (Photo by Mike Windle/Getty Images for WE Day )
Steve Ballmer retains his hold as America’s richest sports team owner for the fourth straight year with a net worth of $33.6 billion, up $6.1 billion from a year ago and No. 15 among all Americans.

Ballmer dropped out of Stanford’s MBA program to become Microsoft’s 30th employee and served as its CEO between 2000 and 2014. He bought the Los Angeles Clippers for a record $2 billion the same year he stepped down.
Microsoft’s stock is up 35% over the past 12 months, fueling the gains in Ballmer’s net worth. The Clippers are in a transition stage with the departure of perennial All-Star Chris Paul, who was traded to the Houston Rockets in July. Blake Griffin is the team’s centerpiece now after signing a five-year, $173 million contract this summer.
Ballmer is looking for a new home for the Clippers, who share the Staples Center with the Los Angeles Lakers. He entered negotiations in June with the city of Inglewood to explore the possibility of building a new arena there.
Another Microsoft alum, Paul Allen, ranks as the second richest sports owner in the U.S. Allen co-founded the company in 1975 with high school friend Bill Gates, who has topped Forbes' list of the richest Americans for 24 straight years. Allen has sold most of his Microsoft stock since leaving the company in 1983 after being diagnosed with Hodgkin’s disease (he beat it).
Allen owns the Seattle Seahawks and Portland Trail Blazers. His net worth jumped $1.7 billion to $20.6 billion.
We only counted sports owners who hold a majority stake or are the managing partner of a major sports franchise. We did not include cases where ownership is spread across a family like the Steinbrenners (New York Yankees) and Glazers (Manchester United and Tampa Bay Buccaneers).
There are more than a dozen billionaires with minority stakes in teams like Steve Jobs’ widow, Laurene Powell Jobs ($19.4 billion), who recently purchased an estimated 20% stake in Monumental Sports & Entertainment, which includes the Washington Wizards, Washington Capitals and the arena they share.
The 43 owners control 55 teams combined, with 11 owners possessing multiple teams. The combined net worth for the 43 sports team owners is $238 billion. The newest member of the exclusive club is Tilman Fertitta ($3.5 billion) who closed on his $2.2 billion purchase of the Houston Rockets this month.
Following Paul Allen. rounding out the top five richest owners is Philip Anschutz ($12.6 billion), owner of the Los Angeles Kings and LA Galaxy, Miami Heat owner Micky Arison ($9.4 billion) and Stanley Kroenke ($8.1 billion), whose sports empire touches the NFL, NBA, NHL and European soccer.
The average NFL franchise is worth $2.5 billion, and not surprisingly football owners are the best-represented sports league among the 400. Eighteen owners made the cut, led by Allen, Kroenke and Stephen Ross ($7.5 billion). The NBA landed 15 owners on the list, followed by nine in MLB with Charles Johnson ($5.9 billion), Marian Ilitch ($5.2 billion) and Ted Lerner ($4.9 billion) on top.
Sports have paved the road to riches for many other Americans outside of team ownership. Nike founder Phil Knight is worth $25.2 billion and ranks as the 18th richest person American. Last year he pledged $500 million to the University of Oregon and $400 million to Stanford, his alma maters. The net worth of Fanatics owner Michael Rubin got a boost in August when SoftBank announced a $1 billion investment in the sports merchandise online retailer. Rubin is worth $2.9 billion, up $600 million. Frank and Lorenzo Fertitta are each worth $2 billion after selling their mixed-martial-arts firm UFC for $4 billion last year to WME-IMG.
Several Forbes 400 members from the world of sports dropped off the list this year, including Under Armour founder Kevin Plank ($1.7 billion). His net worth is off $1.3 billion after a 60% decline in the stock price of the sports apparel maker. Nascar's struggles caused a $300 million drop in the net worth of James France ($1.7 billion) who owns an estimated 36% of the stock car racing series founded by his father.
America's Richest Sports Team Owners
1. Steve Ballmer: $33.6 billion (Los Angeles Clippers)
2. Paul Allen: $20.6 billion (Seattle Seahawks, Portland Trail Blazers)
3. Philip Anschutz: $12.6 billion (Los Angeles Kings, LA Galaxy)
4. Micky Arison: $9.4 billion (Miami Heat)
5. Stanley Kroenke: $8.1 billion (Los Angeles Rams, Arsenal)
6. Stephen Ross: $7.5 billion (Miami Dolphins)
7. Shahid Khan: $7.1 billion (Jacksonville Jaguars)
8. Robert Kraft: $6.2 billion (New England Patriots, New England Revolution)
9. Charles Johnson: $6 billion (San Francisco Giants)
10. Daniel Gilbert: $5.8 billion (Cleveland Cavaliers)
11. Jerry Jones: $5.6 billion (Dallas Cowboys)
12. Ann Walton Kroenke: $5.5 billion (Denver Nuggets, Colorado Avalanche)
13. Richard DeVos & family: $5.4 billion (Orlando Magic)
14. Marian Ilitch: $5.2 billion (Detroit Red Wings)
15. Charles Dolan & family: $5 billion (New York Knicks, New York Rangers)
16. Ted Lerner & family: $4.9 billion (Washington Nationals)
17. Jeremy Jacobs Sr: $4.4 billion (Boston Bruins)
18. Terrence Pegula: $4.3 billion (Buffalo Bills, Buffalo Sabres)
19. Stephen Bisciotti: $4 billion (Baltimore Ravens)
19. Joan Tisch: $4 billion (New York Giants)
21. Arthur Blank: $3.8 billion (Atlanta Falcons, Atlanta United)
21. Robert McNair: $3.8 billion (Houston Texans)
21. Henry Samueli: $3.8 billion (Anaheim Ducks)
24. Tom Gores: $3.7 billion (Detroit Pistons)
25. Jimmy Haslam: $3.6 billion (Cleveland Browns)
26. Tilman Fertitta: $3.5 billion (Houston Rockets)
27. Mark Cuban: $3.3 billion (Dallas Mavericks)
27. Joshua Harris: $3.3 billion (Philadelphia 76ers, New Jersey Devils)
29. Robert Pera: $3.8 billion (Memphis Grizzlies)
30. John Middleton: $3 billion (Philadelphia Phillies)
31. Ray Davis: $2.8 billion (Texas Rangers)
31. Tom Benson & family: $2.8 billion (New Orleans Pelicans, New Orleans Saints)
33. John Fisher: $2.7 billion (Oakland Athletics)
33. Herbert Simon: $2.7 billion (Indiana Pacers)
33. James Irsay: $2.7 billion (Indianapolis Colts)
36. John Henry: $2.5 billion (Boston Red Sox, Liverpool, Roush Fenway Racing)
36. Arturo Moreno: $2.5 billion (Los Angeles Angels of Anaheim)
36. Mark Walter: $2.5 billion (Los Angeles Dodgers)
36. Denise York: $2.5 billion (San Francisco 49ers)
40. Alexander Spanos & family: $2.4 billion (San Diego Chargers)
41. Glen Taylor: $2.3 billion (Minnesota Timberwolves)
41. Dan Snyder: $2.3 billion (Washington Redskins)
43. Jeffrey Lurie: $2 billion (Philadelphia Eagles)

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Local or Global: Who Should Be in Charge of Hiring New Employees?

Everybody bookThere’s a trend in the marketplace these days to go local. Restaurants and grocery stores are touting locally sourced ingredients while Small Business Saturday offers a local antidote to the mad Christmas shopping rush at the mall. Even clothing and furniture stores are jumping on the bandwagon by highlighting items manufactured within the region. But should the push to go local also extend to hiring retail employees? Or is that task best left to the head office? Wharton accounting professor Carolyn Deller and Harvard business professor Tatiana Sandino find answers in their latest research, which examines whether decentralized hiring results in better employee retention and store performance. The paper is titled ”Who Should Select New Employees, the Head Office or the Unit Manager? Consequences of Centralizing Hiring at a Retail Chain.” Deller recently spoke with Knowledge@Wharton about the findings.
An edited transcript of the conversation follows.
Knowledge@Wharton: Your paper looks at who should select new retail employees, the head office or the unit manager? Can you talk about this research?
Carolyn Deller: Typically, where hiring rates fall in an organization is along the continuum. On one extreme, it could be the head office or the headquarters that assumes total responsibility for the hiring process. At the other extreme, it could be local store managers, in our context in the retail chain, who are responsible for hiring.
We’re interested in studying this question because a lot of organizations place emphasis on employee selection, and many executives see it as a key mechanism to ensure that the individuals in the organization are aligned with the company’s goals and values. But there’s very little empirical research in this area. Coming at it from a management control perspective, we were interested in looking at how allocating decision rights plays into the employee selection process.
Luckily, we had this great setting where an organization was rolling out this centralized hiring regime in a staggered manner. They had transitioned from the decentralized regime to the new centralized model, and there were control stores that remained decentralized during our sample period. So, we were able to study not only the main effect of centralized hiring on our outcome variables of interest, but we also felt that it’s unlikely to have a uniform impact in the organization. There’s likely to be circumstances where headquarters would have a hiring advantage over unit managers and circumstances where the local manager would be the best person to hire new employees, maybe because the store is located far from headquarters or it serves a different type of demographic than the rest of the chain. We studied these two different circumstances to see whether centralized hiring was more or less beneficial, depending on the specific circumstances of each unit.
“Our research suggests that the effect of centralized or decentralized hiring could depend very much on the unit’s particular circumstances.”
Knowledge@Wharton: You found some benefits for centralized hiring and some benefits for decentralized. Tell us more details.
Deller: Interestingly, we found that there was no main effect of centralized hiring. On average, centralized hiring did not improve the amount of time that employees stayed with the organization, aggregate monthly employee turnover at the store level, or store sales performance.
What we did find was mostly consistent with our predictions in terms of the moderating effect of headquarters’ hiring advantage or the local managers’ unit advantage. Specifically, we found that in busy stores, which we proxied for the sales per labor hour, where it’s likely that the unit manager is really constrained in terms of time available to screen and hire new employees, centralized hiring was beneficial in terms of increasing the average duration that an employee would stay with the organization.
But in circumstances where the local manager may know best who to hire for the local team — how to serve those unit customers, if the store served a different type of market relative to the rest of the chain, or the store was more likely to serve repeat customers — we found that the benefits of centralized hiring did not appear. In fact, centralized hiring could actually be detrimental, relative to decentralized hiring, in terms of the time that employees stay with the organization and employee turnover for the store overall.
Knowledge@Wharton: What is the takeaway from your research? It seems that retail should take a bifurcated approach. Some places would benefit from centralized hiring, and some places would benefit from local hiring.
Deller: Exactly. I would presume that most organizations probably have a uniform policy in terms of who does the hiring. Is it headquarters? Is it the local unit manager? But our research suggests that the effect of centralized or decentralized hiring could depend very much on the unit’s particular circumstances. Retail chains may wish to consider whether that uniform policy is appropriate or whether they should do a mixed model, where some stores do their own hiring while others leave it up to headquarters, particularly busy stores that really can’t do that on their own, to see if they can improve their hiring processes.
Knowledge@Wharton: In the paper, you point out that decentralized hiring could be beneficial if a store has atypical demographic characteristics. If it’s not like the other stores, it would help more to let the local people hire people locally.
Deller: Yes. A lot of chain organizations franchise some of their units. Prior research has shown that franchising is more common in units that are located farther from headquarters, in units that serve different markets and in organizations where repeat customers are more likely. For those situations, it can be difficult for headquarters to monitor units that are far from headquarters. It can be difficult for headquarters to really understand the nuances of what is needed to serve customers of different demographics.
We were asking, does that apply to the hiring process? You could think that centralized hiring might help employees who maybe feel a bit disconnected from the organization because they’re far away or because they serve a different market. Centralized hiring could be beneficial for those employees to feel like they’re part of the organization. But it seems that the local managers’ informational advantage, in terms of the types of people you need to serve those customers and who would fit in the team, trumps any possible benefits of any centralized hiring.
“I think employee selection and promotion are two very important decisions made by organizations that can have huge costs if you get it wrong.”
Knowledge@Wharton: Are there applications for this research beyond retail chains?
Deller: I think this could apply most directly to retail organizations, but there are many sectors and industries where organizations have multiple units spread across the country or multiple countries. Banking, hospitality chains, even some hospitals. Even more broadly, in large-scale organizations there might be circumstances where managers might know best who fits the demand of different clients served by that business unit. Or there could be cases where that business unit is overly busy, or managers may be disconnected from the overall strategic goals of the organization, so you might want to have experienced HR people in headquarters doing the hiring.
Knowledge@Wharton: What are you going to look at next in your research?
Deller: This paper is really thinking about optimizing the fit between an employee and the organization at the time of initial hiring. But another time where that degree of fit becomes particularly important in organizations is in promotion decisions. You are trying to match existing employees that you have with senior-level positions.
In another study, I am using data from an organization that evaluates employees annually, not only on their performance for the year but also a forward-looking assessment of their potential. How does this employee fare on different leadership competencies that we feel leaders in the firm should have? That potential rating is communicated to employees.
I am looking at the circumstances under which and how those potential assessments are related to employees’ voluntary departure decisions. The parallel with the research I’ve been talking about is, again, looking at a mechanism designed to improve fit and how that might influence whether employees stay or go.
But more broadly, I think employee selection and promotion are two very important decisions made by organizations that can have huge costs if you get it wrong, so many organizations are taking very different approaches to solve promotion and hiring decisions. I’m very interested in continuing to look at these two areas because I think it’s very fascinating.

Does Repealing the Clean Power Plan Make Economic Sense?

coal-fired-power-plantThe decision earlier this week by the U.S. Environmental Protection Agency (EPA) to repeal the Clean Power Plan would force the U.S. to cede leadership in innovation and climate change policies to other countries such as China, hurt job growth in the energy industry and fail to prevent a whole range of adverse environmental and health effects, according to experts at Wharton and the University of California-Berkeley. The Obama-era plan, which has been moved from the EPA website to its archives, aimed to limit greenhouse gas emissions from power plants by helping states begin to replace coal with renewable energy sources.
EPA administrator Scott Pruitt described the Clean Power Plan (CPP) as a rule that exceeded his agency’s authority and as one that would cause “devastating effects … on the American people” in a press release. “Repealing the CPP will facilitate the development of U.S. energy resources and reduce unnecessary regulatory burdens associated with the development of those resources,” he said. “Any replacement rule will be done carefully, properly, and with humility, by listening to all those affected by the rule,” he added.
Pruitt’s decision was “sad” although it wasn’t surprising, said Daniel Kammen, professor of energy and public policy at the University of California-Berkeley, and founding director of the Renewable and Appropriate Energy Laboratory. “[We] know the transition to clean energy is not only something we need to do fundamentally and actually will save not only ratepayers money but will also save us in terms of environmental costs — which we are seeing all around us with hurricanes and storms, and here in my home area (California) with fires — and immediate health costs,” he noted. “So it’s a very sad economic choice, let alone the negative signal it sends in terms of environmental protection.”
According to Eric Orts, Wharton professor of legal studies and business ethics, the estimates for various health benefits under the Clean Power Plan include 3,600 deaths that will be prevented, 1,700 heart attacks, 90,000 asthma attacks, and 300,000 missed work and school-days. “That all adds up to long term benefits of about $54 billion.” Orts is also director of the school’s Initiative for Global Environmental Leadership.
Orts and Kammen discussed the end of Obama’s Clean Power Plan on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
The Context for Costs
Orts noted the Trump administration’s claim that repealing the Clean Power Plan will avoid $33 billion in costs verses the original estimate of $8.4 billion. He acknowledged that some costs will be incurred in implementing the plan, but pointed out that policy makers need to keep in mind the larger gains from the Clean Power Plan, such as reducing air pollution costs. “The [Trump] administration has declared war on almost all environmental regulations,” he said. Kammen added that environmental costs in the U.S. were $100 billion in 2012, but they are now more than double that amount, and could even be three, four or five times as large.
According to Kammen, the Clean Power Plan not only showed a clear cost-benefit analysis, but also provided incentives where each state could pick their own most cost-effective path towards energy efficiency, renewables and natural gas. He noted that many states where the Republican Party is dominant had begun to see the benefits of that program.
Ceding Ground to Other Countries
The Trump administration’s stance on climate change and clean energy is in sharp contrast to the policies being adopted internationally, Kammen said. He pointed out that China is investing $360 billion in clean energy, while Bangladesh has the world’s largest battery recycling program for home systems, and Kenya has become a clean energy leader. “These are countries that have decided that the energy and environmental story is important, but so is the economic leadership story,” he said. “[The U.S. policy] is ceding economic opportunity to others for technologies in which the U.S. has been the prime investor for the past decades.”
According to Orts, the debate over clean power or climate change doesn’t really have two sides to it, and “we get caught in a false equivalency in a lot of these discussions.” He said the issue is beyond argument, citing the advice from experts in both the scientific and economic communities. Instead of the Trump promise to “Make America Great Again,” the reversal on climate and energy policy will have the opposite effect, he noted. The Trump administration’s policy is undercutting the gains seen in solar, wind and other renewable power technologies. The shift to support fossil-fuel industries, especially coal, has been shown as “a loser” by numerous studies, he added.
The unwinding of the Clean Power Plan follows the U.S. pullout in June from the Paris Accord, the climate change agreement signed by 197 countries at a 2015 United Nations conference. Orts pointed out that the U.S. is technically still not out of the Paris agreement, and has to comply with a series of requirements to complete its pullout.
“[The U.S. policy] is ceding economic opportunity to others for technologies in which the U.S. has been the prime investor for the past decades.”–Daniel Kammen
States Stepping Up
The “bright side” is that many states have said they would go ahead with implementing the Clean Power Plan’s programs in any case, said Orts. Kammen noted that California, New York and Washington are among those states that have opted to stay in and implement the clean power programs. California has more than half of the solar panels installed in the country, its clean energy policies are as aggressive or more aggressive than those in Europe, and it has seen more job growth from the solar power industry than from traditional utilities, he added. Businesses, too, have been backing the Clean Power Plan “to preserve their competitiveness,” said Orts.
States and companies that might have opted to back clean energy programs would now slow down and lose economic competitiveness to China and other countries, Kammen predicted. He added that in natural disasters stemming from global warming, the poor and minority communities have been the first affected and least prepared. “Pulling back on the Clean Power Plan is an attack on poor and minority communities, above all others,” he said. Those impacts have been well documented in books by Robert Bullard, a professor at Texas Southern University, who is also known as the “father of environmental justice,” he noted.
Silver Linings
Orts saw the repeal of the Clean Power Plan opening an opportunity to educate people about the benefits of environmentally-friendly policies. “Long term, I expect the American public to have a change of view,” he said. The hurricanes and wildfires are related to climate change, and most Americans will begin to understand that corrective action has to be taken to cope with those disasters, he added. “You will have a shift back that will be even more serious and will have more political support going forward after Trump.”
Kammen pointed to the eroding feasibility of the coal industry. “The biggest irony in the whole story is that of coal,” said Kammen. The coal industry has decreased in value by a factor of 10 over the past several decades, and is worth an estimated $50 billion to $60 billion. “A Jeff Bezos or a Bill Gates could buy the whole [coal industry] more than once,” he said. He noted that ironically, the Clean Power Plan included an $8 billion retraining, re-education and transition fund for the coal industry. He described that as “an incredibly good deal” for states that are most hard hit by the shift away from coal. By contrast, there is no indication that the Trump administration will invest significantly in such retraining programs, he pointed out.
“Long term, I expect the American public to have a change of view.”–Eric Orts
Kammen hoped the Clean Power Plan repeal is contested all the way up to the Supreme Court. He said that several studies, including those done by his own lab (available on his Twitter feed @dan_kammen), show that the job impact of investing in natural gas, solar, wind and other renewable forms of energy outperforms the coal industry by up to a factor of five to one. “This is a story where the [Trump] administration is simply wrong on the basic economics, let alone sustainability and environmental justice.” (Wharton economics and public policy professor Jose Miguel Abito detailed how the Clean Power Plan would spark investment and efficiency in electricity generation in an interview with Knowledge@Wharton last year.)
Shaky Legal Terrain
Orts pointed out that notwithstanding the Trump administration’s moves to unwind Obama-era actions in environmental protection, the EPA has a duty to regulate greenhouse gas emissions. He expected the EPA to face lawsuits to force it to fulfill that obligation. Ironically, the EPA now could claim – after the repeal of the Clean Power Plan – that it does not have the authority to implement that plan. On the other hand, there could be a legal challenge that forces the EPA to come up with an alternative to regulate greenhouse gas emissions, he added.
In his former role as Oklahoma Attorney General, Pruitt has sued the EPA several times to block clean air and energy programs. “This is an agency designed to find innovative ways to regulate and set incentives [to protect the environment] and the Clean Power Plan does that,” said Kammen. “But the fact that Mr. Pruitt has been on the business end of lawsuits against that speaks to … a very shallow play by some people to hold on to money.”

How Pay Inequality Affects the Bottom Line

Taxes
Most private firms have strict policies about salaries: Workers aren’t allowed to know how much money they make compared to their peers. But that’s an unrealistic and outdated notion, especially with so much information available online. Pay inequality is a persistent problem that is getting more exposure than ever before. In her latest research, Wharton management professor Claudine Gartenberg examines how inequality affects individual workers and entire companies.
Her findings are outlined in three papers: “Pay Inequality and Reductions in Corporate Scope,” co-authored with Wharton management professor Emilie Feldman and Julie Wulf of the National Bureau of Economic Research; “Islands of Equality: Competition and Pay Inequality within and across Firm Boundaries,” co-authored with Wulf, and “Pay Harmony? Social Comparison and Performance Compensation in Multibusiness Firms,” co-authored with Wulf.
She spoke to Knowledge@Wharton about why top-tier managers need to pay more attention to this issue.
An edited transcript of the conversation follows.
Knowledge@Wharton: You have three recent papers that look at the issue of pay inequality. Could you tell us about each one of those?
Claudine Gartenberg: These are a series of joint studies with Julie Wulf, at the National Bureau of Economic Research, and Emilie Feldman, management professor here at Wharton, which focus on this question of pay inequality among workers, primarily within companies but also the implications at a societal level. This question of how much pay inequality to tolerate inside of your company is actually a tricky one for managers. It’s one that every manager faces, and it has big consequences not just for HR but also for the company’s strategic position and ability to compete.
In these papers, we have three big findings. The first is that it appears that your pay co-moves more with your colleagues than it would just be predicted for your job itself. Pay moves in lockstep, goes up, goes down, you get some rare bonuses. We attribute that to people comparing pay inside firms more with their colleagues and their co-workers than with just people who work in other companies.
The second thing we find is that it also appears to tie managers’ hands a bit in terms of how firms can respond to competition. We look at a trade shock — this is a free-trade agreement with Canada — and what you would want to do is pay workers more or differently based off how well they’re able to compete and respond to this trade shock. We find that firms respond in lockstep with employees, so they either all give them raises, or they all respond very similarly and not in line with how productive workers are.
Lastly, we find that pay inequality predicts divestitures. If you have firms with very high levels of inequality, it is predictive that they will shed a business unit that is contributing to that. So, it has major strategic consequences; it is not just an HR issue.
“This question of how much pay inequality to tolerate inside of your company is actually a tricky one for managers.”
Knowledge@Wharton: We like to think that our pay is based on what we do and how well we do it. The first two papers seem to show that it’s also about how much our co-workers are making or what’s going on in the larger context of the world.
Gartenberg: Oh, completely. We are social beings. We evaluate our self-worth by how we stack up relative to each other. It’s just in human nature. We’ve seen that behavior in monkeys as well. Once you join a firm, you evaluate yourself against workers inside those firms. That is an inevitable consequence. The thing that is interesting about it is that there’s really two sides of performance pay.
On the one hand, performance pay is a fantastic thing. It’s why it’s been adopted increasingly over the last three decades. You want to give people bonuses for how well they are doing, you want to reward your top workers, you want to make sure people feel valued. On the other hand, performance pay creates pay differences inside firms, and if people perceive those are unfair or unjust, it can create real problems inside firms. In fact, Uber is dealing with this right now. Uber’s cultural issues have received all of the attention in the news, but arguably among the employees themselves the bigger issue is compensation differences. It’s a very real issue that affects companies across the board.
Knowledge@Wharton: There’s been a lot of talk lately about NAFTA and whether it has been good or bad for American business. A part of it that we haven’t heard much about is that NAFTA did affect salaries.
Gartenberg: This is an interesting question. It’s not one that we can get directly at with the data that we have for our research, because we have compensation data for division managers of top companies — real “one-percenters.” These are not your model American workers.
“If you have firms with very high levels of inequality, it is predictive that they will shed a business unit that is contributing to that.”
The interesting thing that we find that I think ought to inform this debate is that the Canada Free Trade Agreement predated NAFTA by five years, but had a very similar impact. It had a very large impact on American companies. The effect of the Canadian Free Trade Agreement was to raise the one-percenters’ salaries. Even though we don’t have the information to prove this, generally people have found that trade agreements lower unskilled worker salaries across the board. If you put those two facts together, these trade agreements should probably widen the gap between the top one-percenters and the 99%. It really does affect pay inequality in a distributional way that is getting a lot of attention and should get more attention going forward.
Knowledge@Wharton: Looking more closely at the third paper, you find companies are more likely to divest divisions where there is more pay inequality. Is there action that can be taken as a result of knowing that?
Gartenberg: This is a really interesting question about corporate strategy that I think has not gotten enough attention out there, which is that companies want to extend into different types of businesses that might be complementary, or they want to acquire companies. A major factor appears to be compensation policies across those business units and how those affect the workers, how those affect post-merger integration, how those affect worker morale, productivity, etc. I think it is something that managers ought to pay attention to.
To give examples from my own experience when I consulted to the energy industry — there was a period of time when energy companies were trying to heavily get into trading operations, sort of Wall Street energy derivative trading operations. To do that well, you need to pay these guys Wall Street salaries. On the one hand, you’ve got a business unit that is paying Wall Street-level salaries. On the other hand, you’ve got your asset side of your business, which is the people operating the pipes in the facilities and moving the product back and forth, and they’re getting paid hugely different amounts. I saw the amount of tension that provoked. These pay differences and the differences of these workers, the way they were treated between these units, it was very, very hard to manage that. That is definitely something that managers should pay attention to when they’re deciding what businesses to operate in.
Knowledge@Wharton: What your research shows is that pay inequality really impacts everything. But companies often believe salaries are a secret, so it doesn’t impact anybody.
“These pay policies are not an HR policy. It’s really a strategic decision that firms need to make.”
Gartenberg: If there’s one takeaway we want from this research, it’s for people to recognize that these pay policies are not an HR policy. It’s really a strategic decision that firms need to make. As much as firms want to keep their pay under wraps, in today’s day and age, that’s increasingly unrealistic. It was unrealistic 10, 20, 30 years ago as well. And it does have major consequences for what firms can do and how they can compete. That is very important to account for.
Knowledge@Wharton: What will you study next?
Gartenberg: The real holy grail behind this research is looking at societal-level inequalities, which are at unheard levels within the U.S. and also other countries around the world, and putting firms and firm strategy into the center of that research. What are the choices the companies are making today in terms of their HR policies and outsourcing? How are those choices influencing inequality? How is societal inequality affecting what managers can do and what type of compensation they can offer their employees? That is a big question, it’s extremely important, and it’s one that we’re just starting to get our heads around.

Will the Japanese Grant ‘Abenomics’ a Fresh Mandate?

japanJapanese Prime Minister Shinzo Abe is campaigning once again for a fresh mandate for his government, nearly five years after he took office in late 2012 vowing to restore the country’s past dynamism. Beset by cronyism scandals, facing new challenges from both the left and the right, Abe is relying heavily on the mixed success of his stimulus-driven economic policies, and worries over the threat from North Korea, as he fights to retain his ruling Liberal Democratic Party’s overwhelming parliamentary majority in the October 22 election.
With opposition divided among a raft of parties spanning the spectrum from communist to ultraconservative, the Liberal Democrats are expected to retain at least a majority in the pivotal Lower House of the Diet. But lukewarm public support for much of his policy platform and widespread opposition to his efforts to revise Japan’s pacifist constitution and build up the military, will likely lead Abe to stick to his playbook on the economic front, avoiding any dramatic reforms that might undermine approval among the traditional bastions of LDP support, Japan experts and economists say.
Element of Surprise
Having seen his support ratings recover from mid-summer lows in the 30% range, thanks in large part to fears fanned by repeated North Korean missile tests, Abe likely was counting on an easy win when he called for a snap election on September 25. Tokyo governor Yuriko Koike dashed those expectations by announcing, on the same day, that she would lead a new national party called the Party of Hope, or “Kibo no tou.” Koike’s announcement set off a major shake-up among the main opposition party, the Democratic Party, whose head Seiji Maehara effectively dissolved his party and recommended that its members campaign with Hope Party in a coalition against the LDP.
As of October 3, Koike said her alliance was fielding 192 official candidates, 109 of them from the Democratic Party. Even if Koike has more than 233 candidates, not all of them will win, so Koike’s coalition is unlikely to attain a simple majority of 233 seats in the 465-seat Lower House, let alone a two-thirds majority.
“That final arrow of his three-pronged strategy of monetary easing, stimulus spending and sweeping reforms has made little headway.”
At the same time, Koike has also said she will not run, leaving the Party of Hope without a clear choice for prime minister if it should triumph in the election. Still, given the raft of opposition parties contesting the election, the Liberal Democrats stand to lose at least a few of the 288 seats they held when Abe called the election, even if its partner — the Buddhist-backed Komeito — remains in the ruling coalition. Meanwhile, Yukio Edano, a popular liberal-leaning former leader of the Democratic Party, has further muddied the waters by setting up his own new party, the Constitutional Democratic Party of Japan.
Not the Economy This Time
Putting aside the risk of an upset thanks to Koike’s challenge, Abe’s timing was deft. Though the government downgraded its figure for second-quarter annualized GDP growth to 2.5% from an earlier estimate of 4% percent, April-June was the sixth-straight quarter of expansion for the world’s third-largest economy, the longest in a decade. Unemployment remains near a four-decade low of about 3%, share prices have held steady (hitting a 21-year high October 11) as have business and consumer sentiment.
For now, the “Abenomics” formula of lavish monetary easing, combined with strong demand for Japan’s exports and a boom in construction ahead of the Tokyo 2020 Olympics, appears to be working. The Cabinet Office is forecasting 1.5% annualized growth in the fiscal year that ends in March 2018 and 1.4% growth in the following fiscal year, relatively strong levels compared with much of the last five years.
That’s all good news for Abe, but not necessarily for Japan in the long run, says Masamichi Adachi, a senior economist at JPMorgan Securities Co. Ltd. in Tokyo. By pumping up to ¥80 trillion (tens of billions of dollars) into the economy every year, the Bank of Japan is keeping the yen weak in a boon for exporters like Toyota and Sony, whose profits have soared. But the strategy does little to address Japan’s long-term challenge of a shrinking home market, as the country ages and its population declines. “The Japanese economy is growing but it is like an old person who used to run 100 meters in 10 seconds but now runs it in 13 seconds,” he says. “Japan’s potential annual economic growth rate is less than 1% now,” Adachi says.
To achieve Abe’s promise to attain a nominal ¥600 trillion GDP for Japan by 2020, from ¥491 trillion yen in fiscal year 2014, would require nominal economic growth averaging more than 3% and real growth of 2% over the next five years.
While Japan is managing to eke out a respectable pace of growth for now, Abe’s economic regime has fallen short in other respects. A 2% inflation target set when Bank of Japan (BOJ) governor Haruhiko Kuroda took up his post in 2013 remains distant, with real inflation still about zero.
The core consumer price index, excluding volatile fresh food prices, rose by 0.7% in August. Excluding energy prices, it was roughly flat. “I do not think they can get to 2% anytime soon. The Bank of Japan has been trying for a long time, but I am not sure what else they can do,” says Franklin Allen, a Wharton emeritus professor of finance, now a professor of finance and economics at Imperial College in London.
Even if Abe wins a strong majority, he is unlikely to push for more monetary easing because it is apparent that there’s little more the BOJ can do on its own, says Shigeto Nagai, head of Japan economics at Oxford Economics Japan K.K. and a former BOJ official. With other central banks, especially the U.S. Federal Reserve, moving to raise rates, the BOJ is unlikely to push interest rates in Japan further into negative territory: The key interest rate charged to banks has been at minus 0.1% for almost two years. “But if the BOJ ends the negative interest rate policy, that will have a strong impact on the exchange rate, so they cannot do that at the moment,” Nagai said. “They will keep the rate negative for a while.”
“… Over the last one and a half years, the government put its heart much more on constitutional reform and security reform than economic reform.”–Martin Schulz
Stronger inflation would require faster growth in wages, which have stagnated as corporations reaping windfalls from the cheap yen have built up their cash stockpiles. Labor cash earnings, which include bonuses and other payments, rose 0.9% year-on-year in August after dropping 0.6% in July. Wages of full time workers rose an average of 0.7% in August, while the rate of increase for part-time workers was 0.4%, according to figures from the welfare ministry. That was the fastest pace of increase since July 2016. But to attain the 2% inflation target seen as necessary to drive a “virtuous cycle” of investment and growth, wages need to be growing at a pace of 3% or more, says Marcel Thieliant, senior Japan economist of Capital Economics.
The jobless rate stood at 2.8% in August, the lowest level in 23 years, which should push employers to raise pay to attract and retain talent. But the country’s limited job mobility means that companies, which already hold the upper hand given the near universal decline in the bargaining power of organized labor, have little incentive to raise pay, Thieliant says.
The Third Arrow Misses the Mark
Soon after he took office, Abe pledged to drill “deep into the bedrock” of Japanese bureaucracy and other factors that have stunted innovation and productivity. But that final arrow of his three-pronged strategy of monetary easing, government stimulus spending and sweeping reforms has made little headway. Efforts to reform labor laws, open up bottlenecks to competition in the medical industry and push ahead with other difficult structural problems have stalled as Abe expended precious political capital on pet issues such as revising the constitution to allow a wider role for Japan’s military.
“At least during the first three years, it was moving forward; but over the last one and a half years the government put its heart much more on constitutional reform and security reform than economic reform,” says Martin Schulz, a senior economist at Fujitsu Research Institute’s Economic Research Center.
In the meantime, the cost of putting off such needed but difficult changes has been allayed by good fortune. Japan’s economy was already emerging from recession in late 2012. Its recovery, with a brief downturn following a hike in the sales tax to 8% from 5%, has relied heavily on reviving demand for cars, electronics and other exports in China, the U.S. and other major markets, says Allen. “The fact that the global economic recovery is doing well is why Japan is doing well,” he says. “Abenomics helped to weaken the yen and helped stock prices, but I do not think it will have much effect on Japan’s long-term growth.”
With the recovery on autopilot, Abe has not done much on the economy in the past two years, says Hideo Kumano, chief economist at Dai-ichi Life Research Institute, a unit of Dai-ichi Life Group. “Japan’s current economic growth is driven by the recovery of the U.S. economy and strong Asian economic growth driven by the U.S. recovery,” he says. For example, relying on the “Trump bump” to growth is risky, given uncertainties over the direction of U.S. monetary policy. A U.S. interest rate hike could slow growth, resulting in an unwelcome weakening of the dollar
Abe’s election platform includes only one new economic initiative, hiking the sales tax, as earlier promised, to 10% by 2019.
Clouds are already gathering on the horizon: The International Monetary Fund and other private economists are forecasting lower economic growth for 2018. The IMF said in its annual review of Japan published in July that Japan had a relatively good year in 2016 and the momentum carried into 2017 with growth projected at about 1.3%. It echoed other economists in saying the trend was largely driven by a favorable external environment, which for Japan means exports. But a rapidly aging population and shrinking workforce means the country needs to speed up reforms to boost wages and productivity and growth. The IMF expects GDP growth to slip to 0.6% in 2018.
Where to Next?
Regardless of whether the opposition makes inroads in the upcoming election, neither Abe nor other leaders are likely to make any dramatic changes. If Abe retains a two-thirds majority in the Lower House in coalition with the Komeito or another party, he’s likely to continue to focus on his effort to establish a legacy by changing the constitution, says Adachi. Abe wants to revise the constitution, shaped by the U.S. following Japan’s defeat in World War II, to clarify the legal status of the country’s Self-Defense Forces. Article 9 of the constitution renounces Japan’s right as a sovereign nation to wage war as well as the “threat or use of force as means of settling international disputes.” The Liberal Democrats’ election platform calls for amending that article after “sufficient debate within and outside the LDP.”
Abe’s election platform includes only one new economic initiative, hiking the sales tax, as earlier promised, to 10% by 2019 to support spending on social services and education. Abe twice postponed that hike in the sales tax, citing the risks to the economy. The sales tax is deeply unpopular with voters, despite the clear need for more revenue to fund pensions and health and other care for the elderly.
The increase in the tax is projected to raise an extra ¥5.8 trillion a year. About half of the ¥4 trillion earmarked for paying down government debt will instead be used to provide free preschool education for children three to five years; to pay for free child care for low income families with children under two years old; to cut waiting times by providing places for 320,000 more children in child care centers by 2020, and to cut college education costs.
While education is vital to Japan’s competitiveness, the shift in spending will make it difficult to meet promises to balance Japan’s primary budget by 2020 as previously promised. “This is a misuse for the VAT and it is like pork barreling,” Adachi says.
So far, the sales tax is the one economic theme that has dominated the run-up to the election, with Koike’s Party of Hope and several other opposition parties running against it. But other key issues, such as whether or not to allow more immigration to help fill labor shortages, are getting short shrift as campaign talk focuses on non-bread and butter issues such as North Korea and constitutional revision.
Though the repeated missile tests have rattled nerves in Japan, they may be distracting the public from vital domestic issues such as how to provide for the country’s rapidly aging population given the country’s precarious national finances. “There is no sense of crisis in Japan about various critical issues such as the population decline, aging and social security,” Adachi says. “The Japanese government has been is just putting off solving any of those critical issues.”
An election win for Abe will likely ensure that dithering continues, says Adachi. But it also will reflect the broad support among Japanese for keeping the status quo. Even if Koike manages an unlikely surprise victory, her “Yurinomics” will likely mirror Abe’s policies, says Takuji Aida, chief Japan economist at Societe Generale Japan Ltd in Tokyo. “Whatever happens, either Abe or Koike, the current monetary policy will continue,” he says.