Asymmetrical Information

Did I read that excerpt right? they're in trouble because he gave bonuses for good work watching over the store? How else are you suppose to get better service from the employees?

I can see this in a resturant. "Sorry ma'am, I can't tip you as it means I'm docking the rest of the staff pay.."

Ah, government. The only place where a budget increase is seen as a cut, and where a bonus is actually docking someone's pay.

One of these days, we're going to hit our Atlas Shrugged moment...

Bob

The left wants to remove any company benefit that would make it harder to unionize the employees.

Another example: the company I work for has a policy of paying a percentage of profits into the lower income employees’ retirement plan. The company continually runs into the limits set for contributions by the tax laws.

The left wants to remove any company benefit that would make it harder to unionize the employees.

Another example: the company I work for has a policy of paying a percentage of profits into the lower income employees’ retirement plan. The company continually runs into the limits set for contributions by the tax laws.

I tend to agree with the above comments, although I suspect there might be more to the story. For example, what would keep a company from cutting everyone to min. wage and making almost the entire payroll a 'bonus'....in other words sneaking docks in by disguising them as bonuses.

This is another reason why we cannot allow the Democrats to win in 2004. The crazies run the Party and pick judges who make such stupid decisions. This is especially true in states like California.

Actually it seems that the judges were doing what they are supposed to do, interperate the laws that are passed by legislatures. It isn't their job to figure out what laws they think make the most economic sense and only enforce those.

That rulling makes no damned sense whatsoever. It's a bonus. If it were part of their regular wage it would be called wages, not a bonus. Where do these people grow up where they think that a bonus is supposed to be something other than extra? Sheesh.

Best Buy stores use a scheme somewhat similar to the one described; a certain amount of 'shrinkage money' is allocated to each store, and if shrinkage is less than the allocation for a given month, the difference is distributed among the employees as a bonus.

I wonder if there's an easy accounting trick for getting around this ruling -- i.e. define the bonus as $0 and then make it proportionately increase in value based on factors 'x'...

Jane,

I'd have sent this via email except I couldn't find where you hid your email address on your page.

Your paid ads include one for "nrablacklist.com", a rabidly anti-NRA organization, which appears to have such lofty intellectual arguments as "NRA lists Sean Connery and Britney Spears, so you should hate the NRA".

Is there any chance you could police your ad traffic? It is sufficiently offensive to make me consider leaving your site for a while.

Robin is right, how can a bonus be confused with wages? Wages have all sorts of regulations attached; bonuses are entirely different (though I'm sure there are regulations about them too). If the California legislature wants to prohibit bonuses based on corporate profitability, they can pass a law saying so.

Another silly aspect of this is that the amounts involved would be tiny. The law prohibiting the docking of wages for shortages or shrinkage is designed to keep store owners from getting a large fraction of their loss back from their employees. Ie, a $100 shoplifting loss would result in a total of something like $100 (or $50, anyway) deducted from employees' wages. By contrast, a $100 shoplifting loss would reduce the company's profits by 1/100,000 (or 1/1000 of 1%) if the company profit was $10 million. If 10% of the company's profits went to the employees, each employee would not notice the difference. (These numbers are made up; Ralph's is part of the Kroger chain, which has profits in the $1 billion per year.)

It has already been explained to people like "PJ", above, that the Kroger chain's profit margin is on the order of 1% to 2%. Even if it was 99%, however, that wouldn't entitle the employees to a share of the money. They get what they contract for, same as everyone else.

I can tell you right now what this ruling is going to mean for Ralphs' employees: employees at shoplifting-prone stores will get slightly larger bonuses. Employees at stores with little shoplifting will get dramatically lower bonuses. The average bonus paid to employees will be lowered overall. The reason: it is now illegal to give workers an incentive to prevent shoplifting. Therefore, shoplifting will increase, resulting in lower net revenue. The chain will make up that money by paying lower bonuses.

I doubt shoplifting will increase in a measurable fashion. If my choice were to shoplift, say, $50 worth of product or not shoplift and see my bonue increase by that portion of $50....there's more money in shoplifing. Preventing shoplifting has to be done by some method other than paying people not to steal.

Bonus's are not that different than wages. From a microeconomic point of view, the firm never gives employees unearned gifts. The bonus is part of the compensation package. From this point of view, the court is correct that docking a bonus is no different than docking regular pay.

Finally, regarding the ads, they are supplied by Google & the advertiser pays by the click. Google's computers tries to determine what ads would be most relevant for the site. Google probably views this site as political discussion which would make a political ad (anti-NRA) relevant. If it makes you feel any better the site is paying by the click so you are costing them money by clicking on the ad.

Ridiculously, the complaint alleges that "Ralphs is 'wrongfully deduct[ing] expenses from the wages of their employees ... which expenses the law requires ... to be borne by ... employers.'" However the GAAP figures in question are by definition the expenses borne by Ralphs. The deductions are against gross corporate income, not prohibited deductions against employee wages.

If the situation were as claimed by the complaintant, the employees would have suffered a loss, and GAAP would have made Ralphs record it as income. (Pro forma income, but income nonetheless.) This contradicts the complaintant's own assertions about the balance sheets and should have been cause for dismissal. Could Ralphs not afford a conscious lawyer?

It is also a virtual certainty that the complaintant did not report the alleged loss as such on his income tax returns, and thus he committed perjury in the matter of this deduction. If I were Ralphs, I'd arrange for the bastard to be audited until he bleeds, then tried for tax fraud. Trifle not with accountants, lest your sheets be balanced with extreme prejudice.

"For example, what would keep a company from cutting everyone to min. wage and making almost the entire payroll a 'bonus'....in other words sneaking docks in by disguising them as bonuses."

Thew same thing that keeps your company from docking you or me down to minimum wage: we would quit.

I disagree with the response. Bonuses will be reworked and made independent of income. But they will be lowered somewhat to compensate the employer for the additional risk they assume for being forced to potentially pay bonuses in bad years.

What an awful ruling. A good candidate for appeal. Regardless of what economically illiterate judges may think, the methodology of determining a bonus is not the same as a wage deduction.

I don't quite get Dan's point about profit margin, except of course that shoplifting hurts low-margin retailers worse than high-margin ones. My example was based on the shoplifting loss being tiny compared to total company profit.

Boonton, as your comment implies, the bonus is more to prevent employee shoplifting ("shrinkage") than customer shoplifting. I don't know that much about retail, but my impression is that these bonus programs are designed to create a "we're all in this together" feeling, which effectively leads to employees policing each other.

Note that this applies to programs like the one at Best Buy that anony-mouse mentions. The program at Ralph's had nothing to do with shoplifting; it was just a bonus program tied to the company's profits. There was no docking going on; the whole suit hangs by the (obvious) fact that shoplifting decreases the company's profits. The class action suit argued that because of this, a bonus tied to them was illegal.

Contra Dan and mj, I expect Ralph's will just end the bonus program. I suppose technically they could calculate their profits apart from shoplifting, cash shortages, and anything else prohibited, but why would they bother? They might miss something, and get sued again. (Also, this calculation would require them to disclose their shoplifting losses, which stores rarely do.)

So the net result is that some lawyers made a bunch of money, a few employees probably pick up a couple of dollars, and Ralph's stops giving out bonuses. Another good day's work for the legal profession.

I doubt shoplifting will increase in a measurable fashion. If my choice were to shoplift, say, $50 worth of product or not shoplift and see my bonue increase by that portion of $50....there's more money in shoplifing.

What's the cash value of being raped in prison? :)

Anyway, you're assuming the employees were the thieves, which is not what I said. The purpose of paying bonuses to employees at low-rate-of-shoplifting stores is twofold. First, it discourages the employees from stealing. Obviously the bonus isn't as much as the cash value of stolen merchandise, but (a) you can use cash to pay for things not sold in a supermarket, such as rent or gasoline and (b) you won't get fired or arrested for collecting a bonus.

But the second, more important, benefit, is that it gives employees a reason to care if people are robbing the store. If you know for a fact that every single act of shoplifting costs YOU money, you're more likely to keep an eye out for thieves. If your paycheck looks the same regardless of whether or not someone robs the place blind, why should you bother to worry about shoplifting? Sure, in the long term the store may go belly-up, but that requires a level of long-term thinking that's virtually unknown in retail work.

Ah, yes. Workers have a right to a nice hefty peice of the big, bad capitalist, oppressor, business-owner's pie....but in so doing, must NOT be required to shoulder any of his risk.

From each according to his ability....

Taken to it's logical extreme, ANY bonus based upon net income is apparently impermissable. Only bonuses based upon Ralph's GROSS SALES would be kosher.

Oh, but wait. Maybe not. What if Ralph's had an off year, and sales dropped by 20%, with bonuses reduced accordingly. Couldn't that also be interpreted as an "impermissable docking" of wages?

The apocolypse is upon us.

PJ, Oscar Meyer Laywer, and several other posters have almost nailed the other big problem here, which is: If the court forces Ralph's to calculate net income in a way that violates the GAAP, then it has ordered them, in effect, to commit a felony under the terms of Sarbrenes-Oxley (sp?). Company execs now have a choice of which charge they want to be jailed on -- contempt of court, or accounting fraud. All because they wanted to give an incentive to their employees. Outcome: end of all incentives for non-exempt employees in California.

PJ, Oscar Meyer Laywer, and several other posters have almost nailed the other big problem here, which is: If the court forces Ralph's to calculate net income in a way that violates the GAAP, then it has ordered them, in effect, to commit a felony under the terms of Sarbrenes-Oxley (sp?). Company execs now have a choice of which charge they want to be jailed on -- contempt of court, or accounting fraud. All because they wanted to give an incentive to their employees. Outcome: end of all incentives for non-exempt employees in California.

I go with PJ/Maryland. The outcome will be no more bonuses and thus less income for the employee's of Ralph's. Yet another case where government causes the very problem they set out to cure.

Jim English
Chicago

"It is also a virtual certainty that the complaintant did not report the alleged loss as such on his income tax returns, and thus he committed perjury in the matter of this deduction. If I were Ralphs, I'd arrange for the bastard to be audited until he bleeds, then tried for tax fraud. "

Errr, wait, are you saying that the employee committed tax fraud because he didn't try to claim a deduction for the amount that he was supposedly docked? There is no legal requirement to take a tax deduction that you are entitled to.

"If the court forces Ralph's to calculate net income in a way that violates the GAAP, then it has ordered them, in effect, to commit a felony under the terms of Sarbrenes-Oxley (sp?). "

Again this doesn't follow. Ralph's would have to calculate hits net income according to GAAP for financial reporting purposes, then it would have to add back in the shoplifing losses & compute bonuses accordingly. Nothing prevents a company from using non-GAAP accounting methods as long as they do follow GAAP for official financial statements.

Overall I think Ralphs should be allowed to use after-shoplifting income as a way to figure its bonuses. I'm not convinced, though, that this was a bad call by the judge. The judge is required to follow the law, even if it leads to a bad conclusion.

If one follows the links to the Case Report, one finds that the parties (and the legislature and the bureaucracy) agree that the "Bonus" for the purposes of California law is Wages.

That being true, it is well settled that no deductions may be made therefrom for "losses".

All this means is that California bonuses must be based not on "Net Profit" but on some other indicator. Stock price perhaps?

The begged question being, "How is that determined?"

So does this mean that any form of merit based pay is not permitted?

Imagine the following scenario. Joe Blo works for you, but not very well. He never completes tasks, shows up for work late, and routinely makes mistakes in the little work that he actually accomplishes. He's a complete buffoon. So, you decide not to pay him a bonus, which your compensation plans expressly permit.

But Joe Blo is mad, and hires a lawyer, Sharkman. Sharkman files suit, claiming that, yes, Joe Blo is indeed a complete slacker, but hey, the impact that Joe Blo causes your business due his complete incompetence are "losses". I can see it now. You're on the stand.

Sharkman: Mr. Capitalist, do you like productive employees?

You: Yes.

Sharkman: Why?

You: Well, because they are a big factor in making my business profitable.

Sharkman: So would it be fair to say that non-productive employees are a drag on your business?

You: No question.

Sharkman: And that nonproductive employees have a real negative impact on your bottom line?

You: Yes, probably more than any other single aspect of my business.

Sharkman: Your honor, I rest my case, and move for summary judgment. Joe Blo has already stipulated that he's an incompetent employee, and Mr. Capitalist has just agreed that Joe Blo's incompetence causes his business losses. Ergo,
Mr. Capitalist, under the laws of this great state, must immediately pay Joe Blo a bonus.

Megan, I think your framing is inaccurate. From the linked opinion:

"To the extent the bonus calculation includes expense items the Legislature or the Industrial Welfare Commission has declared may not be charged to an employee (deductions for any part of the cost of workers' compensation claims or cash shortages for non-exempt employees), such a bonus plan is unlawful. However, other expense items, even those beyond the individual manager's direct control, may lawfully be considered in profit-based bonus programs, which can serve as an effective economic incentive to managerial level employees to maximize company profit by increasing revenue and minimizing expenses. Because the complaint in this case alleges the bonus plan adopted by Ralphs Grocery Company includes deductions for expenses within the first, prohibited category, it states causes of action for unlawful deductions from wages and unlawful business practices. Accordingly, the trial court properly overruled Ralphs's demurrer."

In other words, you can't base employee performance on certain kinds of expense items, but you can on others; the kinds are covered in the relevant law. I'm not sure what's controversial about this.

Anyway, as Boonton points out, this is just straightforward application of the law.

"Taken to it's logical extreme, ANY bonus based upon net income is apparently impermissable."

Someone didn't read the opinion....

Jason: That is, it's legal to give management bonuses based on net income, but not hourly workers. The likely result is that only management gets bonuses, or workers get reduced bonuses not based on profits. As Megan's headline suggested, supposedly pro-worker regulation backfires again.

Does anyone know how the law differs between states? I am remembering a "profit-sharing" plan at an electronics factory in Michigan that was anything but - it wasn't tied to profits, but rather to meeting cost & production targets, which were raised every time they were met. Over a period of several years, every quarter saw more product shipped with the same or fewer people, but yet somehow the bonuses for the hourly workers kept shrinking. I wonder if this was due to a similar regulation? (As an engineer, I was on a different plan that did actually reflect the profitability, until the best hourly workers quit, boneheaded managers decided to fix processes that didn't need fixed, and all profits disappeared...)

Hey, some of you people: Corp Law Blog is right: it's Ralphs, not Ralph's.

Founded by George A. Ralphs many moons ago.

If by "net income" you mean the GAAP statement, yes, they can't give employees bonuses based on that, because it includes forbidden categories like theft, etc. They're not forbidden from coming up with alternate criteria.

The court ruled properly as the law applies to "wages". Ralphs agreed going in that "bonuses", under California law, are "wages." I'm not sure, but I suspect the IRS would agree - after all, tips are considered "wages", to the point that restaurants and bars pre-calculate the amount of tips an employee will make and adjust company-paid wages by that amount (even to below minimum wage.)

But then, as Dickens wrote, "If the law says that, the law is an ass."

Boonton, I'll admit that I'm not an accountant and there's a lot about the relevant laws that I don't understand. But I do recall that at the time Sarbrenes-Oxley passed, a big deal was made about the fact that it applies to all aspects of a company's accounting, not just the financial statements. (That's one reason a lot of accountants were upset about it; they perceive that it substitutes a mindless zero-tolerance policy for professional judgement.) It still seems to me that the court has put the company into an accounting catch-22 where it will be difficult to calculate the bonus in any meaningful way without violating some law somewhere; GAAP as I understand it is pretty clear that the method by which net income is calculated has to be consistent throughout the bookkeeping.

There are certainly other ways by which a bonus could be calculated, but I can't think of one that would be legal under this ruling and still be meaningful to company performance. I think what is really getting people here is that the court seems to be trying to deny a fundemental fact of business, which is that shrinkage and theft losses impact performance. You and other posters could be right, though, in stating that the court had no choice but to rule as it did under California law. If that law contradicts federal law, I guess Ralphs would have to take that up in a federal court. And if Ralphs did concede that the bonuses constitute "wages", they probably need a better lawyer.

Cousin Dave,

I'd be really shocked if the law banned non-GAP accounting in internal management. If a manager sketches a rough estimate of his profit centers income on a napkin, does the new law say he can go to jail if he used a non-GAAP method?

Anyway, as for calculating the employee's bonuses all you would have to do is take:

Net Income per GAAP
add: Shrinkage Expense (from GAAP)

equals: Bonus Base

divide by employees

equals: Bonus per employee.

Boonton: And next year someone hunts through 1000,000 pages of state legislation, finds another prohibited category, and sues again. OTOH, it's clearly legal to give the salaried exempt workers profit-based bonuses and hourly workers no bonuses at all... Expect the businesses to do what is safest - aside from those that are able to do what is really safest and move out of CA entirely.

Net Income per GAAP
add: Shrinkage Expense (from GAAP)
equals: Bonus Base

Boonton, the CorpLawBlog post mentions "cash shortages" and "workers comp costs" as also being illegal.

I waded thru the court ruling and discovered that the bonus plan was tied to the net profit of each store rather than the chain as a whole, so my point in my first post above (that one store's shoplifting losses would be trivial compared to the company's profits) is much less strong.

And I see that earlier court rulings were already a bit ridiculous. In the Hudgins v. Neiman Marcus case, the court said that paying a commission on new sales less returns (ie, "net sales") was illegal because it penalized employees for returns. The wrong turn was taken a while ago, when the court missed the distinction between "deductions from wages" and reductions in additional payments like commissions and bonuses. Clearly the court doesn't understand economics and is fuzzy on accounting in general.

As a non-lawyer, it looks to me like Ralphs could announce a new bonus plan. The bonus will be declared by the company's Board, and will vary year to year. The Board will take into account company profits, shrinkage, workers comp costs, and all sort of other things, and then arbitrarily declare what the bonuses will be. As long as the Board doesn't announce a formula for the calculation, they'll be entirely legal.

Net Income per GAAP
add: Shrinkage Expense (from GAAP)
equals: Bonus Base

Boonton, the CorpLawBlog post mentions "cash shortages" and "workers comp costs" as also being illegal.....

Yes, yes, then just add those two line items in as well and you got your Bonus Base, fully in compliance with GAAP, the ruling and everything else we can think of.

I agree the distinction between regular compensation and an optional bonus should be given room in law. However, I think the problem is not the judges but the lawmakers. It is not the job of the judges to write what seems like a sensible provision into law.

>> Boonton, the CorpLawBlog post mentions "cash shortages" and "workers comp costs" as also being illegal.....

> Yes, yes, then just add those two line items in as well and you got your Bonus Base, fully in compliance with GAAP, the ruling and everything else we can think of.

Yeah, until the next ruling, or regulation. Or the next time somebody sees a chance to make some bucks on a class action lawsuit based on an obscure interpretation of a law...

I agree the distinction between regular compensation and an optional bonus should be given room in law. However, I think the problem is not the judges but the lawmakers. It is not the job of the judges to write what seems like a sensible provision into law.

I dunno, the law apparently says "cash shortages (and other items) cannot be deducted from employees' wages." Somehow, the judges got from that to "bonuses based on company profits are prohibited".

PJ,

It may be a silly law, but it's not a silly ruling. Bonuses are part of compensation, just like hourly wages. Several commenters have noted that in fact Ralphs agreed that the bonuses were "wages" within the meaning of the law.

Contrary to your claims, the court understands economics just fine. Compensation is compensation. Anything that causes a bonus to be less than it wold otherwise have been constitutes a reduction in pay.

Comments are Closed.