Why you won't get that hike?

We all know that decisions of a few rich people are still impacting majority of the population. But, most of us don't care to ask how or why, especially middle class population. We don't feel that it is impacting our lives much. But the time is about to change. If you don't know the answers of how or why, please read ahead. If you know, still read ahead, you might gain a new perspective.

Few rich people are basically the money lenders of the world. They lend it to big organizations through shares. Suppose we have an investor Mr. A who has recently invested in Company XYZ. Now Mr. A can earn from his investment in two ways, first is dividends given by Company XYZ as percentage of share value held. Second, share of XYZ goes up to a value at which Mr. A is comfortable to sell it.

Performance of XYZ is measured by growth, both in revenue and profit i.e. topline and bottom-line. If during 1st year of investment, Mr. A sees 3% of growth in performance of XYZ and gets a dividend of 10% per share value. Mr. A is happy. Problem starts in the coming years. Now, Mr. A won’t be happy with 10% dividend, we will seek a higher value, but the markets are now matured, revenues are difficult to achieve. Growth will be hard to achieve for XYZ, which will result in drop in share value. So, the next thing to improve is Margin (Higher profits at lower costs).

To make sure Mr. A receives a hefty dividend, XYZ must post good numbers, for this Mr. A puts some pressure on leadership of XYZ to improve the margin. Easiest way to improve margin is heavy cost cutting. Few years back, cost cut meant using improved technology or improving processes or sacking underutilized high level personnel. One thing about margin is, it is like tightening a nut. We can't go beyond a point. Cost can be minimized only up to a certain level. XYZ has taken all possible steps over the years to reduce cost. At this point, Mr. A still wants an increased dividend and return. The pressure is still there to reduce cost. Now XYZ has only one way to quickly reduce the cost. Salaries.

Employee salary is one of the biggest operating cost for most of the modern industry. Salary cuts use to happen a decade back as well, but hardly for the lower level employees. Now a days, we can easily see a salary cut in lower level employees. A lot of variable component is also included to fine tune the cost whenever required.

As I said, it is like tightening a nut. We are the new nuts that need to be tightened. So next time you get a pay cut or trimmed hike, it is because some investor wants more juice from his investments.