The New Rules Of Work

value based on performanceperformanceAlmost every day now there is a news item about “the 1%”, talking about their increasing incomes. And right below the “1%” story there’ll be another news item about unemployment, and persistent wage stagnation in other job sectors.

Inequality is becoming a front burner issue for politicians, because so many voters are being affected. On a regular basis now the President talks about the need to “address inequality”.

Clearly inequality is asserting itself in the US, and other countries around the world, but what’s behind it?

It’s not the narrative in the Press about rich people being selfish and greedy. Greed and myopic focus have always been a part of making a lot of money, going back centuries. It is just more out in the open now that those generating wealth are doing it so easily.

It is also not outsourcing, although this has played a part. In the last ten years outsourcing is responsible for roughly two million jobs going overseas. The business owners and managers responsible for those decisions didn’t make them because they are heartless, or unpatriotic people. They made them because the level of productivity produced by the US based workers was available in another country at lower cost, and if those jobs weren’t outsourced now to keep the business alive, the jobs would be gone in the not too distant future anyway, when the business filed bankruptcy, unable to compete in the global marketplace.

Outsourcing has definitely put people out of their existing jobs, but it hasn’t stopped them from re-educating themselves, or acquiring new skills that are in higher demand.

These two issues have currency with the Press because they make for good news stories, and there are easily identifiable “good guys” and “bad guys”. But as usual with the Press, they are just whipping up fervor so you go to their pages and click on their ads.

The inequality of income that is reshaping Society today is not caused by Greed, or by Outsourcing. It is being caused by machine technology entering the workplace, and the increased ability of business owners to measure the performance of their employees.

Namely, how they measure value.

                  Inequality Is Being Driven By Machine Technology Entering The Workplace, And         Employee Performance Being Precisely Measured

To get a fast track understanding of this, think about the world of professional sports. In 2015, John Lester of the Chicago Cubs, and Clayton Kershaw of the L.A. Dodgers, will each be paid $30 million for their services. The average MLB salary in 2015 is $3.8 million, and the lowest paid player this year will receive $58,237.

If you look at the NBA and the NFL the situation is basically the same.

The reason there is such a huge yawning gap between the very top and the very bottom, and why the average is closer numerically to the bottom than to the top, is that every single aspect of these athletes’ performance is being measured.

If you are a major league baseball player there are 16 individual statistics being generated by your performance on the field. Over time, taking into account streaks and slumps, your overall value to the team, and the contribution you make to the team winning games, will be revealed. There will be no way to spin it, it will all be in the numbers. And it is from those numbers the player’s “value”, what a club is willing to pay to acquire the player’s performance to help them win games, is derived.

Players’ Performance Is Recorded In Their Statistics, From Which Is Derived Their “Value”

Over the last fifteen years, machine technology, like PCs, laptops, and the software that runs on it, along with the internet, have become more tightly integrated into business and our personal lives. The main benefit of this has been the ability to process raw information into meaningful data that can be used to make decisions.

With this increase in information processing power, has also come an increased proclivity to measure. A lot of the most useful websites of the last ten years take in user generated data associated with service providors and then give us the results in the form of a score.

Yelp! gives you a rating for local restaurants, cafes, bars. Amazon reviewer ratings of books, Ebay with its seller and buyer ratings, Angie’s List for local contractors, Google Local for basically every kind of service provider.

So if you are a service provider just minding your own business doing work over the last ten years, it may be a bit of a shock, but your customers are now talking about you, and your performance is being rated.

                    If You Are A Service Providor Your Customers Are Talking About You,                    And Your Performance Is Being Rated

With this rating infrastructure surrounding almost every kind of service now, those providers doing high quality work and treating their customers well, they will thrive. They will get most of the business and be able to raise their prices. For the others, as the quality of service and the customer experience goes down, they will find it increasingly hard to do business, as their lower “value” to customers becomes more widely known. They will need to lower their prices to attract business and find it harder to stay in business overall.

These websites operate on the business and service providor level, and it’s out there for all to see. What is less widely known though, is this is happening on the individual level as well. Employees are having their performance measured.

If you work for a major corporation you are no doubt already aware of this, with your Annual Performance Review. As markets become more competitive, the same performance tracking and measurement processes are making their way into small businesses as well.

So employees today have multiple aspects of their work performance being measured. Over time, the “value” of that employee, the contribution he/she makes to the company generating revenue, reducing expenses, and/or adding to organizational effectiveness, will be revealed. And it is from these numbers, the employee’s “value”, what a company is willing to pay to acquire the employee’s performance to help it be successful in the marketplace, is derived.

Every employee in work today has a set of numbers that tells a story about their work performance. These numbers are highly scrutinized by the company’s management, and they are compared with all the other employees in the same company, and at other companies.

Every Employee Today Has A Set Of Numbers That Tells A Story About Their Work Performance

Just like players in professional sports, employees’ stats are known.

Ten to fifteen years ago this was less the case, because it took so much more work and expense to get this information about employees. In recent years though, the widespread adoption of machine technology has made employee performance highly trackable, at low cost to employers.

Today, the performance of an employee can be valued very precisely, and the compensation offered that employee is tied just as precisely to their performance numbers. It’s all revealed in the numbers.

One of the reasons the layoffs post 2008 were so brutal was, employers were now armed with this new information about employee productivity. They saw that a great number of their employees, many who had been with the company a long time and had their compensation based on more subjective criteria, were actually being over valued in terms their actual performance. So when the crash came and companies had to radically restructure to stay alive, it was the employees with numbers showing high productivity that got to keep their job.

The rest?

It’s not entirely accurate to say the rest were simply laid off, although they were. But this was an opportunity for employers to clear out all of the employees operating at low levels of productivity, now that they had data on exactly who those individuals were. These employees were let go, but also, most of the positions they occupied were eliminated too.

Many laid off in the post ’08 Crash years have had a hard time adjusting to the new reality of being paid based on their performance. After long periods of trying to get work again in their former occupations, or related areas, a lot of people have simply given up trying and taken part time work instead, supplemented by the generous government assistance programs.

I realize it sounds harsh talking about it like this, but it is what is happening.

OK, so what does all this have to do with apartment investing?

What Does This Have To Do With Apartment Investing?

This.

In a purely performance based marketplace, there will be the elite performers, the top 1-2%, the top performers, those in the top 15-20%, and the other 80% who produce low to no results at all.

If you want to see a real estate version of this, contact a friend who is a Realtor, get them to log into the local Board Of Realtors portal and pull up the sales stats for all of the active licensed Realtors in the county. It doesn’t matter what county you are in, you will see the exact same thing.

There will be 1-3 agents producing 80% of total sales in the county. About 20 agents will produce roughly 15% of all sales. Then there is a long, long list of agents doing 1 sale a year.

The workplace is being transformed by technology into this kind of performance breakdown, based on worker productivity. There will be the 1% of highly productive elites who have figured out how to use machine technology to their advantage, making huge amounts of money. There will be the 15-20% who service the elites who are the best at what they do, making very good incomes. And there will be those who have to compete against machine technology, in one way or another, whose incomes will go down over time.

Where people live, and how they live, will depend on where they fall on the productivity/income groupings as described above. Whether a person’s income is rising, or falling, over time will determine what housing choices they have.

                         Those Whose Jobs Do Not Use Machine Technology To Their                               Advantage Will Have Falling Incomes Over Time

Bigger cities will become more gentrified and prices will continue going up, as the wealthy buy properties there. Low income residents of larger cities will sooner or later be unable to afford the rent and have to move to more affordable housing in other cities.

Cities with lower priced housing and employment opportunities for low priced labor are going to see a continuous in-migration over the coming decade as people adjust to the new reality of their work lives. These would be cities in the South, the Midwest, Texas, Oklahoma.

Texas is a prime example. Low housing cost compared to bigger cities. Government has set up tax breaks for companies that set up open factories, or offices there. The food is very good and not expensive. There is a reasonably good infrastructure. It just makes sense for someone struggling in a high cost large city, to move there.

It’s no surprise that three of the top five fastest growing cities in the US are in Texas. The things that make Texas attractive to lower income workers are still there, and there is still more growth to come.

Keep your eye out for other states in the South and Midwest that follow the Texas lead, with tax breaks for business and spending on infrastructure projects that improve the standard of living. Cities in these areas with growth minded Mayors will be good markets to buy Class C properties.

If you live in a large city the opportunities will lie more in the gentrification of them. Taking old properties and retrofitting them with modern technology and uses. Sharpen your capital raising skills, and assemble a Dream Team. It will be worth it. Values are only going up.

The biggest opportunity I see though is buying Class C properties in Texas and other cheap housing states in the South. The migration from more expensive cities to these states will keep demand firm for Class C apartments for many years to come.