Commentary | Apple

$45+ billion for Apple shareholders, nothing yet for Apple workers

For more than a year, there has been a high-profile debate over what Apple should do with its enormous cash reserve, now amounting to $137 billion. The proposals have been curiously one-dimensional, with a nearly exclusive focus on how the reserves should be used to reward its shareholders. Almost entirely absent from the discussion has been whether those reserves should also be used to provide fairer compensation to the workers making its products abroad or selling its products here. This imbalance is part and parcel of a larger trend: the share of economic rewards going to workers is diminishing.

The debate should be broadened. As detailed below, Apple’s excess cash should also be used to address the serious deficiencies in the compensation and treatment of Apple workers. Among the steps described are for Apple to make good on its promise to compensate workers retroactively for the many hours they have worked without pay and for Apple to assist its suppliers in increasing wages to offset the reduction in pay resulting from limiting work hours to legal, more reasonable levels. As of now, it appears Apple is walking away from the first promise; the fulfillment of the second promise remains far from certain.

Apple’s $137 billion reserve

The exceptional size of Apple’s cash reserve led to a plan announced in March 2012 to distribute $45 billion of it to stockholders over the subsequent three years. But this distribution would still leave a huge reserve. The reserve now amounts to $137 billion in cash and investments, with an additional $42 billion in earnings expected to be generated this year. A just-released Moody’s analysis found that Apple has the largest cash reserve of any U.S. company; its reserve is twice the size of Microsoft’s, which has the second largest reserve.

Many Apple shareholders have been dismayed by the March 2012 plan, believing that more of the reserve should be distributed to them, especially in light of the drop in Apple stock over the past year. This belief was expressed most publically by well-known hedge fund manager David Einhorn, who in February created a stir with his proposal to create a new class of preferred stock to benefit Apple shareholders. While Apple did not embrace this proposal, it responded by signaling that it will distribute more than the promised $45 billion to shareholders, with a March 11 story indicating that Apple will announce a new plan for distributing its reserve by April.

How have stockholders fared?

The push for Apple to distribute more of its reserves to its shareholder has been influenced by a drop in Apple’s stock price. At the close of the stock market on March 18, Apple’s stock was valued at $456 per share, down considerably from the high of $705 reached in September 2012.

A longer-term view tells a much different story. Apple’s stock is still higher today than at any time prior to January 2012. It is more than one-third higher than it was two years ago. It is more than three times its level of five years ago, with this increase dwarfing the overall rise in the stock market since then.

In other words, long-term investors in Apple stock have done extraordinarily well. This is not to suggest that the stockholders/owners of Apple should not receive any benefits from the distribution of its reserve. But it is appropriate to also consider distributing some of these benefits to the workers who helped generate the $137 billion, who have not fared well over the long term, and who often continue to face harsh working conditions and receive meager wages.

Compensating Apple’s factory workers

The poor treatment of the factory workers making Apple products has been apparent for many years, with public attention on this treatment peaking in the wake of a series of stories in the New York Times in early 2012. Apple subsequently promised to make major improvements in these working conditions, with reported progress since then overstating actual developments on the ground (as discussed here, here, and here). The most recent available information comes from the Hong Kong-based group SACOM, which investigated three Apple factories in China, finding workers still working excessively long and illegal hours, including unpaid work time, often in hazardous work environments. Apple’s figures suggest that more than one million workers are employed at its suppliers.

Some of Apple’s cash reserve could be used to fundamentally improve the working conditions of hundreds of thousands of workers, and to make up for past treatment. The potential steps to be taken include the following.

Fulfill retroactive pay promise. In March 2012 Apple promised it would ensure that the factory workers making its products would receive compensation for all the hours they had worked in the past that had not been paid for. Apple has since gone silent on this promise, and may be walking away from it, even though the promise is a response to illegal and unjust work practices, and could be fulfilled using just a tiny fraction of Apple’s massive reserve.

Here are the details. In early 2012, Apple joined the Fair Labor Association. Apple requested that the FLA study conditions at Foxconn—Apple’s main supplier—and recommend improvements. On March 29, 2012, the FLA released its report. It confirmed that a range of serious labor rights violations occurred at the Foxconn factories in China, including that Foxconn had been systematically failing to pay workers for all their overtime hours.

The FLA reported that Foxconn frequently failed to pay employees for pre- and post-shift meetings, for time spent in mandatory trainings, and for as much as 30 minutes of “unscheduled overtime” on any given day. The first two practices affected a large percentage of Foxconn workers and the last practice, according to the FLA, potentially affected 14 percent of the workforce (so-called “indirect workers” such as maintenance staff and guards).

The FLA findings were not new. Foxconn’s failure to pay for all overtime hours had been reported by independent investigators as early as 2009. Thus, the company’s illegal denial of overtime pay likely harmed large numbers of current and former workers and cumulatively denied them significant amounts of pay.

Foxconn and Apple agreed to make amends. In a press release announcing the new report, the FLA said it “secured agreement from Foxconn and Apple to retroactively pay any worker due unpaid overtime. The companies are currently conducting an audit to determine the payments due to workers.”

Apple has since said nothing about this March 2012 commitment. The company did not mention any actions toward fulfilling this commitment in its recently-released supplier’s report, for instance, even though the report said, “We require all of our suppliers to compensate workers for any illegal deductions and wage deficiencies, including base wage, overtime wage, disciplinary fines, downtime payment, and any other legal benefits or illegal deductions.”

The FLA has also downplayed this commitment. In August the FLA released an interim progress report assessing reforms at Foxconn. The retroactive pay promise was not discussed. This led the Worker Rights Consortium to contact the FLA, and in the subsequent exchange (available upon request), the FLA indicated that no back pay has been provided and implied that none is forthcoming.

FLA’s justification for this shift included that it is “not possible” to provide back pay for uncompensated pre- and post-shift meetings because Foxconn did not keep records of the time workers spent in these meetings. But Foxconn’s failure to keep proper records of workers’ hours (itself a violation of official FLA standards) is the fault of Foxconn, not the workers, and the latter should not be penalized for the negligence or malfeasance of the former. Where proper records have not been kept by an employer, back pay can be estimated based on worker testimony as to the duration and frequency of the uncompensated work.

While the back pay would be of significant benefit to the low-income factory workers in China, and would provide some amends for these unfair work practices, it would have little effect on Apple’s balance sheet. The total payments involved likely amount to far less than $1 billion, or just a very small fraction of Apple’s reserves.

Boost pay to offset decrease in work hours. Another priority emerging from the FLA report was the need to reduce the extraordinarily long hours worked in those factories making Apple products. In this area, Apple has helped advance some progress; its data show the proportion of workers in its supply chain working more than 60 hours per week (the Apple standard) has dropped considerably over the past year. This progress, however, is itself partial, as significantly larger proportions of these employees worked excessive work hours in the fall of 2012, during the peak production season. More broadly, Apple’s standard is well above the legal standard in China, which calls for a maximum work week of 49 hours. Apple has indicated it aims to achieve that legal standard by July 2013.

Progress in reducing work hours exacerbates another problem, moreover. The wages paid to the workers at Apple suppliers are so low that reductions in their overtime hours, and thus in how much they can earn, add to their hardship. For example, the recent SACOM report found that base salaries, which do not include overtime, ranged from $225 to $288 per month in the three factories examined; this translates to between $1.34 and $1.71 per hour. Recognizing this, FLA’s press release from last March also stated, “More importantly, while employees will work fewer hours, Foxconn has agreed to develop a compensation package that protects workers from losing income due to reduced overtime.” The FLA’s interim progress assessment report in August 2012 did not measure progress in this area, saying instead that this goal was something to be achieved by July 2013.

Meanwhile, last May SACOM found take-home pay had fallen at Foxconn factories due to reductions in overtime hours. Further, in its just-released report SACOM found “The most severe complaint of the workers was in regard to unpaid overtime, as they are forced to stay in the factory’s unit until they have met the high production quotas assigned.” (The Apple suppliers examined in SACOM’s latest report did not include Foxconn.) These reports constitute warning signs about sustaining the pay of factory workers making Apple products, when their official overtime is cut.

Apple has the resources, and the responsibility, to ensure that the reductions in hours that it is appropriately encouraging at Foxconn and its other suppliers do not lead to reductions in already low pay levels. Apple can increase how much it pays its suppliers, demanding that the additional amounts go to the workers, or it could even explore ways to provide some pay to the workers directly, such as through stock compensation.

Switch to a livable wage standard. Apple’s supplier code of conduct insists that its suppliers pay wages consistent with legal minimums. In many countries, however, this level does not provide enough income to provide an adequate standard of living. The financial success of Apple underscores that it should use a “livable wage” standard instead. Indeed, since Apple is now a member of the Fair Labor Association, and the FLA’s standards include the right of workers to receive a livable wage as well as the obligation of FLA members to make progress towards that right, Apple now has the formal obligation to switch to a livable wage standard. Apple should work with independent researchers in defining what such a standard would require in various countries, and then should dedicate the resources and persuasion necessary to achieve it.

Other steps.  Modest or tiny amounts of Apple’s cash reserves could also be used to improve other working conditions at its suppliers. Many supplier factories are characterized by significant health and safety threats. Apple could establish a modest fund that after inventorying all needed changes at its suppliers would partly or fully pay for necessary reforms. Apple could also establish a fund to provide retroactive compensation for the range of labor rights violations, beyond the failure to pay for all overtime, that have occurred at its suppliers. This type of compensation for past rights violation is not uncommon. (The ideas listed in this paragraph are not meant to be exhaustive; rather, they are meant to be suggestive of the nature of creative reforms Apple could advance with a small fraction of its reserve.)

Those helpful folks at Apple stores

Relatively little information is available about the wages and benefits of the Apple employees selling products at its stores in the United States, but a July 2012 New York Times story did point to some troubling possibilities. The story focused on the 30,000 individuals working at Apple stores, out of 43,000 Apple employees in the United States, finding that “many earn about $25,000 a year.” Lawrence Mishel analyzed the data in the story and found this salary level, equivalent to $12.02 an hour for a full-time worker, is considerably less than the average hourly wage paid to all young college graduates (which in 2011 averaged $21.68 for men and $18.80 for women). The gap is even larger in comparison to all college graduates. Closing this gap is another way that some of Apple’s reserves could be used. (The Times story said Apple had decided to boost pay for at least some of the workers at these stores, but information on whether the gap may have been closed significantly, or at all, does not appear to be available.)

A more balanced approach

The imbalanced conversation around what to do with Apple’s cash reserve is, unfortunately, consistent with broad trends regarding the distribution of corporate income. The share of this income going to workers is at its lowest level on record, with data available back to 1948. This share exceeded 81 percent just a decade ago but is now less than 75 percent. Each percentage point decrease in labor’s share of corporate income translates to $70 billion less to workers. (This information, based on data from the Commerce Department, has been compiled by the Economic Policy Institute and is available upon request.)

Just as public policy should consider broad measures to address the income inequality that has resulted, in part, from the diminished share of corporate income going to workers, the private sector should be reconsidering its own choices about what to do with its profits. In this vein, the conversation around what Apple should do with its cash reserves should be more balanced. Over time, its shareholders have prospered tremendously and its executive team has been compensated generously (for example, as discussed here, Apple’s nine-person executive team received compensation exceeding $400 million both in 2011 and in 2012). But as Apple itself has admitted, the workers making its products have been subject to a range of labor rights abuses, including working for very low pay, for excessively long hours, in hazardous conditions. So perhaps it makes sense for Apple to commit even more than $45 billion of its reserve to its shareholders, given its astounding size, but surely it makes sense to use some of the $137 billion to assist its workers.


Technical note:

The options for assisting workers discussed here outline proposals in which payments might affect Apple’s ongoing costs and thus its earnings stream. Thus, from an accounting perspective the proposals might affect Apple’s income statement (by raising costs and thus reducing earnings) and not just its balance sheet (where the cash reserve resides). Presumably, some of the proposals could be designed in a way where they are being paid for out of the reserve; alternatively, the proposals could still be designed in a way where they show up in the income statement but Apple could report earnings with and without the special measures. Thus, even if the special measures technically affect the income statement, investors would know the measures are really coming out of the reserve.

See related work on Apple | Wage, hour, and safety laws | Trade and Globalization

See more work by Isaac Shapiro