Parable Of The Shoe Salesman

Posted by Nipun Mehta on Feb 21, 2008
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Due to my last trip to Columbia Business school, I ran into this interesting article by Marjorie Kelly from 1995:

Here's a story that makes me mad. It's a story about the purpose of capitalism, the ways of wealth creation, and for whom the cash register tolls. It's a story about a shoe salesman.

His name is John Ulviden, and I first heard about him from a friend more than a year ago. But as I read headlines about soaring profits and falling wages, I began recalling his story. I'm disturbed that S&P 500 profits continue to soar - up 40 percent last year alone - while real hourly wages keep sinking, as they have since 1973. John's story seems to me a parable of what's gone wrong.

For twenty-one years, John worked as an independent sales representative for Adidas, building his Wisconsin territory up to $7 million in annual sales, and his commission up to $170,000. I mean, this guy was good. And he had a good product, in a period of rapid growth (which he helped create). Out of a national sales force of eighty-five, John was one of the top four revenue producers. And then he was fired.

"Basically, I was making too much money," John told me. "Their philosophy is they don't want anyone to make a lot of money." His tone was matter-of-fact, but I could hear the bitterness. "This happens all the time. A salesperson is always the ugly stepchild."

To get rid of John, his manager used the thirty-day cancellation clause in his contract. "Territory re-alignment," they called it. It took three people to replace him, but the company re-configured the pay system and saved money.

I phoned the manager who terminated John, but he declined to discuss it, saying it was a "personal matter." As for John, he started over with new shoe lines, and his income this year will approach $25,000.

In capitalism we call this a success story. A company re-engineers its sales force. The hard-driving people who build sales are replaced by cheaper folks who can manage existing accounts. Costs go down. Profits go up.

What makes me angry about John's story is how successful he was at creating wealth. After all, wealth creation is the core task of capitalism. It's the genius of the system: Companies end up with more money than they start with, generating profits the way a plant generates oxygen. This is presumably what justifies wealth piling up: Those who create it get to keep it.

Only not quite.

What John's story reveals is that capitalism does not reward people who create wealth. It rewards people who own wealth. It does not reward initiative and hard work and productivity - unless by the ownership class. It rewards owners as much as possible, and employees as little as possible.

John's reference to himself as the "ugly stepchild" is arresting. If a company is a familial arrangement - with stockholder and employee engaged in a common task - it's an arrangement that makes the stockholder the favored child, and the employee the ugly stepchild. True to fairy tale style, note who does all the work.

Of course, one can say stockholders put their wealth on the line, and could easily invest elsewhere. The mobility of capital creates pressure to maximize profits: If a company's performance lags, its ability to raise capital is impaired. Equally convincing is the argument by Sophia Collier at Working Assets Common Holdings. Shareholders come first, she says, because they sit in the back of the bus; everyone else gets paid first. True enough - stockholders may not get paid at all.

But if sales people on commission don't make sales, they may not get paid either. So it's not entirely accurate to say capitalism rewards risk. It rewards owners' risk.

In John's case, he took a risk, performed extremely well, and had everything taken from him. Imagine this happening to stockholders: We take a risk on a company, our investment performs extremely well, and all our equity is taken from us. We would be outraged, and rightly so. We should be equally outraged by what happens to workers like John.

We might note here that "owners" are usually the wealthy. According to the Economic Policy Institute, 1 percent of the population owns 48 percent of the nation's financial assets.

So here's the moral of the story: As we go about our business of maximizing shareholder return, we are systematically moving money toward the wealthy, and away from workers. We are favoring the interests of one class over another, which is not only undemocratic, but mean. We need not even have meanness in our hearts: It's build into the system.

Before wrestling over solutions, we as business people must first sit with the uncomfortable truth: The growing disparity of wealth is not some accidental side effect of capitalism. It is the fundamental design of the system.

Posted by Nipun Mehta | Tags: | permalink


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Comments (38)

  • Ragu wrote ...

    Kelly has been involved in what is known as "Patient Capital" for a few years now. It is proposed as an alternative to Venture Capital that always seeks a fast exit. Check more about it here:

    [View Link]

  • HglMan wrote ...

    To be fair, this isnt best business to fire him, yes relining that territory he set up is a good move, but he has the skill to build new sales base and if they were smart they would have payed him more and moved him to a new region in which to do this. Then use less capable employees to take over the already set up system. The problem here is that it is to easy for those who own the capital to make the less effective choices so that they can make more money. I suppose this is what you are getting at, that there is not punishment or safeguards to keep owners from profiteering over making maximizing wealth growth. However, I think some kind of collapse will be inevitable, ie the owners eat to much wealth, the societal structures break down. Yeah it all a bit Marxist. However, while i don't think a communist type system will ever work the cycle of wealthy take to much, those left out fight back, set up a new system, take to much etc. As the cycle repeats it appears that power and wealth tend to spread out more or rather access and the ability to move into the elite is opened a little wider. The kings son no longer takes the thrown. Some who do take risk are rewarded. The problem to solve then is how do we fix this loop hole of owners making the choice to take extra profit over maximizing wealth which includes not screwing over employees but that doesn't also prop up bad employees and keeps governments ability to help a particular company or group of them and prevent fair markets.

  • anonymous wrote ...

    doesn't anyone realize that by firing John, 3 families now have people who are working and feeding their children? I mean basically the story goes capitalism create enough wealth that one man's salary was enough to feed 3 families, so they did that. That seems great. Not so great for greedy self interested John who was paid too much, but great for the 3 families that now have food on the table.

  • AnonymousToo wrote ...

    Greedy John - imagine him doing just what the man asked, and then expecting not to get fired for it. Tsk, tsk.

  • Anonymous Also wrote ...

    Sure three people have taken over Johns work, but don't be naive and assume that they are splitting his $170,000 in commissions. I'm sure they have a new plan and each is being paid about $30,000 each.

  • MJ wrote ...

    Greedy John? He might very well be... we don't know his personality. But from what I've read, he worked pretty damn hard to get where he got and was rightly reaping the rewards.

    As far as shareholders go, sure you need the startup money, and these people are taking a risk but they can't expect to reap the benefits of their risk without relying on workers to produce and sell their product and/or service. It's like building a car and expecting to get somewhere without the engine.

  • Jeb wrote ...

    I was hoping to see the parable of the shoemakers children in here, (the shoemakers children go barefoot) because I think it would lend a sharper sense of contrast and emphasize to the fact that value, to some, in this economic & even cultural system, seem to be less & less appreciated if not completely worthless in the eyes of the "passerbys" so much so that only those that look closer or have a different background/training know what to look for. However, I say don't lose all hope, if this is indeed the case then eventually a balance will, by default, be struck, when those with talent, having become scarcer, do to societal norms, come into demand. Always the balance will adjust, even if its excessivly and aggressivly dynamic. But I could be wrong, like outragiously and completely. Thank you for the Post.

  • capitaliswhat wrote ...

    "The growing disparity of wealth is not some accidental side effect of capitalism. It is the fundamental design of the system."

    And that is why in my lifetime will will probably either see a major restructuring of the system or its entire collapse.

    If you were to take this disparity to its extreme conclusion of all the money on one side would it not be impossible to function? How is the side without money going to buy the necessities? If they simply worked for nothing except the necessities then how close is this to servitude? How far are people willing to go into this quasi servitude as the approach the actual thing?

  • James wrote ...

    I agree with the thrust of you post, but I have to pick on one thing. How exactly is John creating wealth?

    Selling shoes is not creating wealth, it's redistributing wealth. If John created a machine that made shoes more efficiently, THAT would be creating wealth - because less would be lost to the manufacturing process.

  • Robert V wrote ...

    The owners weren't capitalists, they were idiots.

    A capitalist would have moved him to another area and repeated the process.

    To set him free to potentially work for a competitor is not capitalism. It's just dumb.

    And a growing gap between the rich and the poor isn't necessarily a bad thing. You have to dig deeper. Let me explain ...

    If a man making 100K gets 130K (+30%) and a man making 20K get 40K (+100%), that's a good thing, right? Well the gap between them just grew from 80K to 90K!

  • dave wrote ...

    I doubt this is the whole story. Im in the sporting goods industry and firing your top salesman because he makes too much money is just bad business.

    I can't speak for Adidas, but this is not common practice. Shareholders/owners and managers have a vested interest to grow sales and keep their customers happy.

    If John's customers would be just as happy working w/ a 40k/yr rep, then perhaps John was getting paid too much for his current work description.

    Regardless of whether or not he "built" his trade route, you have to add value marginally on an ongoing basis.

    There are many stories of 'old timers' who have built up a route, and then milk that route for years w/o putting any extra effort into them anymore, because they know the commission is comming regardless they go to work or go fishing.

    They know the orders will flow in because it's "Adidas", or "Nike", or "_____". The brand has demand regardless of the rep.

    Im not accusing John of slacking off, but there was a reason for his termination. I think to write it off as just "greed" is oversimplifying things.

    Consider also that John (or any employee) may also be getting paid for his "time". Not just commission. As an "owner" or "shareholder", there is no such "floor" pay. You could make alot or lose everything, including your time.

    BTW, what we see in corporate america today is not the shareholders making out w/ millions and millions, but corporate execs. Corporate execs are employees too. Employees of shareholders who have voted them into their positions, and chosen to reward them as such.

  • Huw wrote ...

    If John's so excellent, can't he just take all that cash and start up his own shoe business and eat his former employer's lunch?

  • John wrote ...

    The danger we face in this story is that stockholders have become traders and they now have the belief that they rent rather than own the stock.
    As a renter you are only concerned with short term profits. Maximize short term profits, cash out, and move on to the next investment.
    If the management thought the stockholders had an "owner" mentality they would have promoted John or move him into a training role to help the other areas excel.
    This is a great example of being short-sighted.

  • Dave S wrote ...

    I'm afraid I just cannot agree with this article. The problem for John is that he was not creating wealth for himself, but for someone else, which he was hired to do. Capitalism would have awarded him appropriately had he been in business for himself. Secondly, if your making $170,000 a year, you would assume John would have wisely invested his money back into the capitalist economy we have. This would have minimized the impact of the job loss as well as provide for his retirement. The owners of the company re-organizing things for the sake of profits is just part of the same circle/cycle/concept.

  • Steve wrote ...

    Like today's story about the woman who died on the flight from Haiti. First the story from the woman's cousin comes out that there was no O2 on the plane and all the tanks were empty so she died. Then, of course, AA comes out with a rebuttal that there were 12 02 tanks on the plane and that it wasn't the problem. Of course, there is still no 3rd party verification. The truth probably lies somewhere in between.

    I am SURE there is more to this story and to take only one person's side of it without some reasonable verification is bad journalism/blogging.

  • xoc wrote ...

    You have hit the nail on the head. The system favours power over people, and your anecdote is just one of a trillion examples. All systems will naturally do this, which is why it is crucial to include checks and balances. Democracy is the just such a check and balance, but it has not proven strong enough to counteract the immense concentration of power that capitalism facilitates. A thousand lobbyists have influenced a million representatives and laws, one at a time, until we have come to this point. Capitalism has much to recommend it, but left to run amok as it has been, it will eat itself.

  • Greedy Capitalist Pig wrote ...

    Heres my take
    Uhmmm John got a six figure salary for many many years, I would say he was
    handsomely rewarded for working hard. His job was only possible because of Adidas' skill in creating premium footwear, advertising and enhancing the products image through celeb. endorsements as well as managing the entire design, production and distribution operation. As a result of all his hard work john got the opportunity
    to earn a good living and (hopefully) save some of the money for the day Adidas didn't need his help anymore. Now he is free to do whatever he wants (including growing the business of another shoe company)

  • Shaze wrote ...

    Capitalism is for greedy people who want more than they need, decent people are just along for the ride.

    The reality of a system focused on wealth, is that the greedy will dominate it, and the meek will support it.

    A system based on the nessesity of a poor working class, is clearly a flawed system.

  • bob wrote ...

    its all return on capital ie if i have a million dollars @5% it gives me $1,000 a week without touching my principal 10,000,000 $10,000 a week and so on... as they say the wealthy are different than the masses the have money...with all the cash flow billionaires have they can pr anything to their advantage with their think tanks and foundations...I can fire anyone at will if I wish…I can always find another person who will do their best to make me money

  • gds wrote ...

    The company was free to do whatever it wants to maximize its profit. The company does not make its profit by reconfiguring its work force but by selling shoes. The power of capitalism is, that all factors that led to the firing had an impact, e.g. the supply of shoe sellers on the labor market did not justify the high price for this exceptional shoe seller because the company did not produce fancy luxury shoes where you may or may not need exceptional shoe selling ability and at the very end the decision to fire the guy might just be a very poor decision that effectively reduced the companies' long run profits even though it seemed beneficial in the short run. Now my friend, I hope you get the picture that no human being could possibly gather all the information needed to say how this particular shoe seller is most beneficial for the economy. In fact, the point of capitalism is that only the shoe seller himself could tell us how he could provide wealth to others, and he does by being fired, trying the next job and so on, trying to make the best of his life, he is a capitalist himself. The owner of the company, for example, does provide wealth to others by paying the shoe salesman's salary. Now who are you to decide that the owner of the company must have the ability to provide wealth to the guy in question, e.g. not fire him when he wants to.

  • Brett Morgan wrote ...

    The interesting thing about capitalism is that it is adaptive. As we can see from the examples of RIAA and MPAA, large corporates who become too self serving are eventually replaced by new entrants in the marketplace. I think you will increasingly see american manufacturers being pummelled into the ground by chinese based outsourced manufacturers.

  • John wrote ...

    I worked for CompUSA as a sales-erson on the floor and I had a similar problem to the other John over there, only this time the company wasn't willing to compensate you fairly for your hard work on the floor. Whenever they put up an incentive for sales-people to take advantage of, they took it away the moment they sold well... then they told us we should be fortunate to even have the job to begin with.

    Their commission structure was horrible. I sold something like 6k-7k worth of services for the company, and I would see less then 5% of that on my paycheck (and, almost half of it was taxed). It ultimately would have cost the company maybe a few thousand dollars a month to actually pay a fair commission on our paychecks, which is chump change compared to the tens of thousands they see go through the store each day. Ultimately, CompUSA went down in flames and got bought out. They should've went bankrupted and closed doors completely, IMO. It was not the meager commissions that caused them to go out of business... it was their horrible practices, high-turnover which in turn lead to lack of services sold.

  • jimmy wrote ...

    It's better to be overworked and underpaid. If you're underworked and overpaid, you get fired.

  • chaostheory wrote ...

    Correct me if I'm wrong, but a real life example of the "shoe salesman" is Ross Perot.

    "He soon had the highest sales in the company and hence received the highest commission. Then in 1961, IBM executives decided to set limits on how much commission a sales person could receive each year. It did not take even three weeks for Perot to reach his yearly maximum, which caused him great frustration. Additionally, Perot had some new business concepts that he wanted IBM to implement. IBM management was extremely resistant to trying his new ideas. Frustration related to the cap on his commission and the insult of deciding not to implement his business ideas, resulted in Perot leaving IBM in 1962 to start his own company. His company, Electronic Data Systems (EDS), was based on the very ideas that IBM rejected."

    Capitalism favors creativity and risk.

  • Joe Friday wrote ...

    Not to mention 3 jobs were created instead of 1, which is better for the economy overall.

    And I agree with those that say John could well have been "milking" his existing contracts and not adding additional value or growth to the company.

    Anyway, John's sales skills mean he'll never be out of a job - imagine if he transferred that to real estate, etc. And if he invested well... To think that a company somehow "owes you" when they hired you to do the job in the first place makes no sense.

  • MrWilldotcom wrote ...

    Chaostheory - you make an excellent point! Why should the "John" the shoe salesman story end there? If he was a true champion, he would have known (like Ross Perot) that failure is the foundation of success. John the shoe salesman would do what the rest of us do when we get fired... GET ANOTHER DAMN JOB.

  • nobody wrote ...

    Capitalism is not fair, but that is no surprise! What is surprising is that people live better under capitalism than they do under any other system.

    Also, many good sales people have long and prosperous careers. The anecdote on which this story is based is an anomaly.

  • Ryan wrote ...

    John's a fool for giving his energy to a soulless corporation (and they're all soulless). If no one submit themselves to this kind of abuse, then corporations couldn't operate.

  • oldsalesguy wrote ...

    I have the same story as John but in the electronic component industry. Just like John I am an independent manufacturer's rep and commissions are paid on any sales in my territory. John did not work for the company, he was more like a contractor. That means NO salary, insurance or expenses - just 1099 form commission only. If nothing sells, he/I don't get paid. Although John's story doesn't say, I'll bet he had other lines. Just like a contractor who can work for many clients at one time. He was independent and could sell anything else he wanted except directly competing products of Adidas.

    In my case, selling ICs to OEMs, commission started at 5% and went down to maybe 4% after the first $1M, 3% after the next and so on. After selling company A's products for 7-8 years I was in the right place at the right time. Several customers with growth product lines took off and I managed to get company A's products in them - with the help of A's marketing and engineering resources. My sales exploded. Where Company A's commissions were $5 to $10k per year before they now were $40k to $50k per month! In the last year I was paid ~$550k in commission. In my territory, I had taken company A from a few thousand dollars a year to about $18 million the year I was terminated.

    My contracts, like John's, can be terminated in 30 days for no reason and mine was.

    Am I bitter? Not really. I knew the risks/rewards going into the deal and so did John. That's why John is an independent rep instead of a salaried plus some commission employee. He was willing to take risk and he was rewarded for it like a real capitalist.

    John had the line for 21 years and grew sales. Adidas refined products, improved marketing etc, and John benefited from Adidas investing back into their product line as well as his own efforts. John wasn't totally responsible for all of the sales growth and neither was I.

    John was probably pretty getting comfortable, not working as hard as he used to. Did John have or make time to develop new customers like he used to? Maybe not. Split the territory and replace John with three younger, hungry hard working independent reps just like John was 21 years ago and Adidas can watch it happen all over again - times three.

    John got replaced because he would NOT be willing to have his territory and commission cut to one third and still be happy to rep for the company. They didn't give him a chance to try but I know he wouldn't do it and neither would I. Adidas just saved everybody time.

    As for creating wealth, John was one of many factors that brought increased sales and hopefully profits. His experience is just part of the sales cycle of life.. Notice that he found another shoe line. He didn't fold up and go to work as a salaried sales employee somewhere. He still wants that risk/reward.

  • JC wrote ...

    "In John's case, he took a risk, performed extremely well, and had everything taken from him."

    He took a risk? What was at stake? Had everything taken from him? Like what?

    If you consider his job an investment, he had no tangible assets at stake and made quite a bit of money. He certainly didn't lose money. That sounds like a homerun to me.

    "Imagine this happening to stockholders"

    The stockholder's have tangible assets at stake. If the company does poorly, the stockholders incur a loss. John however, does not.

    Your article exhibits a terrible external locus of control.

  • sabat wrote ...

    See, I don't think you're talking about the same Capitalism that Adam Smith wrote about.

    Adam Smith would have abhorred the idea of conglomerate corporations. SMALL BUSINESSES were at the heart of his famous "invisible hand" metaphor.

    If we had true capitalism, rather than quasi-fascism, then Addidas would never have been allowed to grow as large as it is. And John would have gone to work with a competing business -- nearby.

    A society that has a small number of very large corporations that own everything: that's not called Capitalism. It's more correctly called Fascisim, hyperbolic as some people might think that is.

  • Anonymous wrote ...

    It's a free country, those are the breaks. This one time I use to make a lot of money, now I don't. Life's not fair.

    "In John's case, he took a risk, performed extremely well, and had everything taken from him."

    Taken ? John doesn't own this job, it's not part of his private property in some way. John is a gear in the machine of commerce, a gear which has outgrown its usefulness, a gear which must be replaced in order for the machine to work.

  • Wavell wrote ...

    If you know how to take one dollar and change it into two dollars, you'll have a lot of people giving you their money. The minute you fail to be able to do that it is your own fault. He ceased to be able to do that (taking everything, including the fact that other people could do what he did for cheaper, into account) so that is his fault.

    Also, his only 'risk' is the opportunity cost of his next job (say maybe an average hourly pay spread anywhere between 1 week to at most 3 months depending how liberal/conservative you are). Lets say that is 20k to be conservative. How can you compare that to how much a business owner invests to start a business. As a comparison, most banks don't even loan less than 100k for business loans (the general thinking here is under that amount and you should be using credit cards). Also the risk of losing whatever you put in to a business is *much higher* than you losing a job. So the risk described here is total BS.

    Everyone agrees that there should be checks and balances in a capitalistic system to control winner-take-all monopolies, but Adidas is no where near a monopoly. That is all ...

  • Andrew wrote ...

    Boo Frickin Hoo. HVE gets canned for cheaper more profitable alternative. Cry. Me. A. River. Don't tell me this guy wouldn't have jumped ship for double the salary. If he wouldn't have, he's a fool.

  • Joseph Huang wrote ...

    last time i checked, employment was voluntary by both parties. if you are fired nothing is stolen from you. or maybe employees shouldn't be allowed to quit, and companies shouldn't be allowed to fire people. that'd work real well, the fact is, companies can fire you for any reason, and you can quit for any reason. that's called freedom. and if this guy can't find another job after his wonderful performance, maybe he isn't so hot after all. and of course, John can't save his money and start his own business.

  • Rob wrote ...

    Employee ownership, anyone?

    I don't want anyone working for or with me that doesn't own a piece of my company. That's just good business.

    Problem solved. Discuss. ;)

  • Karen V wrote ...

    It'd be great to get in touch with this guy. We treasure go-getters like him in our company, and do all we can to help them get to the top and keep him (or her) there.

  • Jerry wrote ...

    I know John Ulviden.  This has happened to him again.  He worked for a company called Kanner who distributes Finn Comfort and Think!.  He built up the business really strong and hired an assistant to keep up with the demand of his growing business.  Kanner fired John and hired his assistant to run the territory.