How much do your socks add to your bottom line?

December 30, 2020

“You’re the best-dressed guy here!” I told Jack White the first time we met. He was wearing a three-piece suit in a room of 300 well-dressed businesspeople. He winked, hiked up his pant leg, and showed me the multi-colored socks underneath. “This is just a costume,” he said. “My daughter helps me get dressed every morning.”

I didn’t know it then, but Jack is deliberate about his bespoke attire. He’s senior partner in a top Northern Virginia law firm, Chairman of the Board of a business club, and recently testified to Congress. If he’s not well-dressed, he’s losing credibility, influence, and business opportunities.

But Jack doesn’t spend extra money on his socks. Colorful socks are a bonding opportunity between Jack and his daughter. They spend time every evening matching his multi-colored socks with his ties. And Jack doesn’t spend extra money on his shoes. He recently told me that he has re-soled one pair of shoes three times rather than purchasing new ones, because he liked the shoes. “Why waste money on a whole shoe, when the uppers are just fine?” he said.

Separately, I once saw him humbly ask the new, young temp worker at the front desk if he could leave his top hat with her while he went into a lunch meeting. Asked, mind you – the most senior member of the board of governors of the establishment asked the most junior employee within the club hierarchy to do this, instead of demanding it.

Jack’s three-piece suit is an investment to help his business succeed. Expensive socks, new shoes, and elitism are not. This essay will explore the connection between business finance and personal finance, and how making the right decisions in both of these areas leads to far greater financial gains for companies, their leaders, and the families of company leaders.

Corporate jets and old chairs

Socks and shoes may not cost a lot, but they are the heart of proper financial investments. Jim Collins’ classic Good to Great: Why Some Companies Make the Leap and Others Don’t makes this quite clear. Collins and his team spent five years researching what helped good corporations become great. One important financial principle was eliminating unnecessary expenses and reinvesting saved dollars. To quote Collins, “the budget process is…about determining which activities…should be fully strengthened and which should be eliminated entirely.” Good to Great contrasts the executive financial decisions Wells Fargo and Bank of America made in the 1980s:

  • Wells Fargo replaced the “executive corporate dining room…with a college dorm food-service caterer.” The corporate jets were sold, green plants were considered too expensive to water, and the executive elevator was closed. Executives no longer got free coffee or company-paid Christmas trees, and CEO Carl Reichardt demanded the elimination of expensive binders on reports. Reichardt would also “sit through meetings…in a beat-up old chair with the stuffing hanging out.”
  • Contrast this with Bank of America. The executives’ building had “…oriental rugs and floor-to-ceiling windows…” The elevator went from the executive suite to the main level, skipping the inconvenience of stopping at other floors. And even as the company was losing hundreds of millions of dollars per year, reports Collins, “sell the corporate jet” was rejected as a money-saving solution.

Bank of America and Wells Fargo had similar growth patterns from 1973 to 1983. But a dollar invested in Wells Fargo in 1984 was worth more than $74 in 1998, while a dollar invested in Bank of America the same year was worth less than $16 in 1998 – less than even if the same dollar was invested in the general stock market during those same 15 years.

Collins’ steel industry examples are similarly enlightening – Nucor’s success from 1975 to 1990 outpaced Bethlehem Steel’s to the point where a dollar invested in Nucor at the beginning of that time period was worth 200 times more than a dollar invested in Bethlehem Steel at the end of the period. Here are their differences in spending choices, as described by Collins:

  • Nucor’s success from 1975 to 1990 was in part based upon eliminating “hierarchical inequality” between management and workers. With annual revenue of $3.5 billion, its corporate staff totaled 25 people, and all of those people were “crammed into a rented office the size of a small dental practice.” The corporate dining room was a nearby sandwich shop, and “cheap veneer furniture” was in the “closet”-sized lobby of company HQ.
  • In the same time period, Bethlehem Steel had “a fleet of corporate aircraft” which were used for “taking executives’ children to college,” a golf course for executives, and a country club which was renovated with corporate money.

Both Wells Fargo and Nucor outpaced their competitors during the time periods in question. But they didn’t just save money. Wells Fargo invested in being an “early leader in twenty-four-hour banking by phone, early adopter of ATMs,” and a “pioneer in Internet and electronic banking.” It also “hired [and invested in] outstanding people,” many of whom went “on to become CEO of a major company.” Nucor “pioneered application of the most advanced mini-mill steel manufacturing technology” and invested in other technologies even as it “paid…steelworkers more than any other steel company in the world.”

Jack White, Nucor, and Wells Fargo know that investing where it matters is what creates success. Anything else is just a waste of money.

The personal finance corollary to business financial discipline

One of the great outcomes of running a successful firm is the money that comes along with it. But for a small business owner with long-term vision and goals, compensation should “reflect commitment to the company,” says American Gutter Monkeys co-founder and partner Dennis Siggins*. Dennis and his partner take mid-five-figure salaries while running a multi-million-dollar business, and this choice has resulted in several positive outcomes:

  • The company has reinvested salary savings into purchases of company vehicles and buildings, paying staff far more than the competition, and opening new locations – all without going into debt, and often by offering cash for purchases.
  • After six years, the company has nearly 10,000 often-returning customers and annual revenues of several million dollars.
  • The partners’ eventual income from selling the successful company will far outweigh short-term salary income.

“Andy and I do not take salaries that reflect our value to the company. Instead, we take salaries which reflect our commitment to the company,” said Dennis. “We reinvest as much money as possible into the business. Instead of padding our personal financial portfolios, where we may earn 8% – 11% in the market, we keep our salaries small and turn as much possible revenue back into the company, which continues to grow at 25% – 30% annually.”

American Gutter Monkeys’ partners know that keeping their salaries low as their success grows will pay long-term dividends. Tom Brady follows the same principle; the greatest NFL player of all time has taken modest salaries for years to create “a competitive advantage” to put “a lot of good players around me.” Similarly, most of Michael Jordan’s $93 million in earnings as a player were made in his last two seasons with the Chicago Bulls — and those earnings are paltry compared to a personal brand that is worth $1.9 billion today and continues to earn over $145 million annually.

Dennis is my father, and both Jordan’s and Brady’s salaries are public knowledge. I don’t know what Jack White makes in a year, but he certainly hasn’t increased his sock budget even as his suits stand out. But these anecdotes match Collins’ research – Good to Great highlights how executives who built great companies 35 years ago put the company first by taking executive compensation packages which, to use Dennis’ term, “reflect[ed]…commitment to the company” over their own short-term self-aggrandizement.

The principle of putting tomorrow’s brand value over today’s salary may seem counter-intuitive. It certainly will be painful. But it is the successful principle implemented by bank and steel executives who ran billions-dollar firms that crushed the competition; two of America’s greatest and wealthiest athletes; and successful small business owners who climb ladders in jeans and argue case law in three-piece suits, respectively.

The questions now is how to make sure your salary “reflects…commitment to the company” until you depart ownership. Let’s turn now to another research-based book, Thomas Stanley’s 2009 Stop Acting Rich…and Start Living Like a Real Millionaire. Stanley’s pre-Great Recession research showed that most self-made millionaires live in the nicest homes in modest neighborhoods. They hold onto their cars longer than most other people, prefer visiting family and friends over little-used vacation homes, and hold onto their shoes for years.

Perhaps the most important financial choices self-made millionaires make relate to home purchases. They first save on the price of their residence by buying modestly. USAA’s mortgage calculator shows that buying a $500,000 home with a 20 percent down payment at 4% interest costs $1,909.66 per month for 30 years, while a $600,000 home with a 20% down payment and a 4% interest rate costs $2,291.59. This equates to $381.93 in additional mortgage payments per month.

But home ownership also comes with taxes – which are higher for bigger properties. It comes with utility bills, which are higher for bigger homes. Bigger homes and properties come with higher costs for ground maintenance, home maintenance, and home repairs. Double it for the cost of a vacation home, and now each home at $500,000 is costing someone $22,915.92 per year in mortgage costs alone. You and your significant other can skip the vacation house, go on an 11-day trip to Egypt three times in 2021, and still have thousands of dollars left over — before building in vacation house taxes, utilities, repairs, and maintenance.

To summarize the next two sub-sections: small business owners and partners can keep their eye on their long-term brand value by living like real millionaires.

Don’t build personal debt along the way

A business owner with significant personal debt cannot take a small salary, unless you want to run the company from bankruptcy court. Many small business owners take small salaries at first – but tastes often grow as salaries increase.

There are three financial implications to getting lean by eliminating or avoiding ownership’s personal debt. First, selling unnecessary personal items like an extra car or boat will create an immediate influx of cash which can become working capital for the company. Second, any loans that were held against these items will be paid off, eliminating the recurring monthly payments. Third, the extra financial strain of keeping these items (insurance, registration, fuel, maintenance, etc.) is removed. 

But, you say, I worked hard! I earned that boat, car, or other item. My blood, sweat, and tears went into building a successful company – and I deserve a little reward.

That is undoubtedly true. Nobody runs a company just for the fun of working weekends and late nights, and not enjoying life means you’re at a job again. The question to ask is whether going into debt – whether the $500 per month for the car, the $2,000 for the new mortgage, or the $381 for the bigger mortgage – are worth slowing the company’s growth by forcing you to put your salary in front of the company’s needs.

Remember, Cape Cod Gutter Monkeys uses salary reinvestments to buy whole buildings and vehicles with cash. Tom Brady kept his salary small 18 years after entering the NFL to build a powerful brand and future revenue streams that will last long after he retires. Successful owners should follow their lead even as the company’s success grows.

Remove day-to-day financial distractions

One of the secondary benefits of eliminating personal debt is elimination of the small costs of registering, insuring, and fueling a vehicle; country club memberships and correlated meals and drinks; or fancy socks and new shoes. These extras are the perks of success. But they are an additional – and often unnecessary – financial burden on your company. A few hundred dollars a month isn’t much, unless you have four or five of them to deal with. Now we’re starting to talk about real money – money spent distracting you from investing in the company, and time spent pulling you away from growing the firm.

Nobody can or should eliminate all financial distractions. Laundry machines cost money to buy and use – but their costs save hours of hand-washing and hanging to dry. Jack’s suit contributes to his company’s financial success. A nice meal can be relaxing, as can a Netflix account or an annual family trip. But, whether you’re a neophyte who needs to get the company up and running or a successful owner who’s at risk of being spoiled at company expense, determining the difference between necessary and unnecessary financial distractions is key. The former will improve your life; the latter should be eliminated.

Delayed gratification is the winning strategy

Delayed gratification is the key strategy for most of life’s success. Athletes and Navy SEALS put themselves through grueling workouts so they can perform when it counts. Young people are encouraged to invest early in retirement to take advantage of compounding interest. And a business owner’s salary should “reflect…commitment to the company” by delaying personal gratification to compound the company’s, and eventually the owner’s, wealth. 

Warren Buffett has lived this principle for over 60 years. He still lives in the same house purchased with his wife in 1958, and his $100,000 annual salary has been consistent for decades. Yes, he’s a billionaire – but most of that wealth comes from shares in Berkshire Hathaway. Like Tom Brady, like the American Gutter Monkeys, presumably like Jack White – Buffett’s wealth and the company’s wealth have grown hand-in-hand, not in conflict with each other.

The question for a business owner, from the moment the company launches until the day he or she leaves the company, is whether his or her salary should reflect “commitment to the company.” The answer is clear, and it’s how to become a real millionaire whether you wear jerseys, jeans, or pink-and-yellow socks under three-piece suits.

*Dennis Siggins is also involved in Proven Media Solutions.

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