New York Times

José Luis Martínez* started work at as usual at Tesla’s Fremont plant on a January morning earlier this year. He was in his third year as a ‘maintenance technician’, ensuring that production equipment worked as expected at the advanced electric car factory. A new model was hitting the market and sales forecasts were optimistic. Good times. Just before the morning break, his supervisor, Miguel Ángel, came over to him and handed him a piece of paper. It was the end. The end for him, his friends Frank and John, and about 30 other maintenance technicians. The end of his well-paid job, potentially the end of the American dream his father and mother had when they arrived from Mexico a generation earlier. How had this happened? What was he going to tell his pregnant wife? How could his supervisor’s story be true; that their rich CEO, Elon Musk, needed to eliminate over a thousand jobs here in California to reduce costs? It couldn’t be true. Someone must be lying. Please be lying…

…..

I have written extensively about what I politely call cost reduction communication errors. What I have read about Tesla in the press over the last few weeks goes a lot further than a simple communication error, and not in a good way. Let me give a little background and update you on the latest Tesla-related news. Then I will close with some behavioral economics theories.

Senior executives behaving as though cost restrictions don’t apply to them

My first experience with senior executives behaving as though restrictions didn’t apply to them was with Compaq. We went through a rare bad patch around 1999 and needed to put some cost controls in place. A corporate leadership team member went to Norway, Sweden, Denmark and Finland to explain how serious the situation was, and how the teams all needed to work on reducing cost. He had a major problem communicating this as it became known before his arrival that he had leased a private jet to minimize the time it would take to get around the four countries. It is irrelevant whether that saved cost in some imaginary or real way. It destroyed his message, and nobody seemed to take any particular action after he left. We then had to work on the various initiatives in detail, country by country, facing a bit more resistance than usual because of the communication mistake.

The leased private jet example is part of a wider phenomenon whereby the most senior people do not change their own spending habits while making “difficult decisions” that only affect others. Personally, I think of this as cowardly leadership. Issuing travel freezes for your business from the comfort of your Gulfstream as you cross the Pacific is perhaps the most egregious, though unfortunately common example of a complete disconnect between leadership and employees. A G550 costs about $45 million. This is the same as 300,000 advance-booked return flights from Chicago to Atlanta on United by people who now have to jump through hoops to bring in business or cut costs due to the travel freeze. As a general rule, the easiest way large corporations can cut travel costs significantly is to temporarily ground or totally eliminate their corporate aviation fleet. The symbolic value of such a move is also high. Employee reaction will be “Wow, we really need to get serious about reducing cost.”

A new extreme

Tesla and Elon Musk have now achieved a new extreme. I am not making this up. It is quite easy to find articles that report Tesla’s cost reduction efforts in a consistent way. This is one of several that even mentions elimination of toilet paper as one of the cost-saving measures. Given the automobile part of the company makes a loss that may even seem reasonable to some. Even I was hesitant to be openly critical until I read the New York Times article about CEO pay. Elon Musk received a compensation agreement in 2018 that has a maximum payout of $2.3 billion if he hits all milestones, according to the article. $2.3 billion! I won’t attempt to calculate the number of airfares or rolls of toilet paper that could buy. However, I will estimate that it would pay the annual salaries of at least 25,000 Tesla employees. Employees like José Luis.

Elon Musk’s home country used to have a system where a rich white elite controlled the country and believed that different rules should apply to part of the population. It was called apartheid. What we are now witnessing at Tesla is apartheid 2.0: financial apartheid. The person at the top lives one way. Everyone else lives by different rules. I have no reason at all to believe that Musk, a South African, had any time or sympathy for Apartheid while it existed. And we are all familiar with discussions of the societal effects of extreme income disparity. What we tend to skim over is the psychology of being rich; is there a sort of ‘financial Apartheid’ in the mind of the wealthy? There is quite a bit of experimental evidence that suggests that the elite believe they do not have to obey the rules ordinary people follow. Here are two examples:

Experiments show the elite do not play by the same rules as the rest of us

Way back in the 80s, Paul F. (real name not mentioned in this NYT article) moved from being a trader to managing his own bagel business in Manhattan. He delivered bagels to offices each morning and anyone taking one was asked to put money in a box beside the bagels. It was an honesty system and he saw consistent variations in honesty over the years. In one office, executives were on the highest of three floors with lower-level staff on the other two floors. The executive level was the one with the most missing payments, meaning stolen bagels.

More recently, Paul K. Piff, a researcher at the Institute of Personality and Social Research at the University of California, Berkeley, has conducted a study linking bad driving habits with wealth. He stationed students at crosswalks and observed the make and approximate age of cars that stopped to let pedestrians cross (as required by law in California) and those that did not. Guess what? 100% of cheap old cars observed stopped. Quite a few of the most expensive models just kept on going. BMW drivers were the worst. Read a summary here. A lot of other experiments exist.

There is a large scientific literature on the nature of ‘ingroup’ versus ‘outgroup’ thinking – including the scapegoating of those not in our own group, the tendency even to consider them subhuman. While it is not too hard to be believe that some extremely rich think of the poor as subhuman, there’s a more interesting phenomenon: they may mentally delete the poor. Here is one such study, as reported by Scientific American.

So therefore?

So, what’s the bottom line for José Luis, Frank, John and people like them in a world where their CEO could conceivably be paid billions? Well… the billions need to come from somewhere, and it seems like it was their turn to be the source this time. I doubt Elon Musk will get a turn.

*Fictitious name and person.