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What does "Skin in the Game" Mean?
Mary McMahon
Mary McMahon
The slang term “put skin in the game,” usually attributed to Warren Buffett, refers to high ranking members of a company who invest in the company's stock. Buffett, a noted investor in the United States, attracted fame for becoming one of the wealthiest men in the world using a variety of investment tactics, many of which he shared in books, interviews, and through other media. Buffett's opinions on investment strategy have been utilized by people all over the world to make savvier and more effective investments.
The theory behind putting skin in the game is that it ensures that the people who run a company also have a direct interest in running the company well. When someone owns stock in a company, she or he wants the company to perform at a high level to generate returns. Having skin in the game is different from having performance-based bonuses and other types of compensation because there will be direct consequences if the value of the company's stock drops; people will actually lose money if their company does not perform.
In addition, holding stock acts as a vote of confidence. Members of the public are more interested in investing when they see that company employees have enough faith in the company to buy stock in it. This will in turn promote better stock values because more interest in a stock usually increases the value. Stockholders who maintain their stock even through rough patches can also bolster the future of their companies by making it clear that they have confidence that the company will weather the storm.
Some high ranking personnel may accept compensation in the form of stock as a token of faith in the company, and others may purchase stock to get their skin in the game. Care must be taken to avoid situations in which people could be accused of insider trading. In insider trading, people use knowledge which is not public information to make decisions about which stocks to buy and sell and how to balance their portfolios.
This term has also been used more generally to refer to the idea that some sort of investment, whether it is financial, emotional, or otherwise, on the part of people involved in an endeavor can improve the outcome. For example, citizens may be encouraged to get their skin in the game during a financial crisis and make purchases so that the market for consumer goods will rise and promote economic recovery.
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
Learn more...
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
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![When someone owns stock in a company, she or he wants the company to perform at a high level to generate returns.]()
By: leungchopanWhen someone owns stock in a company, she or he wants the company to perform at a high level to generate returns.
Discussion Comments
For clarification, I believe the term predates Warren Buffet. I believe it originated from the habit of mountain men and trappers coming together periodically to sell or trade the pelts they had trapped throughout their time in the mountains. There was little money circulating, but the pelts could be traded for whatever the mountain men needed.
The mountain men would also play cards, betting their pelts (skins) in place of money. Those who were playing had something to lose in the game (a skin in the game). Those who were looking on and offering advice might be told to get lost or shut up because they "had no skin in the game."
@Suntan12 - I think that you are right. When I was in college, I had to pay for my schooling myself and it did make me appreciate my education so much more. I worked about thirty hours a week while going to school full time and because I was investing so much of myself in my education I graduated and got my degree.
I had a friend that went to an exclusive all girl private school that eventually got a scholarship and went away to New Orleans for college and returned home after one semester. She flunked out because she was partying too much.
This girl had a scholarship and the remainder of her $30,000 college expenses was paid by her father. I think that this since this girl had nothing vested in her education she took it for granted. She had no skin in the game.
Now she is going to a local state school and has to pay for her classes herself. This doesn’t happen with everyone that goes away to college, but it does show that some people need to be more vested in their education in order to make more mature decisions.
Having skin in the game does make a difference. This is like couples that live together for many years with no commitment. Sometimes one partner may want to get married and make a commitment but the other partner is happy the way things are. The best way to describe this predicament is with the saying, “Why buy the cow when you can get the milk for free.”
@Cafe41 -That does make sense. I think that anytime you have something invested you are always going to be more committed. For example, my sister in law has her rent paid for by her father and she recently had a falling out with her boss and quit her job.
I know that if she had to pay for her bills herself she would act differently, but since she knows that her father is there to help her out her level of commitment to her job is a lot lower. She really has no skin in the game because her father is paying her bills.
It is really hard for a parent to sometimes balance the need to help their child financially with the need for the child to grow up and learn the lessons that come with independence.
@Sneakers41 - That makes sense. I also think that banks want customers to have skin in the game when they give out loans. With the stricter lending guidelines, most banks will not approve loans when there is no money down because they want the borrower to put something down and have a vested interest in paying off the loan.
Most banks require a 20% discount for most mortgage loans. They also approve more home equity loans or lines because with these banking products the homeowner essentially is putting up their home as collateral for the loan. Here the bank knows that they have the right to seize the home if the borrower defaults so from the bank’s perspective there is very little risk with this type of loan.
I think that it is important to invest in the company that you work for to have “Skin in the game”. My husband used to work for a company that offered its employees a discount on the stock purchase plan along with profit sharing and a pension.
I think that when companies offer long term benefits like this they really are making sure that their employees have “Skin in the game” in order to feel more connected with the company and be less likely to leave.
I do think that your perspective of the company does change and many employees may stay with the company because the benefits are so generous. So the employees tend to toe the line and reduce the company's turnover numbers.
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