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New study on CEO-to-worker pay ratio

One of the most memorable seminars I ever attended as a student was in a political philosophy course, in which one week covered debates about wealth stratification in ideal and real societies. We students were to submit short position papers about what we thought would be the ideal ratio of income inequality in a society. That is, how much gap would be necessary to inspire innovation, excellence, and risk-taking, while also not being so large that it would lead to societal breakdown, unjustifiable poverty, dangerous concentrations of power, or, at worst, armed revolution.[caption id="attachment_26974" align="alignright" width="300"] "No, no, dear. It's only 20 times more than yours."[/caption]As I recall it, the most left-wing students in the class were in the 10-to-1 range (200K income vs. 20 K income), and the more libertarian students rejected the very notion of an ideal ratio ("let the market do its thing, and let the people revolt if necessary"). There were lots of folks in the middle (20-to-1 or even 100-to-1).The real ratios of income inequality in the U.S. have become basically unimaginable since then (as in, I have real trouble imagining the fact that the one Walton family has as much wealth as the bottom 35-40% of our country). Discussion of these ratios has recently focused instead on individual companies. The data is easier to imagine and is, I think, more meaningful, since all the members of a company are, in some sense, working toward common goals and have very clear rewards for working toward them together.Yesterday Bloomberg news put out an excellent story and data infographic of current CEO-to-worker pay ratios. (Fortune did a smaller graphic last year.) In short, the ratio has grown by 1,000% since 1950. Many of us already knew that. What I did not know was that it has even grown since the financial crisis and Great Recession -- up 20% since 2009.The attention-grabbers are the top ratios, with J. C. Penney winning the inequality award at 1,795-to-1. (That's one loaf of bread vs. the Empire State Building, to help you imagine it.) The story profiles a sales employee as contrasted to the ousted C.E.O.But it's the overall picture that is worth pondering. Most real people do in fact retain drive for innovation, excellence, and risk-taking with much lower ratios than companies currently have. I have no doubt some of CostCo's employees are working hard to innovate and excel, even though they only have the "low" ratio of about 50-to-1.For those who often pine for the 1950's, the relatively low income inequality of that era should be remembered as a central aspect of overall stability. And the unprecedented income equality in our own era should be considered a bellwether of further instability.


Commenting Guidelines

Readers may be interested to learn that, a few days ago, RR Reno at First Things posted (from his conservative point of view), some ruminations on the reality of increasing income inequality., Robert T Miller (another economic conservative) posted a reply.

"Id be interested to know what possible incentive business leaders and high-level administrators would have in dialoguing with people of conscience."Some of them (quite a few, in my experience) are persons of conscience themselves, albeit not always particularly enlightened. I.e. they'd like to do the right thing, or at least like the idea of doing the right thing, but perhaps because they live in a bubble, they don't really understand how the other 9/10 lives and its implications.In addition, there is the question of social solidarity. A lot of business leaders understand the importance of keeping the community more or less on their side. They may see it in their own self-interest to listen.

Bernard, Thanks for laying that out so clearly. The very important point you raise at the end bears repeating: "The very wealthy are simply not entitled to such wealth when so many other people are in need."Wealth, goods of the earth, are for the purpose of meeting needs. We forget that.

JIm P. --I agree with you that many businesspersons are persons of conscience, but they often just don't know not just *how* the other half lives but *how many* people there are in the other half. Another good reason to require economics in the high schools, not just facts and figures but the reasoning behind economic policy, such as it is and isn't.I read just this morning that Amartya Sen, the great economist, was 10 years old before he found out that there were many people in India who were starving. He wasn't a rich Indian, just lower middle-class. It gave him a life-long interest in the causes of starvation, and the non-causes as well. He discovered, for instance, that lack of food is not the problem. The cost of food is typically the problem.

"Given these truisms, I have to say that I cannot see any justification for policies that lead to exorbitant wealth for some (however acquired) in the face of the drastic poverty of others."Well, when you put it that way...When I type the word "exorbitant" into Google, it gives the following synonyms:"excessive - inordinate - extravagant - undue"I ask this in all seriousness: is there such a thing as due wealth - as wealth that is not exorbitant? And if we deem that some class of business owners or professionals or heirs or pop stars or lottery winners has non-exorbitant wealth, must their wealth also be redistributed?Should the wealth of the exorbitantly wealthy only be given to those in drastic poverty? That's actually a pretty small part of the population, percentage-wise.If it turns out that the accumulation of exorbitant wealth isn't a zero-sum game - that its accumulation is only weakly connected, or not at all connected, to the plight of those in drastic poverty, should your statement be revised?If it turns out that redistributing the wealth of the exorbitantly wealthy to the drastically poor doesn't materially improve the plight of the drastically poor, should we then conclude that it is imprudent to redistribute that wealth?

@Jim Pauwels (5/4, 10:17 pm) Some quick (perhaps too quick) answers to your questions:1 - Yes, there's non-exorbitant wealth. No, it doesn't have to be redistributed. (Although perhaps we should check with the poor for their judgments on this matter.)2 - No, excess wealth shouldn't be returned only to those in drastic poverty. It should be returned to all from whom it has illegitimately be taken. (Who that is, and how it's to be done is another conversation.)3- Actually, it turns out that the accumulation of exorbitant wealth isn't a zero-sum game...but in the opposite direction from the one you suggest. There's a considerable and growing body of economic evidence that high degrees of wealth and income inequality generate slower economic growth and greater economic instability. 4 - Yes, but the overwhelming majority of economic evidence points to the contrary conclusion.

"A lot of business leaders understand the importance of keeping the community more or less on their side. They may see it in their own self-interest to listen."Yes, of course that happens occasionally. Nike apparently learned from its sweatshop debacle, though other companies apparently have not (see any sad tale of women dying in garment factory fires in Bangladesh leaving a trail of charred American brand labels in the ruins). Moreover, I wonder whether an American society that is increasingly struggling financially has the will to work up outrage over criminal labor practices. In any case, real moral discussions about labor practices among the captains of industry are generally turned over to PR hacks, of which I was one once upon a time. Wal-Mart distracts attention from its purchase-from-sweatshop practices by claiming that their prices are so low that they've effectively given everybody who shops there a something-percent salary raise. The more a business relies on local labor, the more likely it is to meet local wage and benefit norms to maintain good community relations. But these businesses are in constant jeopardy from large multi-nationals that can set up or purchase from offshore factories where working conditions are out of sight/out of mind.Yes, I agree that some business leaders want to be people of conscience, and that's why they created the bubble in the first place. I see no reason why they'd want to leave that circumscribed world where they're seen as upright pillars of the bubble community to face up to business realities that might be very uncomfy.

Thanks, Luke. Jim P.,, in all seriousness. Sometimes in history, a political or economic policy that has been billed as providing a much better and more just fairer distribution of resources to the members of a political society turns out, after a period of time to have been a mistake, even a disaster. The French philosopher Maurice Merleau-Ponty once supported the Soviet political and economic policies but in due course found that they had utterly failed to live up to the billing they had received. The kind of seriously underregulated capitalism we have experienced in the last decades, under various headings, such as "supply side capitalism" or free market capitalism has consistently produced growing inequities both here and elsewhere. To insist that these policies will IN TIME work out well, all presently available evidence notwithstanding, is hard to accept. I have to admit that I don't have an alternative to put forth, but that does not make the case in favor of what's presently in place, any stronger. Rather, it gives me reason to encourage technically competent people to work for alternatives.Take one example. If Wall Street Journal reporting is to be taken as representative of prevailing capitalist views, then the capitalist's task is to make sure that as few employers have to provide health care coverage to as few of their employers as possible. Hence the pressure to make sure that as few employees as possible work as much as a 30 hour week. Under this sort of capitalist flag, there will be an unending "race to the bottom." This example is not, regrettably, atypical.In sum, I have no good reason to see in the prevailing capitalism any movement to "self-correction."

Bernard --As some of us see it, the WSJ is unredeemably conservative in its editorial pages but progressive in its reporting. How it can retain this schizoid mish-mash of opposing attitudes is a true wonder. Then again, maybe it succeeds because the American culture is a mish-mash of basically conservative principles (individualism, right to the fruits of one's own labor, respect for physical force, loyalty to the past) versus progressive/pragmatic responses to matters of fact. I dunno.

Many of the wealthy already benefit from redistributed income:Mortgage interest deductions for any number of properties.Tax shelters.Charitable contribution write-offs."Carried income" very low tax rates.If they are business owners, accelerated depreciation schedules.Tax write offs for private aircraft .. a "business" expense.General liberal interpretations, all allowed in the tax codes of course, of what is a legitimate tax deductible business expense.The ability to shelter certain kinds of current income until a later date when your tax situation may be more favorable to you, even though you have current use of that income.And, if I would bother to take the time I'm sure I can find more.Their tax benefits are paid for by countless others who do not have the political or economic "juice" to structure good deals for themselves.So don't talk to me about income redistribution: it happens on a grand and priviliged scale already. And these people didn't even have to attend that new school for the priviliged mentioned in the posting above.

When a number of large corporations went to the government for a bailout during the recession a few years ago, one of the first things the American people wanted curbed was executive compensation. A business that unsuccessful miserably and wanted TARP help shouldn't be lining already padded pockets. However, a brand new report has found executive compensation slightly dipped even while a number of firms, such as General Motors, AIG and Ally Financial, were receiving TARP funding. Get more details here.