Are CEOs 300 Times More Valuable Than Their Lowest-paid Workers?

This opinion article is by David R. Francis and was originally posted in the Christian Science Monitor. I thought that it was an interesting viewpoint and deserved to be shared.

There’s something missing in the Washington political scene – a genuine populist, a prominent politician persistently pointing out a decades-long drift of income and wealth to a tiny fringe at the top.

Top 5 on Forbes rich list? Bill, Warren … and Carlos!

Maybe this person should be organizing a peaceable march on the Washington Monument to draw attention to today’s extraordinary distortion in the American economy. After all, the concentration of wealth in the United States is more extreme than the much-observed build-up of wealth in Egypt that helped lead to the recent revolution.

Rich are richer, poor are poorer

Here are some facts:

  • The richest 1 percent of Americans took 23.5 percent of all the country’s income in 2007. In 1976 they got only 8.9 percent. Gross domestic income was $14 trillion in 2007.
  • The lowest fifth on the income ladder saw a decrease in income of 4.1 percent between 1979 and 2008. In the same period, the incomes of the top five percent increased 73 percent.
  • The richest 1 percent of US households in 2007 owned 33.8 percent of the nation’s private wealth, more than the combined wealth of the bottom 90 percent.
  • The Forbes 400 wealthiest Americans own about as much wealth as the poorest 50 percent of American households.

Many of these facts are from a “Working Group on Extreme Inequality,” formed in 2007, a coalition of groups concerned about poverty and unequal opportunity, and the “dangers” of concentrated wealth and power. It gives extensive resources online, but my impression is that niche websites and blogs are paying more attention to this trend to the top than conventional media, and certainly more than the politicians in Washington who are so dependent on campaign funds from the prosperous. Maybe there’s another economic similarity between the US and Egypt. Certainly the state-controlled media in Egypt paid little attention to the growing wealth of the elite there, though popular social websites did.

Not about envy, but fairness

Now a good populist should not be appealing to a human sense of envy. Rousing envy could be damaging. Even the poorest Americans are generally far better off than the poorest 20 percent of Egyptians with an individual income of less than $2 a day. And Americans are, thankfully, remarkably tolerant of income differences.

But an appeal to an innate sense of fairness might have some political clout, despite inevitable false charges of socialism or even communism. It is the free enterprise system that after all allowed the massive accumulation of riches in recent decades. So the extremely well-to-do should be paying more to assure a worthy capitalist system is maintained in a healthy state, benefiting the bulk of citizens more generously.

Right now the politicians and press in Washington are obsessed with the challenge of the huge budget deficit and accumulating federal debt, so the climate for populism is cool. Vermont Senator Bernie Sanders is probably the only major politician who regularly speaks on issues of economic inequality with a populist flair.

Obama’s tax proposal not enough

President Obama in his proposed new budget mildly calls for eventual tax increases for upper-income individuals making more than $200,000 a year and couples who earn more than $250,000, letting expire the Bush tax cuts for the rich. He’s also proposing to raise slightly the tax rates for corporate dividends and capital gains. This change wouldn’t take effect until 2013 and would only affect those above the $200,000/$250,000 threshold. It would not hurt most of the middle class, because the top 10 percent of Americans own 90 percent of all US stocks, bonds, and mutual funds, while the top 1 percent control 51 percent.

Nor does the proposed budget raise estate taxes; it merely “resets” them to 2009 levels. Raising them would be another way to stop or slow the growing concentration of wealth – and to pay for deficit reduction.

The economy thrived decades ago when estate taxes and income taxes on the rich were far higher. Though the rhetoric of conservatives maintains a boost in taxes on the rich now would clobber the economy, it is hard to imagine why it is so different now than in the 1960s or 1970s.

Are CEOs really 300 times more valuable?

When this writer attended annual gatherings of the CEOs of the nation’s biggest corporations in the 1960s, they were paid about 30 times the wages of their lower-paid workers. Today’s corporate chiefs are paid around 300 times the wages of their low-paid workers. Are today’s executives really ten times brighter and more able than their counterparts were 50 years ago? Common sense says no. They have merely managed to persuade members of corporate boards that they deserve fantastic pay. Potential members are unlikely to get invited to join a board by the CEO if they have a reputation for toughness on pay. And CEOs tend to mistakenly measure their own individual worth by their level of pay.

By the way, some hedge-fund managers that received hundreds of millions in compensation for amazing returns on their investments in recent years are being charged now with cheating – receiving insider information.

So an eloquent populist in the nation’s capital, by highlighting the growing concentration of income and wealth, could make it politically embarrassing for conservative members of Congress to continue coddling the rich.

David R. Francis was a longtime Monitor economics reporter and columnist.

This post was included in the Carnival of Money Stories hosted by Funny About Money

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9 thoughts on “Are CEOs 300 Times More Valuable Than Their Lowest-paid Workers?

  • Mmm, class warfare, I love it. Also, since taxes aren’t geographically adjusted, it’s also geographic warfare. I digress…

    Are CEOs worth 300 times their lowest paid workers? Some. I’m not going to say that executive pay isn’t asinine in some businesses as that would come to the same logically incomplete argument the author made in his article.

    But is the lower class poor because the CEO makes 300 times what they do? No. Poor is a state of mind, and there are ample opportunities to rise from poverty to at least comfortable middle class. The problem is that few take advantage of the opportunities in front of their face or, after having reached relative wealth, blow it all on consumption.

    Realize also the very obvious shift in the United States, and the general economy from 1960 to today. Whereas the top 5% in the 1960s were probably working in some aspect of manufacturing management, those in the top 5% of earnings today aren’t working in manufacturing…they’re working in places (tech, for example) that require 1) smarts 2) higher pay to attract smarts.

    The simple fact is that manufacturing and bottom-rung service work is not skilled labor, nor is it worth an increase in pay. India can do just as much data entry, at a lower price, than someone in the United States…that’s just the way it is.

    These statistics should be weighted by education, and also general levels of productivity to get any sense of how wealth is shifting. The fact of the matter is that the bottom is relatively just as productive compared to the rest of the world now as it was in the 1960s. The top, however, is far more productive. Relative to the rest of the world, mind you, not relative to history…that’s an incomplete assessment of the matter.

    To make broad generalizations about the “shift” of wealth while ignoring the massive underlying shift in the US economy is ignorant at best, and a lie at the worst.

    P.S. – If we were to take away every last dime of wealth from the top 10%, does the author think that they wouldn’t end up controlling it again?

  • Do we really need to pay executives this much to attract the best? Should executive pay be more tied to performance? In other words, longer term compensation based on stock price and earnings.

    Higher taxes on the wealthy will not solve our deficit problem until our government makes better policy decisions regarding the budget. Where should the tax dollars be spent versus just continuing what we have?

    These are complicated issues that our politicians want to solve with simple cuts. It requires a vision to solve the problem, not a sound bite.

  • I’m sorry – I love capitalism – that’s what America is all about. In recent years we’ve become a society that somehow has lost touch with our roots.

    Rather than crying foul people should be thankful they live in a culture and a country where they have unlimited potential and opportunity. Having lived overseas for many years (and doing so now) I can tell you most third world countries would do anything for the opportunity that exists in the US.

    We don’t need socialist “make everything fair” what we need is smaller government and to repeal income tax altogether – people forget that income tax has not really been around that long and is completely unnecessary as is 70% of our government.

    We need to get back to our roots. I don’t need some socialist telling me to pay more taxes because I bust my rump to earn more – what kind of sick logic is that? Socialism only encourages people to seek the lowest common denominator…

  • The obscene CEO pay checks are one of the reason why I am completely turned off with the whole corporate culture. I think it’s completely ridiculous that the CEO made 10 million dollars while the worker bee engineer toil away in a 6×9 cubicle. Spread the wealth a little and give me a better office. jeez…

    I think the 1% is too big of a group. There are many hard worker who saved and scrimped to get to that 1%. I think the CEOs must be in the .1% or less with their obscene pay checks….

    • The thing is this is exactly the problem – “spread the wealth a little and give me a better office” – that’s not the CEO’s job! If you want a better office, move up the ranks – nothing’s holding you back.

      CEO’s are power brokers and can have a huge impact on a corporation’s success (or failure). I’m the first one to say “string them up” if they don’t deliver, but if you look at the facts, most of these big incomes are not “salary”. Most of what they earn comes as bonuses and those come from delivering the goods.

      The American spirit is not about trying to “hold back” others or being “envious” of others success. Every time I see someone that is pulling in a lot of dough, I am grateful. I’m grateful that we live in a country where that is possible. The last thing we need is to start this socialist “spread the wealth” mentality.

      We’re becoming a nation of whimps and the last real generation of Americans that wasn’t were our grandparents. I did a documentary on WWII veterans a couple years back – interviewed a bunch of them. That was the last generation of Americans who “got it”. Now we’ve deteriorated into a “gimme mine” society – a far cry from the independence and rebels that built this great country and our great grandparents and grandparents who fought the wars defending it.

      So Mr. Retirebyforty, guess what, I retired at 34… and no one “gave me” a damn thing – I carved out my own slice and the great thing is SO CAN YOU! Start by not being “in” the system. You’ll never get ahead in this life working for someone else…

      • What you say about CEO salary is true. Salaries can top out at maybe $500K or $1M. However, there is often a disconnect between CEO pay and performance. True, CEOs can be power brokers using their name, business acumen and contacts to grow a business, however, we saw during the financial meltdown that many CEOs unfairly benefited while laying off thousands, stock prices lagged, and investors lost a ton of money. Sure, CEOs can be compensated whatever the company deems is necessary to obtain and retain the best talent, but there also needs to be accountability. If I screw up at my job I’m out with no golden parachute.

        • That’s just the thing – there is accountability – the Board of Directors and the stockholders. And every time one of these guys screws up big time, the stockholders should nail ’em to the wall.

          But what we absolutely don’t need is more big government and some socialist definition of “what is fair” trumping our beautiful capitalism. Capitalism is not equality for all or “fair” for all. Capitalism is equal opportunity.

          • Oh come on, my CEO got paid $100 million for being on the Google Board. He is not CEO of Google, isn’t that a conflict of interest. The whole board of directors are all buddy buddy so no one will hold anyone accountable.
            Our company stock has been flat for 12 years, why should the CEO get pay $10 million dollar this year?
            I’m a stock holder and I can’t vote him out, there isn’t even an option.

            Sure I complain about my crappy office, but I’m working on getting out of here so I am not just sitting on my butt like you suggested.

  • It’s actually worse than that.

    Many of them are collecting pay from more than one company and/or non-profit at the same time.

    For example, the former head of a particular casino company busted for having a fake degree (was in the WSJ) was drawing pay from 4 companies and 3 non-profits all at the same time.

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