Ask Stacy: Why income inequality matters to everyone

Our recent post about CEOs who make 1,000 times what they pay their workers sparked a spirited debate.

By MSN Money Partner May 6, 2014 12:11PM

This post comes from Stacy Johnson at partner site Money Talks News.


Money Talks News on MSN MoneyWe recently published an article called "Fast-food CEOs paid 1,000 times more than their workers."  You should check it out, but the gist of the article is made clear by the headline. Here are a few more sentences:

If you want a glimpse of super-sized pay inequality, look no further than America's fast-food industry.
Nowhere is company-level pay disparity more apparent than in fast food, where CEOs reportedly take home $1,000 for every $1 earned by their typical employee.

CEO © Comstock/JupiterimagesArticles like this often invite spirited debate, and this one was no exception. I'm going to reprint one reader comment, not because it's unique, but because it isn't.


It's from a reader who calls himself "bkp100."

What an INCREDIBLY [dumb] comparison this article makes. How much does a cameraman get paid compared to $20M per movie actors? How much does an intern make compared to a senator? How much does an orderly make compared to a surgeon?
Are you so fabulously dim, and so steeped in political correctness, as to not understand the reasons for that?
Where's the discussion on how much personal RISK the CEOs put into the business they started? Or how many 20-hour days? How many sleepless nights can the workers claim worrying about meeting payroll; about balancing receivables and payables; about labor issues; about regulatory and health issues; about insurance issues? How much negotiation with contractors; with vendors; with transporters did the workers undertake?
I am SO tired of hearing about ONE side of the inequality equation by hacks like this, when the equation is SO stacked by the inequality crusaders as to make it laughable.
The beauty of this country, and THIS system is that you are NOT denied the OPPORTUNITY to excel. However, and rightly so, it's NOT going to be handed to you on a platter. It takes WORK, it takes invested TIME, and it takes AMBITION, and often RISK … NOT just saying "I want it."
If we DO ever reach a point of equal pay for unequal work/investment/time, then kiss this country's integrity, its overall standard of living, and its freedom to excel to whatever point you're willing to work to get there, goodbye.

This comment is a good jumping-off point into a divisive issue you may have heard about lately -- income inequality.


What is income inequality?

Bkp100 apparently thinks those discussing income inequality believe all workers should be paid equally. That, of course, is nonsense. The income inequality highlighted in articles like "Fast-food CEOs paid 1,000 times more than their workers" is referring to the widening gulf between the workers and the bosses.


While income inequality has been the concern of some for decades, it became a flashpoint during the 2012 presidential election, and prior to that with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010. Section 953(b) of that law requires companies to report the ratio between the median annual compensation of a company's workers and that of their CEO.


Some, like bkp100, think it's nobody’s business who makes what. Others believe that too much wealth is accruing to too few. As you might imagine, those leaning left are more likely to adopt the latter belief, those leaning right the former.


So here's a look at what's happening, some possible reasons why and, most importantly, how this debate matters to you.


Some facts about income inequality

Most of the following came from the Economic Policy Institute and this article from the Globalist:

  • Overall worker pay in the U.S., adjusted for inflation, grew 5.7 percent from 1978 to 2011. CEO pay grew 727 percent during the same period.
  • The ratio of CEO to worker pay in America is higher than in any other developed country in the world. In 2012, the average American CEO made 354 times what the average American worker made. In Germany, CEOs made 148 times more. In France, 104 times more. In Britain, 84 times more. In Japan, 47 times more.
  • In 1965, average CEO pay in America was 18 times that of workers.
  • On average, the CEOs of large U.S. companies received $12.3 million in compensation in 2012, or $5,894 per hour. An American working for minimum wage would take 20 weeks, or about five months, to make what that CEO makes every hour.

What about the risk they take?

Bkp100 says, "Where's the discussion on how much personal risk the CEOs put into the business they started?" OK, here's that discussion. The CEOs of the vast majority of America's largest companies didn't start the businesses where they work, have none of their personal fortunes at stake, and other than their personal job security, have undertaken no risk whatsoever.


They must deserve it

It's easy to believe CEOs must deserve the money they make. After all, why would they be paid so much otherwise?


While most CEOs are presumably talented managers, there are myriad examples of pay in the largest corporations not being related to performance. Here's one: Former Yahoo chief operating officer Henrique de Castro was basically forced out for failing to make progress in turning the company around. Nonetheless, he made about $50 million during the 15 months he was there.


How can even questionable managers make so much relative to workers? Here's a possible explanation.


CEOs of major corporations often get paid so much because, unlike individual workers, their pay packages are approved by a company's board of directors. That board is often, albeit not always, staffed by personal friends, acquaintances or people who owe their paid board position at least partially to the CEO.


In other words, where you work, your pay is determined by a boss whose mandate is often to hold down expenses. But a CEO's pay may be approved by a group of peers with no such incentive. In fact, since they could cross paths with the CEO in future ventures, board members might have a much greater incentive to reward a CEO than to protect the shareholders, workers or customers of the company.


The result is CEOs who are often radically overpaid in relation to any contribution they could possibly make.


Why does it matter?

So what if some CEO is overpaid relative to their value? Capitalism is a system encouraging you to take as much as you can legally get. Besides, it's the company's money being wasted, not the taxpayers'. So why should we care?


We should care for two reasons. The first is that exorbitant pay may be passed along to consumers. The second, and more important reason, is that in the long run income inequality could create the most vicious of cycles.


I can illustrate pay potentially being passed along to consumers with an article I wrote four years ago called "Insurance outrage: Hike prices, pay CEO $100 million." An excerpt:

My personal health insurance bill went up 40 percent this year. And this week I learned the CEO of the company that issued my policy, United Healthcare, personally received more than $100 million in compensation last year alone.

Keep in mind, it wasn't just my health insurance that went up that year. I'm sure thousands of United Healthcare customers got similar notices. Were the increases we endured related to that CEO windfall? There's no way to know, but somebody was certainly paying the bill.


And now for the vicious cycle I mentioned.


Tell me again: Who are the job creators?

There's a documentary making the rounds that everyone should see called "Inequality for All." In it, political economist Robert Reich illustrates the growing income inequality in this country and the potential ramifications it has on the overall health of our economy and jobs.


One of the people interviewed in the movie is a very successful investor and entrepreneur who owns, among other things, a clothing factory. One of the things he said stuck with me. To very loosely paraphrase: "There's a lot of talk these days about penalizing the job creators in this country with higher taxes. But job creators aren't people like me. Jobs are created by our customers. And if our customers aren't paid enough at their jobs to buy the output of these jobs, I'll be out of business."


So here's the real point when it comes to income equality: How much a CEO makes is none of my business. Until, that is, the concentration of income growth at the top results in regular working people who are too poor to be able to click on the ads on my website, buy the shoes in your store or the car your neighbor manufactures.


That's when we all lose, and why income inequality matters.


Then there's the moral outrage

You can't honestly discuss income inequality -- or at least I can't -- without at least mentioning the absurdity of all this.


I'm a staunch capitalist, as well as the CEO of this small company. Do I deserve more than those I employ? You bet I do. Unlike the CEOs of major U.S. companies, I started this one with my personal savings and took 100 percent of the startup risk. I've also gone unpaid so those I work with didn't have to.


And yet, although I'm a CEO, as well as a proud member of the 1 percent, I'd chop off my own foot with a dull ax before I paid myself millions of dollars while paying a relative pittance to the other people responsible for this company's success.


Paying anyone 354 times more than the people they work with isn't capitalism. It's greed. It's stupid. And it's only possible in America's biggest companies because different rules apply in the executive suite and on the factory floor.


What do you think?

Like any complex issue, this one is multifaceted. But I'd urge you, and bkp100, to consider both sides of this interesting argument before leaping to a conclusion that may undermine your own best interests.


So join the discussion. Share this post with your friends and family, then leave your opinion below.


More from Money Talks News

VIDEO ON MSN MONEY

33Comments
May 7, 2014 8:59AM
avatar

This is the first well-written argument I've seen against income inequality, based on some fact and logic, and not mere emotional populist agitation propaganda.

 

Stacy raises some excellent points about the corrupt and perverse tangle of incentives in corp boards determining CEO pay and the revolving door of board seats. It could very well be an insiders' club that is fleecing the stockholders. (But this in no way demonstrates that the workers are being underpaid relative to their value.)

 

Whereas I would previously have agreed with bkp100 and dismissed the whiny liberal hysteria out of hand, this article at least has me willing to consider that executive pay scales may be based less on "capitalism" and more on corrupt cronyism.

 

Now, since the federal government is the most corrupt and greedy for-profit cartel in the history of human-kind, I'd like to see some solutions that do not involve giving the feds more money or power, but for that, we need more rhetoricians like Stacy and fewer like Obama, Harry Reid and Kshama Sawant.

May 7, 2014 9:24AM
avatar

This part of the Article basically Sums it up Best for most Americans as opposed to the propaganda you hear daily at time from others.


"I'm a staunch capitalist, as well as the CEO of this small company. Do I deserve more than those I employ? You bet I do. Unlike the CEOs of major U.S. companies, I started this one with my personal savings and took 100 percent of the startup risk. I've also gone unpaid so those I work with didn't have to.


And yet, although I'm a CEO, as well as a proud member of the 1 percent, I'd chop off my own foot with a dull ax before I paid myself millions of dollars while paying a relative pittance to the other people responsible for this company's success.


Paying anyone 354 times more than the people they work with isn't capitalism. It's greed. It's stupid. And it's only possible in America's biggest companies because different rules apply in the executive suite and on the factory floor."

May 7, 2014 8:35AM
avatar
How about I not give one red cent to the parasitic classes amongst us.   Socialists will always vote to seize and take other people's wealth for their own benefit.  That is why Marxism always fails.   Those that produce see no point in continuing to work hard.   They join the freeloading parasites.   Pretty soon you have everyone collecting, and no one working.   This is how you create democrats, cities like Detroit, Oakland, Chicago, and of course an entire new generation on the government plantation.
May 6, 2014 1:01PM
avatar
It does not matter to me. If you want more, go work harder.
May 7, 2014 11:50AM
avatar
Wealth inequality has spiked under the odumbo administration Fact After 5 full years of liberal failed policies, the rich got much richer and the poor got poorer Democrat voters are not bright people

May 7, 2014 11:48AM
avatar
...Remember to vote out every lying anti-American socialist democrat in November U know, the ones that lied for three years to steal your healthcare Make the socialist filth pay dearly Take the country back

May 7, 2014 10:47AM
avatar

excessive CEO pay is theft of my 401K money. 

 

"public" stock should have meaning. 

 

if you want crazy excessive pay, keep the company private. 

 

if your stock with an excessive CEO salary has any chance of being part of my 401K mutual funds, then you are stealing cash from me. 

May 7, 2014 1:53PM
avatar

CEO pay is probably way to much.  There is no doubt that it is the good ol boys club at most companies between management and the board of directors, all scratching each others backs.


 However, it has zero direct relationship to what the rank and file get paid.  Supply and demand dictates pay. When you have excess labor, you have weak pay. Simple as that.  And to suggest that government should step in is plain stupid.  And what should government do?  Dictate pay?  You have got to be kidding me.  To even think that politicians and bureaucrats that can barely balance their own checkbooks, let alone spend our tax dollars wisely and create money from fairy dust would be the ones we should trust in this? 


This is a stupid article.

May 6, 2014 1:00PM
avatar
Does a CEO deserve what they make? That's no ones damn business except the stockholders.
May 6, 2014 4:00PM
avatar
It only matters to those with a world-order agenda. I'm not one bit concerned about it. I chose my job and my lifestyle. I'm happy where I'm at. Thanks, though, for writing more bulls**t, media puppets.
May 6, 2014 1:15PM
avatar
Bkp100....I agree with you 100%.  I'm tired of this Liberal crap.  
May 6, 2014 5:27PM
avatar
Will we also limit the amount professional athletes make relative to minimum wage workers?  How about limiting our Congresspersons' wages as well? Actors' wages? Best selling authors' incomes? How about doctors' incomes?  

Let's limit everyone to a certain ceiling on income. Bound to improve the country, dontcha think?
If not, why not?  If it is greed for one group, IMHO, it is greed for all groups to make that much more than minimum wage, right?  

I think it would stifle ambition, but that is just me. 


May 7, 2014 2:00PM
avatar
it seems pretty simple to me that if the consumer is not making enough money to participate in the market all those goods he makes,  he cannot buy.   Plain and simple if you do not agree, look at the great depression. No job, no purchases, no purchases, no jobs, no purchases. The cause of this may be political, but it the FACT that it happens is nonpartisan.  It really does not take an econmist to figure this out, althoughI have a masters in the sbuject. It is plain and simple math folks.
May 8, 2014 1:54AM
avatar
"Why isn't the discussion focused on ACHIEVEMENT inequality?  I think one could make a good argument that some (not necessarily all)  CEOs are worth a hell of a lot more than someone who can't write and do basic number crunching."

Well that's exactly is the problem, the Wage Gap was once 40 to 1, then rose to over 400 to 1. Now it's fast approaching well over 1000 to 1. The Vast Majority of Folks can Write and do basic Number Crunching. Besides, most CEO don't crunch a DARN thing, that's why they have someone called the CFO. Chief financial officer. Funny how some posters talking about some so-called achievement inequality can't even figure that part out but they yap all day about how a company is run. Clearly most yapping about businesses really don't have a clue about how most are actual run.

Funny also how some of the most successful CEO types were College Dropouts. The ACHIEVEMENT inequality has not separated the CEO types and those under their control at all, in fact, many of those under the CEO have far better educational Achievements. However that's not what get's you into the CEO position many times, they have the Good Old Boy Network for that. That's one of the Reason far fewer Women are in that Position. Some folks will never figure that part out either.
May 7, 2014 5:55PM
avatar
Folks on the right need to understand that CEOs get paid what they do because of Corporate Cronyism, not Capitalism. Folks on the left need to understand that so-called government "solutions" to the problem of inequality are just another way for government bureaucrats accruing more power and control for themselves. I don't know the solution, but I do know that neither of the solutions offered by the left or the right are effective. The status quo leaves power in the hand of the Corporate Cronyists. The left wing solutions leave the power in the hands of government bureaucrats. In either case, the folks at the bottom are not any more powerful than they were before.
May 7, 2014 1:58PM
avatar

Maybe all those whining about CEO pay just need to change occupations and become CEOs.  What was that?  Not very many openings for CEOs that are high school dropouts?  With no job skills?  Can't read?  Can't do more than print their first name?  Sleep all day, play all night? 


Guess there is always room for these aspiring losers on the government plantation.

May 7, 2014 5:02PM
avatar
"About 26% of high school seniors perform at or above “proficient” levels in math, meaning they grasp challenging concepts. In reading, about 38% perform at or above proficient, two percentage points less than students in 1992."

Why isn't the discussion focused on ACHIEVEMENT inequality?  I think one could make a good argument that some (not necessarily all)  CEOs are worth a hell of a lot more than someone who can't write and do basic number crunching.  
May 7, 2014 4:02PM
avatar

I like income inequality.

It's fun having more money than others do :)

May 7, 2014 4:57PM
avatar
Folks on the left like to compare employee wages to CEO of large public traded companies. Teachers like to compare themselves to very successful professional baseball players. These comparisons would lose steam if they were comparing employees and CEO of average privately held companies, and teachers compared there salaries to minor league baseball players.  
May 7, 2014 12:02PM
avatar
When will it dawn on some folks that these Glorified shareholders, most are the same Hedge Funds these very same posters claim to Hate.

When will it dawn on some posters that many of these Glorified Shareholders, were the biggest benefactors of the Welfare know as QE to infinity.

So why is It fine and dandy to punish Saviors by manipulating Interest Rates while allowing Too Big to Fail and Too Big to Jail to continually steal wages off the Backs of the Working Poor and Fading Middle-Class?

Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.