16-06 Segment 1: Wage Inequality: Why we have it and how to narrow it

 

Synopsis: It’s campaign season, and we’re hearing from politicians about the wage gap between the top 1% of earners in this country and the rest of us. What is the gap? When did it begin to develop and why? And what can we do to narrow it? Our guests offer their opinions on the subject and some solutions.

Host: Gary Price. Guests: Les Leopold, Director of the Labor Institute in New York, and author of Runaway Inequality: An activist’s guide to economic justice; David Lewin, Neal H. Jacoby Chaired Professor Emeritus in the Anderson School of Management at UCLA, and an expert on executive compensation.

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Wage Inequality

Gary Price: It’s campaign season, and we’ve been hearing a lot about the disparity between the “Top One Percent” of wage earners and the rest of us. That top one percent includes star athletes, movie actors, tech company owners and, increasingly, corporate executives who negotiate contracts worth hundreds of millions of dollars. At the bottom of the pay scale are the minimum wage earners who whose take-home pay is barely enough to keep them housed and fed. It wasn’t that long ago when most of us could buy a house and a car, feed our families well, go on a vacation now and then, and even send our kids to college without experiencing financial hardship. What happened? Where did this wage gap originate and why has it grown through the years? And what, if anything, can people do to narrow it? Our guests look at this issue and come up with a few suggestions. First, Les Leopold, Director of the Labor Institute in New York, and author of Runaway Inequality: An activist’s guide to economic justice says the wage gap took off in about 1980…

Les Leopold: At that time the gap between the top hundred CEOs and the average worker was about 45-1. Not bad. There were plenty of wealthy people back then. But it’s grown from 45-1 to 829-1. That’s astronomical, and all during that period of that growth at the top average wages have stagnated. In fact, they’ve actually declined in terms of their buying power. So around 1980 is the turning point because that’s when policy changed dramatically in this country.

Price: A graph in Leopold’s book shows that for every dollar a non-supervisory or production worker makes, one of the top 100 CEOs in the country makes about 829 dollars. Quite a leap in just a few decades. Leopold says that the deregulation of Wall Street had a role to play…

Leopold: We began what I call the “better business climate” model which was get the government out of the economy, cut back on taxes, especially on the wealthy, and deregulate. And the deregulation was supposed to be things like airlines and trucking and telephone and those kinds of things, but in fact the key deregulation that led to runaway inequality was the deregulation of finance, the deregulation of Wall Street. Once that happened, all kinds of things started taking place that – I use the term “financial strip mining” – our corporations were actually financially strip mined by the combination of the CEOs and Wall Street, which now have the ability that prior to 1980 it was illegal for them to do. And we are paying for that deregulation tremendously. That led to the crash of 2007-8 and it’s led to this kind of runaway freight train of wealth going to the top.

Price: The more money a CEO makes for a company, the more he or she takes home in pay and in company stock. David Lewin, Neal H. Jacoby Chaired Professor Emeritus in the Anderson School of Management at UCLA, is an expert on executive compensation. Lewin says that there’s an easy way to look at executive pay that brings the entire issue into focus. He says to view it like the U.S. Open tennis tournament. The winner might get two million dollars. The second-place finisher, one-point-five million, and so on down the line to 50th place, where the loser gets rewarded just for playing…

David Lewin: If you take out first place in that tournament, write in “CEO” and add a zero or two you would now have CEO at the top of the income distribution at $200-million. Strike out second place and write in “COO” or “President,” add a zero or two and so on and so forth. Strike out third place, add “CFO”; strike out fourth place add “VP of Marketing” or “Director of Marketing” or “Chief of Marketing.” And in 50th place would be your, not your average worker providing services or goods, production, but your lowest-ranked worker. This now gives you a picture of what’s happened to executive compensation. It used to be that the line would be upwards sloped, but the differential would be 40, or 50, or 60 or 70 times from the top to the average.

Price: There’s another aspect to wealth too. As the decades went on, not only did top people, make more money, they also got to keep a lot more…

Lewin: Income inequality started to increase in the early 1980s and that was associated with the tax cuts in the Reagan Administration. And those tax cuts wound up cutting top rates much more than middle or lower rates. That meant that executives who were paid could keep more of the money that they got rather than having it go to the government in taxes. And that sort of thing has continued, so that the tax rates that pertain to income are relatively low at the top compared to what they used to be. It may surprise you if you don’t know it, that when Dwight Eisenhower was President of the United States, the progressive income tax, the graduated income tax rate, federal tax rate on income went up to 91%, and that kicked in at $200,000.

Price: Compare that to 2015’s top rate of 39.6 on ordinary income – your paycheck – and it’s a very dramatic reduction, especially when you figure in how executive compensation has risen exponentially. There’s something that rankles many people more than what top executives make, though. Often when CEOs fail to produce for their companies, they can leave and join another one, like a losing tennis player can enter another tournament and be rewarded – win or lose. The average employee just gets shown the door. Why the CEO “golden parachute”?

Lewin: In 1970 no executive had a contract. You were an “at-will” employee, you went and applied for a job, you get interviewed, they quoted you a price and you said “yea” or “nay.” Today every executive has a contract and typically an agent that negotiates it. That is another thing that is consistent with Tournament Theory: if you’re a top star or an entertainer, and that’s what CEOs have become, then you have an agent. You don’t negotiate for yourself, that agent has negotiated for you and it has an “out clause” should you get fired or there’s a change of control – that’s a very common feature – it usually means a merger-acquisition, and you’re displaced you get a big severance package.

Price: Leopold says that another reason for the wage disparity is the decrease in unions around the country in the private sector.

Leopold: There’s an inverse relationship between the number of people in unions in America and inequality. When union strength, membership is high inequality was low, and as soon as union membership stated collapsing in the early 1980s, inequality took off. So it seems to me that if we want a fairer society we still need people in unions because bargaining collectively is just so much more effective. Low-wage workers like McDonald’s workers in the United States are getting wages that I can’t imagine living on $9.00 an hour, $8.00 an hour. In Denmark, where unions are very strong, the wage of McDonald’s workers is $20.00 an hour. They live a completely different life; they live a middle class life working in a place like McDonald’s. And if McDonald’s chooses to be in Denmark, they have to pay those wages because they’re very strong with unions. So I don’t think the role of unions have ended.

Price: Lewin says that not all companies buy into the high executive pay and low minimum wages model. He says that these corporations are doing just fine for themselves and the rest of the country because of the way money moves through the economy…

Lewin: We do have a market system so for every company that might seem to pay egregious amounts to executives, we have other companies that believe the other way, who say that, “Look, when we spout organization culture, we say we’re all in it together, we rise and fall together,” that has to apply in compensation. And in those companies, the differential between the CEO and the average employee might be in the neighborhood of 12 times or 15 times or 20 times. It’s still substantial, but it’s nothing like a hundred, 200 or 300. Examples of companies like that include Southwest Airlines and SAS, and Harman Kardon and a bunch of others. It’s like the minimum wage. Most retailers oppose it, the CEO of Costco’s been running around the country the last five years saying, “Raise the minimum wage and raise it more than President Obama’s advocating,” he says, “because what’ll those people do if they get an increase in income? They spend it at places like Costco.”

Price: How can we change the system for the better? What can the average worker do? Leopold says that becoming educated about the situation is the first step. After that, it’s activism…

Leopold: Step one is get yourself really up to speed. Because what you’ll see is runaway inequality will not cure itself. It’s on us. That’s number one. Number two is to start sharing the information with your coworkers and people in your community. It would make an enormous difference. You know, in the 1880s the Populist Movement grew from a, virtually, door-to-door educational campaign. We should not belittle the power of education. You’re not going to get it from the media right away; you’re not going to get it from politicians. And things do start to change. We had Occupy Wall Street for about six months, and it wasn’t particularly well organized, but it changed the national conversation. All of a sudden we were talking about the one percent and the 99 percent. Before that we were talking about the grand bargain to cut Social Security. It was a conversation changer.

Price: Lewin says much the same thing about executive compensation. A single small shareholder can’t do much alone, but collectively they can raise their voices to change the composition of boards of directors to be more diverse…

Lewin: CEOs or other officers can also be the Chair of the board of directors. That’s prohibited in many other countries. In the U.S., no seat on a board is assigned to a customer, or to an employee, a non-executive employee, or to a supplier, a vendor, or to a government representative. They could well be. The boards of directors are, as analyses in many fields has show, including finance and organizational behavior, that the boards, despite the overuse of the word “independent,” the boards, the network analysis shows, that these are folks who are very close to the chief executive officer. That’s not too surprising but the data show that despite the rise of so-called “independent directors.” So, we could look to changing the composition of the boards of directors and also doing some things with respect to the role of compensation committees, which are pretty much rubber stamps for any compensation increase that a current officer is getting or is likely to get.

Price: To learn more about the issue of the wage gap and what can be done to close it, pick up Les Leopold’s book Runaway Inequality and visit him on Facebook and Twitter. To find out more about David Lewin and his work, log onto UCLA’s Anderson School of Management’s site at Anderson.UCLA.edu. For more information about all of our guests, visit our site at Viewpointsonline.net. You can find archives of past programs there and on iTunes and Stitcher. I’m Gary Price.

 

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