CEO Pay, Capitalism, and the Case for a Better Deal
The following is adapted from an essay I wrote a few years ago as part of my graduate program at Avila University.
CEO pay is not a new topic. Both texts I read for this module were written in 2006, and reference is made to as far back as 1992. Still, the political significance of this topic is near the forefront again with the accusations (and in places, embrace) of "socialism." It doesn't take a socialist to be fed up with the sky-high amounts CEOs are paid. Abigail Disney spoke for many of us when she said:
"Jesus Christ himself isn't worth 500 times his median worker's pay." — Abigail Disney, filmmaker, Disney heiress, and Patriotic Millionaires member (Edgecliffe-Johnson, 2019)
The Numbers Don't Lie
Earlier this year USA Today published a list of the top 100 highest paid CEOs at major companies in the United States. The results demonstrate the immensity of the problem. At number 100 was Michael Kaufmann of Cardinal Health, whose most recent annual compensation was $8.4 million. The company employs 40,400 people and has $130 billion in revenue, making his pay actually seem fairly reasonable, all things considered.
At the other end of the spectrum, though, we have a tie between two people, both employed by Oracle as co-CEOs. Safra Catz and Mark Hurd both make $108.3 million annually. Their company has $37.7 billion in revenue and employs 138,000 people. That means Oracle is paying a total of $216.6 million for its top two executives — 0.57% of Oracle's revenue — while a measly 0.0065% goes to Mr. Kaufmann at Cardinal Health.
Are these people really worth it?
As Connecticut State Representative Josh Elliott put it:
"The conservative narrative is that business owners are the job creators. But if the CEOs and owners of capital have unlimited potential for their own compensation, they're just taking money away from their employees. And that's a system that is simply unsustainable." (Anderson, 2017)
It's not just that high-paid CEOs are taking money away from "lesser" employees, but also that such money could be reinvested in the business for greater profit. Financially it makes little sense, other than that this is what the market — composed of investors — is willing to pay. If Catz and Hurd at Oracle were paid like Kaufmann at Cardinal Health, that would leave $208.2 million available for employee benefits, hiring, business expansion, property upgrades, and much more. Instead it goes into private bank accounts, where the recipients must struggle to think of ways to spend it, only to give up and invest it elsewhere for themselves, just to watch it grow. Then, when they do some philanthropic activities with a million or two, they get a nice tax deduction and the benefit of a positive public image.
A Country in Decline, By the Numbers
The economic and social reality of the United States stands in stark contrast to the high rate of pay enjoyed by its many CEOs.
We are facing a new challenge: declining life expectancy in the U.S., down for the third year in a row in 2018. This is the first three-year decline since 1915–18, which was largely attributable to influenza. The big change in mortality is the number of 20-to-40-year-olds succumbing to drug overdose (70,000) and suicide (47,000). The U.S. now places 33rd globally in life expectancy.
America also has rising income inequality. The average hourly wage peaked in 1973 in real terms. It is the same in real terms as it was in 1978. The annual increase in hourly wage is 2.7 percent in the past five years, versus a 4 percent average increase in the years prior to the Great Recession. Since the year 2000, the average increase in hourly wage for the bottom 10 percent of earners is 3 percent, 4.3 percent for the bottom 25 percent, and nearly 16 percent for those in the top 10 percent. The top 10 percent now make nine times as much as those in the bottom 10 percent.
So what can business leaders actually do about it? Marketing executive Richard Edelman laid out a fairly concrete list:
"Take heed of the winds of change and stop quoting Milton Friedman's admonition that the only responsibility of business is to maximize shareholder return. Be part of the solution, especially in education, for example by allowing your workforce to volunteer as mentors to high school students. Take seriously the challenge of automation by insisting on retraining for those most vulnerable to robot replacement, associating your company with community colleges for blue collar upskilling. Put your supply chain to work by insisting on a minimum level of purchases from entrepreneurs, especially those of color, because those are the fastest-growing employers in the U.S. Recruit the best and brightest employees who want to work for a company that has purpose and delivers societal value. Pay employees a higher wage, even if you have to reconsider your pricing policy on low-end products. And lead from the front on compensation—include workers at all levels in equity plans." (Edelman, 2019)
Why This Is So Hard to Fix
The difficulty in bringing about change in the United States boils down to a lack of knowledge of history and a widespread belief in the capitalist mythology we've all been steeped in since childhood. Those of us who grew up during the Cold War are well-familiar with the dire human cost of communism, which leads us to be suspicious of anything with a hint of "collectivism" about it. This makes us hesitant to use the means of government to control any aspect of business. In my youth I held so strongly to this idea that it amounted to a separation of business and state, much like what we should expect regarding the separation of church and state. However, this is out of touch with reality.
The corporate model depends on the concept of being chartered by the government. Historically, it's a relatively new idea in economics and business. Further, it isn't as though there really is a hard division between the day-to-day of business operations and the function of government. In the US we benefit from labor laws that include fair hiring practices, ensuring a safe work environment, and regulation of trade and banking to prevent both fraud and monopolies. The government has a vested interest in regulating business to the ultimate benefit of society. We are only now discussing what those terms should be, and how far they should go.
As Andrew Edgecliffe-Johnson noted:
"In 2011, Mr Barton had warned his fellow business leaders that they could reform capitalism themselves or have it reformed for them 'through political measures and the pressures of an angry public.' The question now, he says, is whether companies will take more meaningful action — even at a short-term cost — to save what Mr Dimon still calls the most successful economic system the world has ever seen." (Edgecliffe-Johnson, 2019)
It seems extremely doubtful to me that business has the wherewithal to self-reform. There are few incentives for it to do so, and the threat of regulation alone would likely only lead to token reforms that don't really resolve the root causes of the problem. Instead, like many European nations, we could go the route of evolving into a social market economy.
What a "Social Market Economy" Actually Means
A social market economy balances both the market economy — presented as an indisputable and unsurpassable universal concept — and the concern for social justice.
"This economic model, implemented in 1948 by the Federal Republic of Germany, is the result of the synthesis of some economic analysis made in the 1930s and the political will of the founding fathers of the FRG. Thus, the social market economy is not a sort of third way between capitalism without limits and collectivist communism, but aims to combine, on the basis of a competitive economy, private initiative and social progress." (Social Market Economy, 2011)
In this model, it is the state that explicitly guarantees the social and economic order — the former based on liberalism, which requires a state with strong regulatory authority. This will to reconcile apparently contradictory elements may be the major innovative essence of the social market economy.
It's a common misconception in the United States that there's only one way to be capitalist, and it looks something like laissez-faire. Held to that standard, it's no wonder that anyone who speaks for taking social issues into consideration is immediately denounced as a socialist. However, social market capitalism takes seriously the benefits of free markets while also acting to ensure the social benefit of the economy to as many people as possible:
"The concept of the social market economy links the principle of free markets and the one of social compensation. Thus the advantages of market economy, such as economic freedom and technological progress, are combined with social objectives such as high employment rate. In contrast, many economic disadvantages of ultra liberal Anglo-Saxon economy, such as abuse of free markets, are erased. The State has a strong position, is involved in making economic decisions in the public interest and acts as co-organizer of social and economic policies. The principle of coordination and competition is the basis of the system; formation of monopolies is prevented. The personality is the basic idea of the social economic market; man is not considered as a purely economic agent here, but as a social actor as well (everyone has to assume responsibility of themselves and of the others). The state provides assistance only if man cannot help himself (principle of subsidiarity)." (Social Market Economy, 2011)
Two Very Different Examples
This can be employed well, or badly. Brazil, where my children were born and where I've lived a couple of times, has a strong centralized government and an interventionist philosophy that is wishful thinking at best, and profoundly corrupt at worst. The social nets promised to the people rarely function well, being ill-conceived and poorly funded, while the tax burden to citizens and business is onerously high.
On the other hand, there's Sweden:
"Sweden operates under a model similar to those of other Nordic nations: heavily capitalistic with a large percent of spending going toward public service. Once well above the global average, tax rates have decreased, and an advanced infrastructure and transportation network assist with equal wealth distribution. Health care, as well as a college education, are free, and its people boast one of the longest life expectancies in the world. Almost all of Sweden's trash is recycled. Swedes are some of the world's most generous people, donating about 1 percent of gross national product to humanitarian aid programs each year. The society continues to diversify as a growing number of refugees, currently accounting for 10 percent of the population, are welcomed into Swedish borders." (US News)
Where This Leaves Us
It is possible for the United States to do better for its people, with a healthier, more equitable economy. CEO pay is only one symptom of a much larger problem, but it is one that most certainly should be addressed. It is my position that this can only be done legislatively.
Sources
- Edelman, R. (2019). CEOs and Capitalism.
- Centre Robert Schuman. (2011). Social Market Economy (PDF).
- US News & World Report. Sweden Ranks Among the World's Best Countries.
- Anderson, S. This Capitalist Is Fighting Skyrocketing CEO Pay. Bill Moyers.
- Edgecliffe-Johnson, A. (2019). Why American CEOs Are Worried About Capitalism. Financial Times.
