U.S. Leads All Highly Developed Countries… In Income Inequality

Personal opinions vary about how national income should be distributed and everyone is entitled to their own opinion. Economists, Political Scientists and Sociologists attempt to predicate their views on tangible evidence when they are practicing in their field, although they too are free to adopt their own opinions independent of the facts.

Joseph Stiglitz, Nobel Laurate in Economics, pointed out facts in his book The Price of Inequality, specifically:

“Recent U.S. income growth primarily occurs at the top 1 percent of the income distribution, those at the bottom and in the middle are actually worse off today than they were at the beginning of the century, and America has more income inequality than any other highly developed country.”

Since Stiglitz’s book was published the 2018 tax code revisions have been made and they are regressive, which means they will exacerbate inequality. Stiglitz then transitions into a more opinion-based mode: “In a democracy supposedly based on one person one vote, the 1 percent could be victorious in shaping policies toward its own interests.” He attributes the realities of this unequal distribution to low voter turnout, a system in which electoral success requires heavy investments, and the belief that those with money have made political investments that have reaped large rewards – often larger than the returns they have reaped on their other investments.  Since there is no sound scientific analysis that can be used to unequivocally establish a causal relationship between wealth and influence these observations must be treated as one person’s (albeit a highly qualified person) readings of the tea leaves.

Each organization must make decisions that allocate resources internally. Microeconomics has provided substantial theory grounded in research that provides policy makers with guidance about how to manage rewards. An organization that attempts to be a low-cost provider (i.e., Walmart) may choose to pay the lowest wages possible and to limit eligibility to employee benefits. An organization that is seemingly identical that uses different cost calculations may choose to pay more and provide more benefits (i.e., Costco). Walmart’s average pay has been 25-30% lower for non-management jobs than Costco’s, yet Walmart paid its CEO about 5 times what Costco did in 2014. The median income of a Costco customer is much higher than a Walmart customer, which would suggest the organization could charge higher prices, although they generally do not. Walmart is criticized by the government, the public, unions and many employees for their rewards strategy. But Costco is sometimes criticized by its shareholders for investing more in pay and benefits. There is no “right” answer to distributing income within the organization. Different parties at interest will have differing opinions about what policy should be. The Costco CEO defends the higher investment in people by comparing its turnover to that of its competitors and pricing that turnover, thereby justifying the policy driving compensation to a higher level. There certainly is a presumption by Costco management that higher pay has a positive impact on turnover.

The comparison of Walmart to Costco illustrates that income distribution within an organization is a complex issue, with many contributing factors impacting what results will be, given any policy. One of the metrics that has been used to attempt to address “fairness” of internal pay distribution is the relationship between CEO pay and the pay level of those at the bottom of the pay structure or the pay level of the average employee. The U.S. private sector multiples are dramatically higher than any other country at an aggregate level. But to decide whether this is a “fair” multiple or an optimal one the economic system must be considered, as well as the type of organizations included in the analysis. Any multiple is based on opinion and it is reasonable to assume it should be determined independently by each organization.

If the founder of a start-up becomes extremely wealthy because the person came up with an idea, turned it into a business plan and executed a strategy that created more value than the CEO of a Fortune 50 company did any comparison between the two must be tempered by an understanding of what drove the outcomes. If the start-up never made a profit and virtually all of the wealth was a result of a sky-high valuation of the organization, whether it was publicly traded or private, one might view the outcome as being the result of a bet on the future by investors. And investors make choices about when to buy and when to sell, since they are free to do so. If the Fortune 50 company CEO pay was the result of a Board decision to award a high salary and cash bonus it seems fair to judge the decision by asking a few questions: 1) did the performance of the organization produce a high return to owners?, and 2) did it result in high salaries and cash bonuses for the rest of the employees? If there was little correlation between organization performance and the rewards paid out the judgment of the Board should be questioned. And if the CEO and other highly paid employees did well at the expense of other employees someone must decide if this was justified.

Recent analysis seems to indicate that increasing income inequality is driven by certain types of organizations, industries or sectors. My consulting work in the public and not-for-profit sector has shown me that there tends to be much less difference between the top and the bottom pay ranges in the typical public sector pay structure than in the private sector. And since there is less usage of variable compensation and equity ownership the variation in total compensation is even greater in the private sector. For example, in public utilities, library districts and many cities and counties there is seldom more than a 10 – 15 times variance between the highest and the lowest paid employee. Since the most commonly cited CEO – average employee multiples in the private sector is 200 – 400 this is a very large difference between the sectors. The public sector does provide much richer benefits than the private sector, but the Economist Intelligence Unit has priced the gap at no more than 30 percent. The average large corporation provides its CEO with a salary of 1 million dollars or more, which drives this multiple to such a high number.

All of this leads to a conclusion… there is no “right” or “fair” multiple, at the organizational or national level. But there is a lot of emotion generated by numbers like a 400 multiple when reported in the press. Economists, Politicians and Sociologists generate tangible evidence regarding what exists. But their personal opinion about what is “right” or “optimal” is just that – an opinion. Where an individual stands in the income hierarchy will certainly influence opinion. And where one falls on the Liberal – Conservative political scale will also influence how one reacts to the current income distribution.

The federal government must influence national income distribution through taxation policy, and in some countries in Europe there is deliberation about capping executive income. CEO’s must deal with income distribution within their organizations. Individual citizens should form their own opinions and act on them… in how they vote, in how they feel about income distribution within the organization they work for and in how they express their views individually and collectively. Having the most unequal national income distribution among highly developed countries can be viewed as desirable or undesirable, depending on one’s perspective.