Thursday, July 23, 2009

Kevin Drum on the Compensation of Those Not Highly Compensated

Ellen Schultz (Wall Street Journal) writes something that catches the interest of Kevin Drum:

Executives and other highly compensated employees now receive more than one-third of all pay in the U.S., according to a Wall Street Journal analysis of Social Security Administration data -- without counting billions of dollars more in pay that remains off federal radar screens that measure wages and salaries … In the five years ending in 2007, earnings for American workers rose 24%, half the 48% gain for the top-paid. The result: The top-paid represent 33% of the total, up from 28% in 2002.

Kevin follows up with:

You probably thought that the big problem with skyrocketing executive pay was the fact that it left nothing for the rest of us. And you're right: that 24% increase for "American workers" includes the 48% increase for the top earners. In other words, the executives got a 48% increase, the rest of us got approximately nothing, and it all averaged out to 24%.

There may be two problems here. Kevin is taking a simple average of 48% for the wealthy one-third and zero for the rest of us to get this 24% overall average but that’s not quite right. A weighted average where one-third received a 48% increase and two-thirds received a 12% increase is more in line with the overall increase being 24%. But if the rest of us received a 12% increase in how nominal wages over this five-year period, how does that compare to the increase in the consumer price index? If one compares the CPI as of December 2007 to the CPI as of December 2002, the increase in CPI was over 16%. In other words, those who were not highly compensated may have seen their nominal wages rise slightly but in real terms, wages declined.


Kevin Carson said...

It's instructive to consider the differing theories of human motivation implicit in the compensation of executives and of ordinary production workers, respectively. Every day I see some talking head on CNBC bloviating that we can't expect a CEO to give it his all unless he gets a compensation package in the tens of millions of $$. The Board has to give him enough money as an incentive not to take off for Honduras with a suitcase full of money, apparently. But the ordinary production worker only needs Fish! Philosophy and a bunch of official happy talk about "teamwork," coupled with the threat of downsizing, and he's expected to bust his ass.

Guess what? It doesn't work. Based on my personal observation, the losses from deliberate waste and sabotage by disgruntled workers exceed the alleged savings from downsizing and stagnant wages.

The MBAs may be too fucking stupid to realize it, but making your employees hate you isn't a real good business model.

Martin Langeland said...

Nor is concentrating on the bottom line sufficient if it leads to cutting labor below what is required for efficient operations.

Anonymous said...

Individuals all have a personal point of declining marginal utility of money. At some relatively low dollar amount middle management starts worrying about non-money compensation. They whine about needing recognition, about needing to feel part of a team, whine, whine, whine. Sr. management is made up of people with much higher declining marginal utility of money (I have met one person who I suspected had no declining utility. Turned out he did, but boy was it high. He pulled the classic "try to get my boss killed by the board so I can get both my handcuff and parachute" move I have seen executed by 2 F500 COO's. "Its a win-win" is how one of them explained it.) So middle managers get their time on stage being presented pins or plaques, or some bric a brac about team blah blah blah, while Sr. management keeps the money for themselves.

Looking at the world like this leads to some interesting insight into the impact of tax cuts on wages. The arguement that tax cuts cause high income folks to "create" more income ignores the game theory game available for high income folks to change the size of the pie slices as a way to "create" more income for themselves without making the pie any bigger at all. Tax cuts lead to greater income disparity and may or may not lead to greater total income.

not anonymous - Frank