Income Inequality in America

[goon175]

Ok, I am researching this "phenomenon" for an upcoming article for Hit the Woodline. It generally pisses me off that people would rather complain about it being "unfair" then do the work to get to that level themselves. I would, however, like to hear everyones opinion on this and maybe get a few different well thought out points of view. The below articles are the two that really got me going on this issue as of late:

http://www.latimes.com/business/la-fi-hiltzik-20131020,0,770122.column

http://mashable.com/2013/03/02/wealth-inequality/

 

[JHD]

I've been watching this, as well, to see how it plays out. I'll let you know what I think! and you can use as you see fit.

The LA Times article refers to Drucker's recommended salary ratio from the 70's. But if you look at market capitalization of big business from that same time period, the increase corresponds to the six-fold increase in CEO salaries.

Large multi-billion companies must bid up the compensation packages for their CEO's as there is Avery limited supply of people to pick from capable of managing a very large company successfully. So in an environment where a more talented CEO might have a .020 impact on market capitalization, for a $500 billion corporation, that equates to a $100 million. There will always be outliers, where a CEO is paid an astronomical sum and fails dramatically. But that points to a bad decision by that board of directors, and is not the norm.

So why have CEO salaries increased by roughly six times when the average median worker's salary has not? For one thing, the economy hasn't grown by that much during the same time period, and the average worker doesn't have the same impact on the economy that a CEO of a multi billion dollar company does.

We are a free market society, and companies should be free to get the best talent. There is not a worldwide pool of talent to pick from. Long gone are the days when you could take someone from inhouse and groom that person to be CEO. The same principles are applied to our actors and sports figures. Put a superstar in a movie, get a blockbuster. Recruit a star player for your team, ticket sales and revenue skyrocket.

JMOO.

 

[TLDR20]

I don't think there is a problem with income inequality. Regular old inequality is a problem still though.

 

[comrade-z]

It seems to be an conflict between what is wanted by organizations that want the best CEO they can get, versus the issue of concentrating wealth in too few. Put another way, the issue many people have with income inequality and their problem with the income of CEO's is that CEO's are just a good example of exorbitant amounts of wealth being bestowed upon an individual, when redistributing say x% (x=single digit number) of that salary could give a large boost to quite a few people. The reason for seeing it as a problem is the need for a strong middle class, which while America does have a decently strong middle class, it has the potential to be significantly stronger.

Generally speaking, I'd agree with cback - income inequality itself is not a bad thing, and it is just a fact of life if we are to continue using this abstraction of value we call money. Let's just try to keep it so that everyone can participate at some level or another.

 

[DA SWO]

I've been watching this, as well, to see how it plays out. I'll let you know what I think! and you can use as you see fit.

The LA Times article refers to Drucker's recommended salary ratio from the 70's. But if you look at market capitalization of big business from that same time period, the increase corresponds to the six-fold increase in CEO salaries.

Large multi-billion companies must bid up the compensation packages for their CEO's as there is Avery limited supply of people to pick from capable of managing a very large company successfully. So in an environment where a more talented CEO might have a .020 impact on market capitalization, for a $500 billion corporation, that equates to a $100 million. There will always be outliers, where a CEO is paid an astronomical sum and fails dramatically. But that points to a bad decision by that board of directors, and is not the norm.

So why have CEO salaries increased by roughly six times when the average median worker's salary has not? For one thing, the economy hasn't grown by that much during the same time period, and the average worker doesn't have the same impact on the economy that a CEO of a multi billion dollar company does.

We are a free market society, and companies should be free to get the best talent. There is not a worldwide pool of talent to pick from. Long gone are the days when you could take someone from inhouse and groom that person to be CEO. The same principles are applied to our actors and sports figures. Put a superstar in a movie, get a blockbuster. Recruit a star player for your team, ticket sales and revenue skyrocket.

JMOO.

Disagree. I think you can find plenty of talent in lower/middle management. CEO gigs have become revolving doors (kind of like NFL Coaching Jobs); get fired by one team (corporation) get hired by another. Performance doesn't seem to be a key indicator in CEO-land anymore. You would think that some guy/gal that tubes a company would be black-listed, but they still seem to get new CEO-ships, along with those "Golden Parachutes".

 

[RustyShackleford]

I saw a good piece on the CEO of COSTCO a while back and how he intentionally keeps his salary low, pays workers a little more, etc., all in the name of the business. If you go into a COSTCO then visit a Sam's Club, there is a definite difference in the quality of the store as well as the overall quality of the employee.

 

[Isiah6:8]

Milton Friedman IMOO had a lot of great things to say about this.

On the articles you listed: The second video I stopped watching after :56. It was utter garbage. What is "Ideal" and who is that income spreading "Ideal" for? It is not ideal for those producing, that type of income spreading is ideal for those who are benefiting from the system. The first article - the average worker thinks they can be a CEO, and unfortunately that just isn't the case. The ability to grasp exactly what it is your company does, break down every aspect of it, understand it, articulate it, and form a path which will allow the company to follow or go down to be successful in the coming years is an incredibly difficult process. There is a reason there is only one in any type of structure.

On CEO's - there are CEOs of small companies as well fyi. Only ones being talked about are the big hitters here. Listen, the reason they are there and still have jobs is because at some point in their past they have the track record of succeeding. It is an incredibly difficult role to be in, I think you can find plenty of people who think they can be CEO and find fewer people who could actually handle it, or want to handle it. Sometimes the latter is the real kicker. On their salary, why redistribute the wealth of their salary if the end result produced isn't the same? Also, be careful about "salary" because some CEO's pay themselves $1 a year and give themselves(through the board) $10-30MM in options. So you really need to look at the whole package they are getting.

 

[TLDR20]

I saw a good piece on the CEO of COSTCO a while back and how he intentionally keeps his salary low, pays workers a little more, etc., all in the name of the business. If you go into a COSTCO then visit a Sam's Club, there is a definite difference in the quality of the store as well as the overall quality of the employee.

Costco pays well has a revenue sharing program and great benefits for starting workers. Not many better places to work for 10-15 bucks an hour.

 

[DA SWO]

Milton Friedman IMOO had a lot of great things to say about this.

On the articles you listed: The second video I stopped watching after :56. It was utter garbage. What is "Ideal" and who is that income spreading "Ideal" for? It is not ideal for those producing, that type of income spreading is ideal for those who are benefiting from the system. The first article - the average worker thinks they can be a CEO, and unfortunately that just isn't the case. The ability to grasp exactly what it is your company does, break down every aspect of it, understand it, articulate it, and form a path which will allow the company to follow or go down to be successful in the coming years is an incredibly difficult process. There is a reason there is only one in any type of structure.

On CEO's - there are CEOs of small companies as well fyi. Only ones being talked about are the big hitters here. Listen, the reason they are there and still have jobs is because at some point in their past they have the track record of succeeding. It is an incredibly difficult role to be in, I think you can find plenty of people who think they can be CEO and find fewer people who could actually handle it, or want to handle it. Sometimes the latter is the real kicker. On their salary, why redistribute the wealth of their salary if the end result produced isn't the same? Also, be careful about "salary" because some CEO's pay themselves $1 a year and give themselves(through the board) $10-30MM in options. So you really need to look at the whole package they are getting.

That is generally done as a way to avoid taxes, tax that income or reduce tax write-off for vehicles not used for corporate business and see what direction those people take.

 

[JHD]

Disagree. I think you can find plenty of talent in lower/middle management. CEO gigs have become revolving doors (kind of like NFL Coaching Jobs); get fired by one team (corporation) get hired by another. Performance doesn't seem to be a key indicator in CEO-land anymore. You would think that some guy/gal that tubes a company would be black-listed, but they still seem to get new CEO-ships, along with those "Golden Parachutes".

Disagreed with you because at the level we are talking, getting an unproven talent in that position would be detrimental. The shareholders wouldn't approve, the financial markets wouldn't approve, the capital markets wouldn't approve. If that person is a failure bad things multiply exponentially. The bigger the company is, even a slightly better CEO, with a slightly better performance will mean millions of dollars for said company.

There will always be bad board decisions (JCP), there will always be outright fraud (Enron), there will always be Home Depots. Those are not the norm. You are correct that CEO's can and do job hop for whatever reason. They could be a superstar in one industry, absolutely outstanding performance, get the urge to move on, and be a dismal failure at the next gig. Like any job, the key is to find the right person that fits the need at any one time.

At that level, golden parachutes are also the norm. The higher the position, the better the package due to the time involved in finding a "comparable position" if let go.

 

[comrade-z]

On their salary, why redistribute the wealth of their salary if the end result produced isn't the same?

All your points are good, and a few of which that had slipped my mind so I thank you for bringing it into this discussion. However as to the quoted bit as to why redistribute, personally I don't think redistribution is the best way to do it; redistribution was just what came to mind, and the point made by that comment is mostly a side-thought.

Primarily, I see this as about more than just the end result produced - the end result produced is only important because it gives people something they want. Someone can have the most efficient, effective way of developing an absolutely useless product. As such, I see it as that society as a whole is compensating someone for their efforts because that person's efforts are beneficial to society. So in this understanding that I use, the employee/investor/whoever has very much earned their compensation, but that compensation can only exist when society can produce the financial compensation to bestow upon them. A stronger overall society can reward more entrepreneurs and hard workers, perhaps to a similar or even greater extent as the current balance.

 

[Isiah6:8]

That is generally done as a way to avoid taxes, tax that income or reduce tax write-off for vehicles not used for corporate business and see what direction those people take.

That is not accurate, but it does have merit. What you said is a side benefit, you still have to pay taxes on the present value of the options at time of issuance in form of compensation. So $1-3MM in options is still taxed vs say 10MM in salary taxed(for big hitter CEOs which this thread is leaning in talks about) is still a tax benefit but it isn't the driver. You do it because of this: you have a CEO who owns a percentage of the company and whose net worth is already tied to the company. By going the option route you tie their massive upside in options to future performance of the company. They don't need a salary because it doesn't effect their living, so by giving them the chance to make as much upside as possible or the options might be worthless down the road, they will bet on themselves leading the company most times. This is all still tied to looking at the expiration ladder and strike of the package which like before, you must really look at if open to view.

You can actually see this opposite effect taking place with big name actors. In their contracts they used to be offered a salary and points. Points was a percentage of movie sales (domestic and international), products, toys, etc etc etc that came from the movies. Big name actors are now wanting large salary payments up front wanting cash now and leave the points on the table due to volatility in box office hits. Used to be more predictable with what could generate a lot of revenue growth, with more flops at the box office coming you see big name actor salary prices going higher because they are leaving the points on the table.

@comrade-z - was merely bringing up the point that when people bring up large salaries normally they say re-distribute the wealth. Always an interesting discussion.

 

[RustyShackleford]

Costco pays well has a revenue sharing program and great benefits for starting workers. Not many better places to work for 10-15 bucks an hour.

Which equals better service and part of the reason we switched to them from Sam's about seven years ago.

 

[surgicalcric]

Disagree. I think you can find plenty of talent in lower/middle management...

I agree in theory but just like most of us have witnessed in the military, a good company CDR can be a piss poor BN or group (brigade) CDR. The same holds true for the corporate sector.

 

[DA SWO]

I agree in theory but just like most of us have witnessed in the military, a good company CDR can be a piss poor BN or group (brigade) CDR. The same holds true for the corporate sector.

True, but those CEO's started as junior/mid-level managers. I have faith that the Jr Mid-Levels still have talented individuals, you only need one to be CEO.

 

[AWP]

CEO gigs have become revolving doors (kind of like NFL Coaching Jobs); get fired by one team (corporation) get hired by another. Performance doesn't seem to be a key indicator in CEO-land anymore. You would think that some guy/gal that tubes a company would be black-listed, but they still seem to get new CEO-ships, along with those "Golden Parachutes".

When I worked at Merrill Lynch I gained a small amount of insight into this, something I'd never thought of before. Look at the CEO positions of major companies, of the NYSE, and some of the other players which escapes me at the moment, and there is a lot of inbreeding. Some guys bounce from company to company. Look at folks who tanked their companies: Carly Fiorina, destroys HP, fails to beat Barbara Boxer in an election, now sits on the board of directors or trustees for a number of companies or schools. Stan O'Neal, former CEO of Merrill Lynch, one of the worst CEO's of all time, currently on the board of directors for Alcoa. John Thain, Stan's replacement at Merrill, formerly the head of the NYSE, left it to be Merrill's CEO, is fired, and lands the job as CIT Group's CEO.

I'll bet if I did some digging these three wouldn't be out of place.

Even if there isn't income inequality (I don't have a position as yet), there certainly is a "hiring inequality" in America.

 

[Isiah6:8]

Is there an income inequality? Yes, absolutely, but on a level of consumption I wonder if that gap has been widening or closing in the past years, I would say the latter. I think that there is an important difference to distinguish there. I also think that an income inequality is in some respects a good thing.

Here are a few good looks on this - the first article is interesting, the second is a video clip, it's a very simple breakdown 4 minutes long worth looking at, it starts at :15. The first article I feel is a very interesting read, I do not agree with everything in it, but I enjoy the points made.

http://www.academia.edu/298328/Milton_Friedman_on_Income_Inequality

 

[DA SWO]

Inequality based on performance is good. We are losing the performance requirement. I get fired (or "step down") and a friend gives me a board position, which allows me to get another CEO-ship.

Board Members grant outrageous (in some cases) salaries to friends/colleagues, with the unspoken agreement to help me get a position when I need one. We are stifling creativity by killing corporate loyalty, in part by ensuring you will be capped unless you move to a different company.

I still think "Loosely Regulated Capitalism" is the best system, but those in-charge are going to kill the Golden Goose via greed and cronyism.

 

[Marine0311]

Some of this has to do with people not knowing how money works, how to manage your money (budget, spend, save, etc) and using your money to buy crap you either can't afford or don't need.

Many good points made ITT.

 

[goon175]

Also, I think a lot of the outrage by those who are upset by the income gap in this country, isn't just directed at the CEO's pulling in millions; they are also looking at the Bill Gates and Mark Zuckerburgs out there who are pulling in billions and billions of dollars. Those are what I would consider "true" 1%ers as far as money goes. It doesn't matter what their "salary" is, they make all their money off of dividends and investments - something literally anyone in the country can take part in.