Executive Pay and Inequality
As the number of rich people in the United States becomes smaller; the amount of money they control keeps getting larger. Some people think that is a good sign. It shows that democracy in America is thriving: if you want to be very rich, the USA is the place to reach your dream. That is the opinion of free market advocates. On the other hand there are some people who are outraged and would tell you that the riches needed to be divided equally between each man, woman and child; only then would it be true that American democracy is thriving. Those would be people from a strictly Marxists ideology.
The historian, Paul Kennedy, in his 1993 book Preparing for the Twenty-first Century commented,
An increasing majority of Americans have found their real standards of living – like the real level of national productivity - stagnating since the mid-1970s. Just as the gap between the upper one-fifth and lower four-fifths of global society has increased, so also, though less drastically, has the upper one-fifth in American society detached itself from the rest.
The book was published almost twenty years ago so the numbers have changed, but the trend has continued. The rich have gotten richer and middle class incomes have been shrinking towards the poverty line.
The essay addresses this gap in access to cash as an inequality which must be caused by some modern phenomena. Many people are very upset about the amount of CEO pay. Even when a company fails the CEO in charge gets a large amount of severance pay plus other benefits. The middle class finds this unacceptable. This may be an unacceptable way to do business from a moral or ethical point of view but what about from the economic point of view?
This discussion considers executive pay and inequality. What effect does one have on the other? Are the large amounts of executive pay adding to inequality or are they only a visible reminder of the income gap in the USA? I suggest they are a symptom of the problem of inequality.
Free market ideology and Marxist ideology will be compared in order to understand the difference between the two ideologies and maybe gain some insight into whether the large sums executives are paid has any impact on income inequality.
Free Market
An article by the late economist Rothbard (2011) was published in The Free Market newsletter. He argues that in a free market “All participants benefit from the market and therefore all their interests are in harmony.” He blames government intervention for the problems and the inequality. (para. 3).
The Economist an online and print financial news magazine published an article titled “Bosses under Fire.” The article reports that executive pay grew by “over 300% between 1998 and 2010.” British workers receiving a median real wage have been watching their pay stagnate. In fact the ratio of executive to average pay is 120:1. (Executive Pay, 2012, para. 2)
Free Market ideology does not view inequality as a problem. A Free Market proponent wrote that executive pay has gone up due to globalization. The top executives have to have extraordinary skills and they are worth every penny. (Exec. Pay, 2012, para. 2)
Marxist
An opinion closer to the Marxist ideology is that stated by the financial research company, Obermatt. The head of Obermatt is Hermann Stern. Stern would like to see a change in the way CEOs salary is calculated in order to introduce more fairness. He has suggested that the top executive’s pay should be correlated to earnings growth and shareholder return. Otherwise, Stern points out, salary calculations are not correlated to any realistic measure; instead companies pay excessive amounts. One example (one of the worst according to Stern) is Ray Irani head of Occidental Petroleum. In 2008 he earned over $200 million. According to the Obermatt’s pay scale equation, Irani was paid about 8 times morte than he deserved. (Focus, 2012, para. 1)
When Kennedy wrote about the widening gap in 1993 he mentioned that one fifth, or 20%, of the richest people in the USA hold most of the money. In 2012 an article discusses the widening gap between “American’s richest 1%” and the rest of the population. The signs and chants of protestors say “1% against the 99%” to emphasize the size of the gap. The people taking part in Occupy Wall Street want justice in the system. Marx and Engel would support that goal.
That does not mean that all the protesters are Marxist though. Although some of the protestors that have spoken in public and on the news do not support the free market claim. Mainly, they say, because the market is not free. Many corporations are receiving government subsidies and special tax breaks. So some marketplace entities are receiving special treatment. If the market were really free everyone would get the same treatment. Then it would be possible to gauge how a free market works.
An article in the Cultural Logic (having Marxist leanings) suggests that in the future choices between strategies such as free market and socialism can be made. The authors note that it is not enough to base a choice only on the “critical assessment of the capitalists system.” They advise taking into account a system that will meet the goals of both justice and environmental sustainability. (Gokay & Whitman, 2009, 37)
Conclusion
I think it is better to have more equality in the system. Neither a Free Market or Marxist strategy is necessary, but a balance of pay according to hours of work would be one example of a simple, fairer calculation. Marxism is the better choice for an economy which will run properly without so many problems. Executive pay is a symptom of inequality and a good discussion starting point of the subject.
Bibliography
Rothbard MN. (2011) It’s the people vs. the government. The Free Market. 29(2), 1-4. Web.
Gokay B and Whitman D. Mapping the faultlines: A historical perspective on the 2008-2009 world economic crises. Cultural Logic. Web.
Kennedy P. (1993) Preparing for the twenty-first century. New York: Random House, Inc. Print.
Inequality. The gap widens, again. (2012 Mar 10) The Economist. Web.
Focus. Executive pay and performance. (2012 Feb 7) The Economist. Web.
Executive pay. Bosses under fire. (2012 Jan 14) The Economist. Web.
