A good friend of mine recently brought up the issue of income
inequality, specifically in developed countries such as the United States. The reason,
she argued, why movements such as Occupy Wall Street gain so much traction is
because people feel it is unfair that CEOs and business owners can be paid thousands
of times more than a hard-working employee, who may struggle to just afford rent
and pay bills. They believe that the business elite are unjustified in awarding
themselves huge bonuses while so much of the working class lives at or below
the poverty line.
I agree with my friend’s position that income inequality is
a problem that should be addressed. However, I don’t see a gulf in wages as being unfair, only that if a person does not earn enough he or she should have support to maintain an acceptable living standard. I also believe the government should
bear this responsibility.
The general misconception about senior management positions is
that they are relatively easy to fill – after all there are so many business
executives and they all appear to do the same kind of unquantifiable work. CEOs
especially seem undeserving of their pay since they can make tremendous
blunders and still earn millions of dollars. The most common yet fallacious explanations of
why corporate management can be paid so much are because A) they either choose
their own pay, or can influence others to pay them, or B) management positions are
overvalued and no one can or wants to do anything about it.
Management compensation is governed by the laws of supply
and demand the same way as the retail workers, lawyers, or professional athletes.
They are set by the company’s owners (board of directors) and the board must believe
the value of management is worth more than its salaries before they will
approve it. After all, every dollar that is paid to the CEO is one less dollar distributed
amongst the owners.
But why are CEO salaries so high in the first place? Again,
it is supply and demand. The scope of a CEO’s influence is massive – for example,
in a Fortune 500 company, the CEO regularly makes decisions that affect thousands
of employees and millions of customers. The difference between pursuing a brilliant
strategy and a merely good one, the quality of the pitch to partners/investors, the effectiveness of its execution, can all result in the gain or loss billions of dollars, far more than
what any regular employee can influence. Regardless of what the public may
believe, the CEO selection process is extremely competitive because there are so
few candidates who have the detailed knowledge, specialized skill set, and intimate
background in an industry to perform successfully. If there are only 500 fast food specialists in the world who the McDonalds board would trust to run the company, you bet the board of McDonalds would be willing to pay top dollar to hire the best of that 500.
High management salaries may be the cause of rising income
inequality statistics but lowering them to compensate workers is not the
solution. Salaries for the top 0.001% is supposed to increase faster than the
median as the economy grows (visualize a bell curve), and as business becomes
increasingly globalized and complex, demand to hire the best management goes up
as well.
To argue that a corporation should pay its workers more because
it is making extremely profits is also illogical. Management does not act for the greater good but is legally bound to do act in the best interests of its shareholders. Since the purpose of a
company is to earn maximum return for its shareholders, all decisions that
management makes should align with this goal. It is up to the owners and
shareholders if they want to compensate workers better, but to pay workers a
non-optimal wage based on altruistic motives means that profitability
decreases. The increased wages lead to higher cost margins and lower competitiveness that can weaken the stability of the company. It would be far more desirable for
shareholders to try to earn maximum profit from their investment and then pay
workers out of their own profit (or simply donate to charity instead).
Every person should have access to a basic standard of
living if he or she is willing to willing hard, but while everyone has this
right, there are circumstances that prevent some people from earning enough to live
at that level. Only with government intervention such as relief programs for
the poor, minimum wage requirements (can only be used in moderation), and employee
protection can this problem be alleviated on a country-wide scale. Income
inequality should only be addressed up to the point where every individual can
earn enough or can be supported at a decent quality of life. Once people can
live comfortably and worry-free, I believe they will have the means to create opportunities for themselves, such as by undergoing skills training or pursuing further education.
