Executive Pay and Globalization

 In the Lexus and the Olive Tree, Tom Friedman has a catchy chapter on the dangers of a winner-take-all, free-market society--the kind of society rewarded by processes of globalization. He uses a professional basketball analogy to make his main point. A few top competitors--those like Michael Jordan or LeBron James--reap massive rewards, while the average competitors in the market--the lesser-known teammates of the superstars--get much less. Friedman's concern is a real one: How sustainable is a team that includes both mega-rich and not-so-rich players? We have cause to worry about the erosion of social solidarity between the affluent and the ordinary.

U.S. income data since the 1970s suggest that this concern is valid. "The rich are getting richer, while the poor are getting poorer" is one of those thoughtless cliches that turns out to have some truth in it. The undisputed fact here is that the top 1% of income earners now account for at least a quarter of the nation's total income.

But who are these people and how do they get their money? Are they executives, doctors, lawyers, or financiers? According to a recent study of tax returns by three researchers reported in today's Washington Post, "executives, managers, supervisors, and financial professionals" accounted for around 60 percent of this group by 2005. Executives, managers, and supervisors alone were 40 percent of the group. 

The study itself is pretty dry material for the average reader, but the Post story by Peter Whoriskey frames their findings with a comparison of the top executives at Dean Foods, a Fortune 500 national dairy company. 

His lead paragraphs capture the reality of today's executive compensation problem:

It was the 1970s, and the chief executive of a leading U.S. dairy company, Kenneth J. Douglas, lived the good life. He earned the equivalent of about $1 million today. He and his family moved from a three-bedroom home to a four-bedroom home, about a half-mile away, in River Forest, Ill., an upscale Chicago suburb. He joined a country club. The company gave him a Cadillac. The money was good enough, in fact, that he sometimes turned down raises. He said making too much was bad for morale.

Forty years later, the trappings at the top of Dean Foods, as at most U.S. big companies, are more lavish. The current chief executive, Gregg L. Engles, averages 10 times as much in compensation as Douglas did, or about $10 million in a typical year. He owns a $6 million home in an elite suburb of Dallas and 64 acres near Vail, Colo., an area he frequently visits. He belongs to as many as four golf clubs at a time — two in Texas and two in Colorado. While Douglas’s office sat on the second floor of a milk distribution center, Engles’s stylish new headquarters occupies the top nine floors of a 41-story Dallas office tower. When Engles leaves town, he takes the company’s $10 million Challenger 604 jet, which is largely dedicated to his needs, both business and personal.

Meanwhile, as Whoriskey reports, 

while pay for Dean Foods chief executives was rising 10 times over, wages for the unionized workers actually declined slightly. The hourly wage rate for the people who process, pasteurize and package the milk at the company’s dairies declined by 9 percent in real terms, according to union contract records. It is now about $23 an hour.

The concern here is about relative gains. The ordinary workers, probably because of union power, are not destitute; $23 an hour is a decent wage. But their share of the overall wealth generated by the company is declining, just as ordinary workers' shares of national wealth are declining. And whose shares are gaining? The bosses'.

CNN reported in 2007 that the average American CEO was making 364 times more than the average American worker. With stock options and salaries and all the rest, the top bosses were doing quite well, even while they were downsizing and outsourcing and union-busting. As a result, CEOs became the single largest group within the top 1 percent of American income earners.

Back in the day people like Kenneth Douglas were willing to turn down raises out of a sense of solidarity. But people like Gregg Engles--and other winner-take-all executives--are jeopardizing the stability of our society. They might blame globalization, but they we all know that greed is the real problem.