A Philosopher's Blog

CEO Salaries

Posted in Business, Ethics, Philosophy, Politics by Michael LaBossiere on June 4, 2012

One side effect of the economic meltdown was the creation of the loose Occupy Wall Street movement. This had the interesting effect of getting some attention paid to economic issues, such as income disparity and class issues. This attention revealed that there is significant disparity between (to use the terminology of the occupy movement) the 1% and the 99%.

As I noted in a previous essay, there has been considerable disparity between the income increases of the various classes in the United States. The after-tax income of the top 1% in the United States increased 275% from 1979 to 2007. In contrast,  the top 20% (excluding the top 1%) had a 65% increase in earnings. Those in the bottom 20% also saw an increase, but this was only 18%. As might be imagined, this has created some concern.

The disparity becomes even more extreme if one examines the income of CEOs relative to the workers. One well paid CEO, David Simon, received a pay package worth over $137 million in 2011. The national median salary is $39,312. Doing the math, that means that a person earning the media salary would need to work 3,489 years to earn what Simon received. Someone who is earning the current minimum wage of $7.25 per hour would need to work 9,095 years and 11 months to earn what Simon earned last year. Of course, Simon’s pay is above average, so it would be fairer to compare the median CEO salary with the national median salary.

The median CEO salary as of May, 2012 is $9.587 million per year. A minimum wage worker would only need to work 636 years to earn that much while a person making the national average salary would need a mere 244 to match the one year income of the average CEO. Interestingly, while many workers are facing salary cuts, the average compensation for CEOs increased by 6% from 2011 (and there had been an increase from 2010 to 2011). While there is considerable debate over how to determine the value of a person’s work, accepting that this disparity is just would require accepting that the average CEO is equivalent in productivity to 636 minimum wage workers and to 244 average workers. As anyone who has every worked knows, people do vary in productivity because of skills, talents, motivation and so on. For example, one roofer might put in a roof faster and better than another and thus she would be more productive. It is even easy to imagine one worker being equivalent to many workers in terms of productivity (and this is sometimes demonstrated when people are fired and other people are forced to do these jobs as well as their own original jobs). However it seems unlikely that CEOs are the economic equivalent of superheroes and thus can produce 244 times what an average worker can produce. As such, this would seem to indicate a clear injustice in regards to the pay of those who work for the companies with well paid CEOs.

One obvious reply is that while it would be absurd to claim that one CEO can do the work of 244 average workers, it could be argued that they actually generate value equal to (or greater than) 244 workers. After all, the value of what is produced can vary greatly. To use an obvious example, when I painted houses for money, I was paid much less than I am paid as a professor. However, this is because the service I offer as a professor has more value than that of the services I offered as a painter. In part this is due to the economics of scarcity: almost anyone can work a paintbrush, but few people can teach critical thinking or ethics at the college level. In part the difference is due to the fact that when I painted, the result was just a painted house. When I teach, the result is often a person with a college degree who goes on to get a job (or create them) and contribute to society. As such, by creating more value as a professor, I thus justly earn better pay than I did as a painter. Provided that the value I produce as a professor is proportional to the pay, then the disparity between the pay of Mike the painter and Dr. LaBossiere the professor would be just.

Turning back to the CEOs, if the average CEO is able to produce 244 times the value of the average worker, then the pay disparity would be justified. While this might strike some as unlikely, it does not seem impossible. After all, the writer Suzanne Collins has made vastly more than I ever will as a writer because her book outsell mine to some absurd degree. My books in turn outsell some other authors’ books. However, the disparity does (in general) seem fair. After all, if I could write like Collins and was able to make the right connections, then I could also be a very successful author instead of a low-end scribe. As another example, the author and speaker Sarah Palin vastly out earns me. This is because many people want to buy her books and want to hear her speak. While I do sell a few books, people generally only come to hear me speak because their grades depend on it. And sometimes not even then. As such, the income disparity between myself and Palin could be regarded as just. After all, if I could only write and speak as well as she, then I surely could earn a comparable income.

In the case of the CEOs it could be thus argued that they are like the better authors-what they produce is vastly more valuable than what other workers produce and hence they justly earn their vast incomes. As such, all a defender of disparity would need to do is make a reasonable case that CEOs do generate value proportional to their compensation and that the same is true of the average workers (and minimum wage workers).

Of course, it might be countered that the ability to create such  great value depends on an economic and political system that is rife with injustice. To use an analogy, a skilled thief might “earn” much more than an unskilled thief, however it would be odd to say that the better thief has justly “earned” her wealth. The obvious counter to defend the disparity is to show that the economic and political system is just and, as such, the disparity in compensation is warranted rather than being based on exploiting an unjust system.

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  1. ajmacdonaldjr said, on June 4, 2012 at 9:04 am

    This perceived problem has a very simple solution, which could be solved to the satisfaction of both the far left and the far right: so long as “Fat Cats LLC” pay me, as a worker, a just wage I can use to support my family I could care less how much my boss (CEO) makes. Different jobs have different pay according to the skills required. For example. I worked as a truck driver with a printing paper distributor for 10 years which was the distribution arm of International Paper. I made $14 per hour and had a good, affordable benefits package. Salespeople at the company were making six-figures, and the CEO made millions. Why is this not fair and just? I thought it was, and I still do. Without the CEO the company is leaderless….without salespeople there are no paper deliveries or truck drivers needed…..and everyone who worked there considered themselves to have been treated fairly by the company.

  2. T. J. Babson said, on June 4, 2012 at 1:03 pm

    We have been trending toward a “winner take all” society for a long time. The top golfer makes 100 times more than the next guy (with endorsements). Major league ball players make a huge amount more than their minor league colleagues. People who act in local theaters are surprisingly talented, but earn a pittance next to George Clooney. Same goes for musicians, writers, and even college professors. Elizabeth Warren, for example makes about $430K for teaching at Harvard.

    The question for Mike is why he is focused on CEO salaries while remaining virtually silent on the others?

    • Michael LaBossiere said, on June 4, 2012 at 1:28 pm

      Two replies to the “remaining silent” gambit:

      First, I’ve written about those folks on other occasions.

      I wrote about NBA players here: https://aphilosopher.wordpress.com/2011/11/28/nba-and-pay/

      I wrote about pay disparities in academics here: https://aphilosopher.wordpress.com/2011/10/21/a-hell-of-a-contract/

      Second, even if I did remain silent on the others, this would have no logical impact on what I say about CEO salaries.

      • T. J. Babson said, on June 4, 2012 at 4:58 pm

        “If a writer has chosen to be silent on one aspect of the world, we have the right to ask him: Why have you spoken of this rather than that?”

        –Sartre

        • dhammett said, on June 4, 2012 at 7:28 pm

          Shakespeare was a prolific writer, but he didn’t write about all aspects of the world.

          Had Shakespeare been beset by people asking him why he chose “to be silent on one aspect of the world” or another, and ,had he taken the time to respond to each question, he wouldn’t have had nearly as much time to write plays and sonnets. As a result, of course, there would have been even more people dissatisfied with his failure to write about the one aspect that concerned them. And others who would have questioned his choice to write about an ‘aspect of the world’ in such a way as to depict their view of the world in a negative light.

          My guess is , he would likely have set some time aside to write a scathing comedy about people who would ask that question.

        • Michael LaBossiere said, on June 4, 2012 at 8:04 pm

          “Whereof one cannot speak, thereof one must be silent.”
          -Wittgenstein

          For each thing I speak of, there is an infinity of things on which I remain silent. For example, when I speak on goats, I am silent on stoats. Wherein lies my sin? To the stoats for not speaking of them? With the goats for speaking of them? Or with the other?

          • magus71 said, on June 9, 2012 at 2:53 pm

            “For each thing I speak of, there is an infinity of things on which I remain silent.”

            You’ve employed this argument before, specifically in the case of al-qaeda et al. Sophistry at its finest. While there may be an infinite amount of topics to write about, it does seem the human mind can narrow down the topics and when you philosophize about an issue, it seems you cherry pick stories that support your left-leaning bias. It’s called spin.

            • Michael LaBossiere said, on June 9, 2012 at 5:29 pm

              I’ve had a consistent position regarding A-Qaeda and similar groups: they act in a way that is objectively evil and the world would be objectively better without them. I’m not sure what more I need to say about this view.

              As far as picking left leaning stories, I suppose that I would be left of the current right. But so would Ronald Reagan, Teddy Roosevelt and many of the pre-Tea Party Republicans. I just seem left by way of comparison.

  3. Michæl said, on June 4, 2012 at 7:36 pm

    If two painters each spend the same amount of time and energy creating one painting each, set up identical booths at an art walk, and one sells his work for ten times what the other earns, it would not be up to us, the observers, to defend this disparity. The fact that the disparity existed in a free, non-coercive market is defense enough. Clearly the first painter’s work was judged more valuable by the consumers.

    The same rules apply to executive pay. If one man manages to sell his labor for $1,000 per hour while another can barely sell his hour for $10, the only defense owed is by one owner or board member to another. To us on the outside, the fact that the disparity exists is proof enough that one man’s labor is exceedingly more valuable. The people with a stake in the corporation make these determinations at their own risk.

    This is seriously complicated by the state of affairs in this economy, where taxpayers regularly absorb the cost of bad decisions in the private sector via handouts, grants, and bailouts. But the blame here doesn’t lie with businesses, it lies with corrupt policymakers who sell out to those businesses.

    • Michael LaBossiere said, on June 4, 2012 at 8:13 pm

      In the case of the painter, you make a reasonable point: the market is free. If Sam wants to lay out $15,000 for a painting by Sally, yet would not go a nickle higher than $5 for Ted’s painting, then that is Sam’s call. Now, Sally’s paintings might be crap and Ted’s masterpieces-but the disparity needs no defense from us.

      In the case of workers, the matter is rather different. After all, we do not approach the job market in equality (of opportunity) and in free competition. While it is tempting to leave it up to the corporations and say that the market will sort it out, the reality is that this is not an economic abstraction: actual people are struggling to get by because of the economic inequality and hence this seems to involve them as well-not just the owners and board members. Now, if we were all equally free to succeed on the basis of merit and effort, then it would be fair to say that those who exceed and those who fail have earned their due rewards. However, this is hardly a situation of free and open competition. It is no free market, but (as you suggest) a carefully rigged game.

      While I do blame the policy makers, they are at most half-guilty. After all, one who pays a bribe bears guilt as well as the person taking it.

    • dhammett said, on June 4, 2012 at 8:23 pm

      “But the blame here doesn’t lie with businesses, it lies with corrupt policymakers who sell out to those businesses.”

      Very Biblical. Through deception businesses (Satan) offered money (fruit from the forbidden tree of knowledge) to the policymakers (Eve and Adam). In the Bible the first couple’s (the policymakers’) sin was of such magnitude that all of mankind, from that day forward, was doomed to suffer. Only divine intervention at the cross has lessened the punishment.

      But the Bible hardly absolves Satan (the businesses) of guilt.

  4. Sam Hampton said, on June 5, 2012 at 11:20 am

    “Attention paid” is a salary with a net value of zero. The mass-media ONLY displays that which is in the interest OF the ruling-class to broadcast. Oh, and speaking of “Bible” and “Satan,” when you see this dude’s YouTubes on mass-media – you’ll know things are…..TRULY different…

  5. magus71 said, on July 21, 2012 at 9:49 pm

    • T. J. Babson said, on July 22, 2012 at 8:03 am

      I’m not really buying it, Magus. I think John Bogle has it right: what has happened is that because mutual funds now control most shares, real shareholder oversight has declined and companies are now being run for the benefit of management rather than for the benefit of shareholders.

      • magus71 said, on July 22, 2012 at 10:04 am

        What I don’t understand is the wild fluctuations of CEO pay in relation to worker pay. As much as CEO pay has been in the news recently, relative pay of CEOs was higher in 2000 but dropped drastically in the next few years by about 50%, only to begin rising again. People working the system from the inside seems an inadequate explanation for this phenomena, especially since the fluctuation only begins to occur about 20 years ago. Prior to that it was quite stable.

        http://haywardeconblog.blogspot.com/2012/05/nice-graph-showing-ceo-to-worker-pay.html

        • T. J. Babson said, on July 22, 2012 at 10:37 am

          If CEOs are rewarded in stock options, wouldn’t this explain it?

          • Michael LaBossiere said, on July 24, 2012 at 12:02 pm

            I’d like to get stock options. The tax cap is 15% on capital gains. When I get a “bonus” it gets taxed at 35%. Faculty sometimes get a $1,000 bonus instead of a raise.


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