Ask Stacy: What’s Income Inequality and Why Does It Matter?

Ask Stacy: What’s Income Inequality and Why Does It Matter? Photo (cc) by Axion23

The rich get richer, the poor get poorer.

It’s an old expression, referring to what today we call income inequality.

Income inequality is a national discussion that’s been surfacing off and on for years now, but thanks to presidential politics, it’s once again in the headlines. Bernie Sanders has a page of his website devoted to it. Hillary Clinton has given speeches on it. Ted Cruz has addressed it, and so has John Kasich.

We’ve done many stories on the topic. One example: A couple of years ago, we published “Fast-Food CEOs Paid 1,000 Times More Than Their Workers.” The gist of the article is made clear by the headline, but here are a couple of sentences:

If you want a glimpse of super-sized pay inequality, look no further than America’s fast-food industry. Nowhere is company-level pay disparity more apparent than in fast food, where CEOs reportedly take home $1,000 for every $1 earned by their typical employee.

Articles like this always invite spirited debate, and this one was no exception. I’m going to reprint one reader comment, not because it’s unique, but because it isn’t. It’s from a reader who calls himself “bkp100.”

What an INCREDIBLY dumb comparison this article makes. How much does a cameraman get paid compared to $20M per movie actors? How much does an intern make compared to a senator? How much does an orderly make compared to a surgeon?

Are you so fabulously dim, and so steeped in political correctness, as to not understand the reasons for that?

Where’s the discussion on how much personal RISK the CEOs put into the business they started? Or how many 20-hour days? How many sleepless nights can the workers claim worrying about meeting payroll; about balancing receivables and payables; about labor issues; about regulatory and health issues; about insurance issues? How much negotiation with contractors; with vendors; with transporters did the workers undertake?

I am SO tired of hearing about ONE side of the inequality equation by hacks like this, when the equation is SO stacked by the inequality crusaders as to make it laughable.

The *beauty* of this country, and THIS system is that you are NOT denied the OPPORTUNITY to excel. However, and rightly so, it’s NOT going to be handed to you on a platter. It takes WORK, it takes invested TIME, and it takes AMBITION, and often RISK … NOT just saying “I want it.”

If we DO ever reach a point of equal pay for unequal work/investment/time, then kiss this country’s integrity, its overall standard of living, and its freedom to excel to whatever point you’re willing to work to get there, goodbye.

This comment is a good jumping-off point into a divisive issue you’re likely to be hearing more about as the presidential race evolves.

What is income inequality?

Bkp100 apparently thinks those discussing income inequality believe all workers should be paid equally. That, of course, is nonsense. The income inequality highlighted in articles like “Fast-Food CEOs Paid 1,000 Times More Than Their Workers” is referring to the widening gulf between the workers and the bosses.

While income inequality has been the concern of some for decades, it was a flash point during the 2012 presidential election, and before that with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010. Section 953(b) of that law requires companies to report the ratio between the median annual compensation of a company’s workers and that of their CEO.

Some, like bkp100, think it’s nobody’s business who makes what. Others believe that too much wealth is accruing to too few. As you might imagine, those leaning left are more likely to adopt the latter belief, those leaning right the former.

So here’s a look at what’s happening, some possible reasons, my take and — most important — why this debate matters to you.

Some facts about income inequality

Most of the following came from the Economic Policy Institute and this article from the Globalist:

  • Overall worker pay in the United States, adjusted for inflation, grew 5.7 percent from 1978 to 2011. CEO pay grew 727 percent during the same period.
  • The ratio of CEO pay to worker pay in America is higher than in any other developed country in the world. In 2012, the average American CEO made 354 times what the average American worker made. In Germany, CEOs made 148 times more. In France, 104 times more. In Britain, 84 times more. In Japan, 47 times more.
  • In 1965, average CEO pay in America was 18 times that of average workers’ pay.
  • On average, the CEOs of large U.S. companies received $12.3 million in compensation in 2012, or $5,894 per hour. An American working for minimum wage would take 20 weeks, or about five months, to make what that CEO makes every hour.

What about the risk they take?

Bkp100 says, “Where’s the discussion on how much personal risk the CEOs put into the business they started?” OK, here’s that discussion. The CEOs of the vast majority of America’s largest companies didn’t start the businesses where they work, have none of their personal fortunes at stake, and, other than their personal job security, have undertaken no risk whatsoever.

They must deserve it

It’s easy to believe CEOs must deserve the money they make. After all, why would they be paid so much otherwise?

While most CEOs are presumably talented managers, there are myriad examples of pay in the largest corporations not being related to performance. Here’s one: Two years ago Yahoo Chief Operating Officer Henrique de Castro was basically forced out for failing to make progress in turning the company around. Nonetheless, he received a severance package of about $58 million for the 15 months he was there.

Yahoo’s current CEO, Marissa Mayer, has also failed to improve the company. As a result, Yahoo was recently forced to put itself up for sale. But if Mayer loses her job as a result, her severance package will be $59 million. That’s in addition to the $79 million she’s already earned since taking the reins in 2012.

How can even questionable managers make so much relative to what workers make? Here’s a possible explanation.

CEOs of major corporations often get paid so much because, unlike individual workers, their pay packages are approved by a company’s board of directors. That board is often, albeit not always, staffed by personal friends, acquaintances or people who owe their paid board position at least partially to the CEO.

In other words, where you work, your pay is determined by a boss whose mandate is often to hold down expenses. But a CEO’s pay may be approved by a group of peers with no such incentive. In fact, since they could cross paths with the CEO in future ventures, board members might have a much greater incentive to reward a CEO than to protect the shareholders, workers or customers of the company.

The result is CEOs who are often radically overpaid in relation to any contribution they could possibly make.

Got more money questions? Browse lots more Ask Stacy answers here.

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