Pay Double Standards and American Mythology

December 21, 2008

Why does American business logic says that to be competitive you have to pay your workers less and pay your executives more…much, much, much more?

The conventional American wisdom holds that in order to achieve stellar returns, companies need stellar management that you can only attract with out-of-this-world compensation packages. Illogically, this thinking doesn’t apply to rank and file workers. I suppose this mindset is rooted in thinking of labor as just another raw material — with a fixed value — that goes into making your widgets. The CEO is presumed to have limitless ability to “create value” while the worker’s value is static. It’s a mythology that plays well in boardrooms and country clubs.

Take a look at this graph from a WSJ article comparing Japanese, European, and US CEO pay. That bar on the right that looks way out of proportion, that would be average American CEO compensation. When I look at this graph, my first thought is : Whoa, American CEOs are grossly overpaid! The funny thing is, the gist of the accompanying article was that Japanese and European CEOs are grossly underpaid. Never mind that Japanese companies like Toyota, whose CEO received less than $1 million in total compensation in 2004 (latest available), often outperform American competitors whose executive earn nine times as much. Clearly those silly Japanese and Euro weenies need to be paying CEOs more because, well, they’re CEOs.

I believe in merit-based pay, and I know that a lot of — maybe the majority — of American company leaders are are incredibly hard working, dedicated, and bring special skills to their positions, and therefore deserve higher pay than me and maybe you. But it seems to me that we moved away from a meritocracy and into a plutocracy decades ago — around the time that median income stopped increasing apace with productivity, and we have banana republic income inequality and growing economic turmoil to show for it.

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