As a follow up to our blog on December 4th, “A Conversation with Joseph Stiglitz,” this subject is such a vital part of our national debate and our escalating debt.  Garry Wechter and I will present a few more posts on different aspects of this subject.

Here in Part II, we discuss the subject of the disparity of executive compensation.  We hear a great deal lately about income inequality and the pay of CEO’s.  Not only from Joseph Stiglitz who promotes this in his writings, but it’s difficult to read or watch the news without this topic being featured pretty regularly.  It’s now a primary focus of what President Obama likes to pontificate about it since he’s struck out on just about everything else.

Average CEO compensation reported for the 500 biggest US companies in 2012 was $10.5 million (Forbes Executive Compensation Report), which works out to almost $6,000 per hour.  Private industry worker salary and benefits averaged $31.16 per hour in September 2013 while workers in state and local governments averaged $42.51 per hour  (the Bureau of Labor Statistics reported last December).  The question de jour by many, including Stiglitz, is whether this is FAIR or good for America?…the insinuation being that CEO’s are unfairly paid too much.

At first glance some executives’ pay seems extraordinarily high, especially when it’s unrelated to performance.  But let’s take a closer look.

For the movie Anger Management, Adam Sandler was paid $25 million plus 25% of the gross.  That’s $37.5 million in the Sandman’s pocket (according to Celebrity Net Worth).  Even Michael Jackson (deceased), The King of Pop, pulled in $145 million in 2012 (per Forbes).  Baseball player Alex Rodriquez’s annual salary for 2013 was $29 million (per Wikipedia).  Oprah is estimated to have earned $200 million in 2012 (per Forbes).  We can go on and on, of course, but the question is why the comparison isn’t being made between these and other wealthy folks, rather than only comparing the workers to CEOs?  We’ll focus on the power of the free market versus the president’s income redistribution efforts.

You see, redistributionists, like Joseph Stiglitz, do not seem to understand that the free market, for the most part, pays people what the free market thinks they’re worth.  Union worker compensation distorts the process a bit as does government employment.  But in the private sector, if the free market changes its mind regarding someone’s value, compensation will ultimately be adjusted.  And, yes, there are often and always distortions, but in the end they are usually corrected and corrected more efficiently than any government policy could hope to achieve.  Let’s give you some questions to ponder.

Should a doctor earn more than a bus driver?  Should an auto mechanic earn more than a receptionist?  Should a programmer earn more than a garbage collector?  Should a prison guard earn more than a social worker?  Or should there be a policy of income redistribution to level the compensation of all workers?  Your answer to this question should also lead you to answer the income inequality question.

If you or someone in your family were sick, would you choose to go to a doctor who’s earning the same as a bus driver?  Or might you worry about that?  Do you imagine such a doctor would provide the quality of care you hope for?  Both the doctor and bus driver provide a valuable service, but do you think that extra effort in time and education as well as dollars invested by the doctor is worth more compensation than that of a bus driver?  If you don’t believe that, then you’re a true redistributionist and nothing said here will make any difference.  If you agree that it’s reasonable for a doctor to earn more than a bus driver, then if you take that concept to its natural conclusion, you can’t really disagree with anyone’s free market compensation.

Is everyone’s pay FAIR?  Absolutely not!  Over time, is most free-market-determined compensation FAIR?  For the most part, yes.  Does Adam Sandler deserve to earn $37 million per movie?  If the free market says he does, then we’d have to agree.  Do CEOs deserve to earn multiple millions per year?  If the free market says they do, then we have to agree.

Jealousy, envy, control and power are the negative forces that encourage and support the movement toward income redistribution.  What Donald Trump or Warren Buffett earns has nothing to do with me or what you and I earn.  Only what we do, how we behave, what we’ve learned impact our earnings.  We Americans need to return to our roots in valuing hard work, perseverance, honesty and personal responsibility in all our endeavors and not worry about or covet what others are doing or earning.  I think this would be a good lesson for many, including Joseph Stiglitz and the redistributionists, to follow today.

In Part III next week we’ll discuss the facts and misconceptions about poverty here in America.


1 Comment

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  1. Dan Goodstein

    “Qu’ils mangent de la brioche” (“Let them eat cake.) Best remember what happened to Louis XVI and Marie Antoinette before dismissing “redistribution”, a term not well fitted to the matter of what some believe to be excessive pay for many CEO’s. Robin Hood doesn’t fit in this forest either.

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