(This is an archived extract from the book Patterns of Power: Edition 2)
CEOs and other directors have seen their pay increase disproportionately. In America between 1979 and 2006, for example:
“… the top 1 per cent of earners in the US more than doubled their share of national income, from 10 per cent to 22.9 per cent. The top 0.1 per cent did even better, increasing their share by more than three times, from 3.5 per cent in 1979 to 11.6 per cent in 2006." [1]
There is a popular fallacy that paying more to top people would result in increased economic growth, which would ‘trickle down’ to everyone else, but there was lower growth during that period – so this argument is now discredited.[2] CEOs had more power than the rest of the workforce, over matters of remuneration, and they took full advantage. Boards of directors are composed of people who know each other and many sit on the boards of several companies, so they can choose to reward each other highly.[3]
The American shareholders also gained, seeing their portion of profits increase.[4] Increases in share prices benefited both them and those directors who had share options – but running companies to maximise ‘shareholder value’ led to cost-cutting and reduced investment in a way that damaged their health in the medium-to-long term, as was the case with General Motors for example.[5]
Workers in wealthy countries have been affected by globalisation, as the global supply of labour continues to increase, though the resulting downward pressure on wages will eventually be offset as developing countries become more productive and increase their wages (3.4.3.2).
© PatternsofPower.org, 2014
[1] Hah-Joon Chang quoted figures on high earners from a 2009 report by the Economic Policy Institute (EPI), the centre-left think tank in Washington, DC, entitled The State of Working America, 2008/9. He commented on high pay in his book 23 Things You Didn't Know about Capitalism, in Thing 13: Making rich people richer doesn't make the rest of us richer, where he pointed out that the empirical data show that economic growth in America slowed down during the period when inequality was rising so rapidly.
[2] Ibid.
[3] On 17 February 2014, HuffPost published an article by Dean Baker, entitled Corporate Cronyism: The Secret to Overpaid CEOs, which was available at http://www.huffingtonpost.com/dean-baker/corporate-cronyism-the-se_b_4805560.html.
[4] Thomas Piketty’s book, Capital in the Twenty-First Century, described how those who own capital – shareholders for example – have been gaining an increasing proportion of national income. The Economist published a review of the book on 14 January 2014, which was available in May 2014 at http://www.economist.com/node/21592635.
[5] Hah-Joon Chang examined the increased portion of wealth going to shareholders, and the impact of running companies to maximise ‘shareholder value’, concluding that “maximizing shareholder value is bad for the company” (op. cit., Thing 2: Companies should not be run in the interests of their owners). He cited the example of General Motors, whose chairman Jack Welch is credited with coining the term ‘shareholder value’ – but who later conceded that it was probably ‘the dumbest idea in the world’.