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How Will It Play Out?

The SEC recently established a new rule requiring most companies to disclose the ratio of CEO pay to that of their average employee. “Fifty years ago, chief executives were paid roughly 20 times as much as their employees, compared with nearly 300 times in 2013,” according to a study cited in The New York Times.

The rule in no way dictates what the pay should be, but it gives investors a window into the compensation practices of publically traded firms. The new rule is designed to help investors compare pay scales in companies. But it also promotes awareness of growing income inequality. Thomas Piketty, the French economist whose best-selling book helped fuel a global debate on income inequality, notes “higher wages for top earners in corporate America had been among the main drivers of the widening income differences in the United States.” He added in an interview last year: “The system is pretty much out of control.”

On the other hand, as The Times noted, “Representatives of corporations were quick to assail the new rule . . . saying that it was misleading, costly to put into practice and intended to shame companies into paying executives less.” It is probably all of those things – but that does not mean it is a bad idea. How will it play out?

Gretchen Morgenson at The Times looked into it and found a number of experts on who thought the rule might actually succeed in curbing “over-the-top pay.” The numbers, easy to grasp and probably shocking to many, could possibly galvanizing employees as well as state governments to act. Even so, the official ratios probably will underestimate the true extent of the disparity as the numbers will not include pensions and supplemental retirement plans – which most executives and almost no other employees enjoy.

Investors won’t care, and the large mutual funds, like Vanguard and Fidelity will “vote their clients’ shares routinely in support of lush pay practices whether they like it or not.” As Morgenson notes, “These voting policies help keep corporate boards clubby and executive pay aloft.”

So the new rule is unlikely to be effective by itself, without significant efforts to influence public awareness. That may well occur as the presidential campaign heats up.

But a more immediate effect, according to The Wall Street Journal is that “businesses will spend more time explaining to employees at all levels how they set pay.” When lower level employees know what the averages are in their companies, as a result of the rule, they can and no doubt will agitate for increases.

That’s the real issue, shining a light into the black box of corporate compensation. Charles Elson, Director of the Center for Corporate Governance at the University of Delaware, commented that the “pay ratio was designed to inflame the employees.”

That is no doubt what so profoundly agitates the U.S. Chamber of Commerce and other corporate lobbying groups who are opposing the rule. “When they read that number, employees are going to say, ‘Why is this person getting paid so much more than me?’” Elson speculates: “I think the serious discontent will force boards to reconsider their organizations’ pay schemes.”

So in the end, the new rule may not mean that CEOs will get paid less, but that other high level employees will end up getting more. Paradoxically, that will increase the cost of management and, no doubt, widen that gap between the rich and poor.

Can We Do Anything About It?

The rich not only tend to care less than the poor about our growing economic inequality, but also they just don’t see it. According to recent studies, reported in Psychological Science: “Attitudes to redistribution and the economic status quo appear to be subject to (informational) biases in the environment as well as biases in the mind.”

This is a stiff and academic way of saying that the environment itself tends to screen out discordant perceptions about many “anomalies,” including perceptions of the very rich and the very poor. So it is not just that the rich do not want to see economic inequality, according to these studies, they actually can’t see it.

The same goes for the poor, but that matters far less as they have virtually no influence on the public policies that might address the problem. As the authors of the studies put it, these inherent limitations on the perception of differences, “may lead to increasingly dissociated enclaves of political perception and preference.”

It is no surprise, of course, that self-interest leads us to ignore or forget uncomfortable facts. That’s just human nature. Those who have money want to hold onto it, and tend to be unsympathetic if not uncomprehending of arguments against that. And it is also true that we all experience pressures to conform to the beliefs of the groups to which we belong. We depend upon those groups to confirm our identities and support our self-esteem. Rich as well as poor tend to coalesce around those that share their perceptions and ideas. That too is an aspect of human nature. But this is yet another wrinkle.

The authors suggest what seems a virtually hard-wired inability to see some aspects of reality. Their focus in these studies was on economic inequality, but it would be easy to extrapolate their findings to racial or ethnic differences, differences that tend to disappear or lose their significance in the eyes of the beholders, as they become simple, unalterable “facts” about the environment.

The authors don’t say anything about social class, but that is exactly what comes to my mind in reading about these studies. It may be that the cognitive limitations they describe may be the result of class differences among segments of society that exist in “dissociated enclaves.” Or, perhaps, the authors have stumbled upon the psychological mechanism underlying the formation and persistence of social classes.

We tend to think of class as determined by economic factors, and that is true, no doubt. Whether one thinks of social stratifications into low, middle and upper income groups, or into groups that are distinguished by their relationships to the means of production (i.e. salaried workers, managers, professionals, and owners), class differences tend to become ossified, rigid and hard to alter. This theory suggests that, apart from the forces that establish classes and assign members to them, their persistence may be due in part to cognitive factors that exert a steady and controlling influence.

That, in turn, suggests how difficult it would be to dismantle our class system. This may be the perfect example of what the English poet William Blake called “mind forged manacles.”

[My appreciation to Jeff Axelbank who called my attention to these studies.]

CAN WE?

In America, we tend to think that success is all about individual effort. And recently Jeb Bush reinforced that idea in suggesting that our economy could be more robust if each of us worked harder.

That’s a truism, at best, but deeply misleading. Actually according to statistics collected by The Organization for Economic Co-operation and Development, we already work harder than others in first world countries.

Americans now put in an average of 112 more hours per year than the British, and 426 hours (over 10 weeks!) more than Germans. And there is no doubt that we feel it as, typically, our corporations, averse to hiring new workers, will redistribute workloads among existing employees whenever they can. And those that take on the extra work, as those who already have, are fully aware of the risk that, no matter how hard or effectively they work, they also face the risk of being downsized themselves.

So, yes, if we work more hours we will be more productive, but then we would need to factor in the costs of overwork: illness, alienation and anger, stress, inattention, less time with our families, resentment and, even, sabotage. Moreover, as T.M. Luhrman pointed out recently in The New York Times, workers in the U.S. already have one of the world’s highest levels of anxiety. (See “The Anxious Americans.”)

Work is perhaps the most meaningful and important of our activities. In the modern world, work is not only how we support ourselves but also how we are connected with each other, how we gain self-esteem, and how we define who we are. But, at the other extreme, when the conditions under which we work are not protected, we face the risks of exploitation and helplessness.

There is yet another risk stemming from the fact that not all work is equal or equally rewarded. The benefits of work are distributed disproportionately, as things stand, and will become even more so, as we become an even more stratified society. As a result we will become a progressively less unified, coherent and just society.

It’s better to have a job, of course, but it matters significantly what kind of job. Those who work at McDonalds or Walmart are underpaid. So it is crucial to have social safety nets and minimum wages, as well as guarantees against exploitation. Those who work in the banking and technology industries are less likely to care about the disparities – or even notice them. But we will all end up paying the cost in terms of illness, accidents, and social friction.

But thinking on that scale seems to take place in a zone that is dead to consciousness, a kind of stagnant sea, where awareness of our deeply interconnected lives tends to disappear. We don’t think about it. The media doesn’t usually report it. It doesn’t register.

That is what makes Jeb Bush’s comment plausible. And he is not alone in thinking that way.

Can We See It?

Many in the West defend “free markets,” asserting that unfettered competition produces goods and services most efficiently. But how true is it that our markets are free? And how efficient?

When capitalism takes its own picture, it inevitably smooth’s over the blemishes, like the rest of us, and hides as many of the scars as possible. As Joseph Stiglitz, the Nobel Prize winning economist put it recently: our “bankers, among the strongest advocates of laissez-faire economics, were only too willing to accept hundreds of billions of dollars from the government in the bailouts that have been a recurring feature of the global economy since the beginning of the Thatcher-Reagan era of ‘free’ markets and deregulation.”

And, then, our politics, overrun my money, compounds the problem. He provides these examples: “Congress maintains subsidies for rich farmers as we cut back on nutritional support for the needy. Drug companies have been given hundreds of billions of dollars as we limit Medicaid benefits. The banks that brought on the global financial crisis got billions while a pittance went to the homeowners and victims of the same banks’ predatory lending practices.”

“Economic inequality translates into political inequality, and political inequality yields increasing economic inequality.”

This isn’t a radical speaking or a socialist – though it can sound that way. A mainstream, respected economist, Stiglitz, is speaking facts that are all in the public record.

If we lift our eyes above our own horizon and take in China and Greece, we can see our past mistakes revived. In love with the dynamics of capitalism and its power, China converted to a market economy. And, just as capitalism provided an immense surge of productivity and wealth for the west in the nineteenth century, so did China benefit from growth and increasing prosperity. But now the Chinese are shocked to discover they can’t have the upside without the downside too. And the Greeks are discovering the consequences of corruption and inattention where the wealthy succeeded in bending the system to their own benefit.

Clearly, the system requires strong regulation and vigilant monitoring to work, restraints that our financial system fights and undermines at every possible turn. China and Greece are reminders of how vulnerable we all are. But even with strong and reliable oversight, two problems inherent in the system remain, apart from its inherent instability.

The first is that it produces inequality, which is a constant threat to democracy. Not only is the distribution of wealth massively skewed, and corruption encouraged, as a result, but also many workers suffer from insecurity and our fragile and frayed safety nets.

The second is the reckless exploitation of the planet. For a while, mesmerized by the cheaper goods our super-charged economy provided, we scarcely noticed the depletion of the planet’s resources, the pollution, the degraded conditions under which we are forced to live, the stunted lives, and illnesses. The rewards of capitalism distracted us, and it seemed a price worth paying.

We all too easily forget to costs and the risks as we celebrate prosperity. And we look the other way.

Perhaps the problem is that it just takes too much effort to remind ourselves of the risks, and we tune out. To be sure, those who benefit most from the system encourage us to look the other way. But we also have to keep in mind facts we would rather airbrush out of our minds.

Foe Men and for Women

A recent study suggests that the chief problem facing women at work is no different from that facing men. It is not balancing the demands of home and the job. It is, simply, too much work.

According to research conducted by two business school professors: “men were at least as likely as women to say the long hours interfered with their family lives.” But the truly astonishing finding: “they quit at the same rate.”

This flies in the face of conventional wisdom – as well as the prolonged conversations about how companies could become more gender friendly. Adjustments like flexible schedules or working at home often end up penalizing women who are seen as lacking the commitment to sacrifice as much as men for their careers. Indeed, the company that invited the research started out presuming that they were losing more women, an assumption belied by the facts.

According to a report on this research in The New York Times, “Men and women dealt with the pressure differently. Women were more likely to take advantage of formal flexible work policies, like working part-time, or to move to less demanding positions that didn’t involve serving clients or earning revenue for the company. Men, on the other hand, either happily complied, suffered in silence — or simply worked the hours they wanted without asking permission. About a third of them, according to another paper . . . would leave to attend their children’s activities while staying in touch on their phones. They also developed more local clients to reduce travel or informally arranged with colleagues to cover for them. Decisions like these tended to get men promoted.”

Men are expected to be devoted to their work, and women to their family. A female associate said: ‘When I look at a female partner, it does leak into my thinking: How do I think she is as a mother in addition to how do I think she is as a partner? When I look at men, I don’t think about what kind of father they are.’”

These are stereotypes, of course. But they are also prejudices, whose impact is vastly augmented as the volume of work in our society continuously ramps up. Men and women alike suffer from overwork, and it is getting worse. “The time Americans spend at work has sharply increased over the last four decades,” the Times noted. “We work an average of 1,836 hours a year, up 9 percent from 1,687 in 1979.” This is substantially above the norms for other industrialized western countries.

The researchers said that when they told the consulting firm that had hired them to research the problems faced by their female employees, they found a bigger problem: long hours were taking a toll on both men and women. But “the firm rejected that conclusion. The firm’s representatives said the goal was to focus only on policies for women, and that men were largely immune to these issues.”

They did not want to know, perhaps because they were not prepared to do anything about it

To be sure, those speaking for “the firm” on this were almost certainly men. The official view was at variance with the research findings. But it would very difficult for firms to change their attitudes towards work as their competitive advantage often depends on the forms of exploitation that had become standardized and taken for granted.

It is the new norm.