If you ever wondered why real wages and income have stagnated since the 1970s, read “Who Stole the American Dream?” by Hedrick Smith (Random House).
According to Mr. Smith, a best selling author, one fundamental cause of wage stagflation is the difference between the early and mid-20th century industrialists, such as Henry Ford and Reginald Jones (Jack Welch’s predecessor at GE). They believed that part of their mission was to benefit all of their constituents – workers, suppliers, the community, to name a few. In those times, the Chief Executive Officers pay was around 40 times the pay of the average worker according to the Federal Reserve. So, if an average worker earned $30,000 a year, the person who began the operation or led the operation could expect to make 40 times that pay – or $1,200,000. A nice incentive, but nothing like today.
Unfortunately, along came economists like Milton Friedman in the 1970s, who took the view that the mission of the CEO was to maximize shareholder profits rather than view employees as the Company’s greatest assets. Maximizing shareholder profits leads to pressure on all costs, and most importantly in our opinion, the costs of labor. With that as the mission, CEO’s began taking stock options and stock shares as compensation. A nice incentive that motivated them to solely increase profits.
The result? The multiple today between average worker pay and the pay of the CEO has risen tenfold – to 400 times the average worker pay instead of 40 times. So, if the average worker earns $30,000, the CEO expects 12 million dollars in compensation.
By the way, at Wal-Mart – the “friend” of the struggling middle class and working poor – former CEO Lee Scott was paid $17.5 million in 2005 – 900 times the average pay and benefits of the typical Wal-Mart employee.