Here’s a snippet from Leonid Bershidsky’s Bloomberg article on automation and employment:
The people at the top of the income distribution aren’t all bankers or tech gurus. Seven percent of the top 1 percent of earners are lawyers, another 7 percent doctors, 3 percent work in insurance and real estate. According to a recent article by Jonathan Rothwell, a Brookings Institution fellow, “there are five times as many top 1 percent workers in dental services as in software services.” Technological disruption doesn’t explain the rise of the top 1 percent and the lack of median income growth.
There are some other factors that do, however. Those include occupational licensing and other regulations, subsidies, and mass immigration.
I’d also add upper level managers in big companies to my list of “people at the top of the income distribution”. I know how I’d curb that but I’m interested in your views. How would you curb excessive executive compensation? How would you define it?
“Those include occupational licensing and other regulations, subsidies, and mass immigration.”
All of which add up to government subsidies of the rich at the expense of everyone else.
As for curbing excessive compensation, bring back the guillotine, that great fixer of excessive height. I’m sure it can work for curbing excessive executive compensation as well.
Another idea: Procrustes Wealth Management Device.
“there are five times as many top 1 percent workers in dental services as in software services.â€
I suspect the dentists making it in are largely oral surgeons and/or guys who own large practices, making money off of their workers. Still, I would bet that the top 3 or 4 earners in software make more than all of the dental workers in the top 1% combined. For those software guys who invented a product and stuck with it and are now making big bucks, I am pretty much OK with those guys. The manager who runs the company at a multiple of 5-10 times what they would make elsewhere in the world, not so much. If you really want to address income inequality, you have to go where the money lives, at the top of the 1%.
Steve
I’ve got an idea how to curb excessive compensation. Don’t. That’s a matter to be decided between the owners and management, purchasers and providers. Dictating it is the road to hell. But if we must go to hell, I want first dibs. I’ve decided all members of the entertainment class make too much, beginning with rappers, including all sitcom actors and ending with a certain author.
Here’s a few thoughts, organized somewhat logically:
1) When people say ‘executive,’ particularly around the words ‘excessive compensation,’ they think of golden parachutes (e.g. when Jeff Simisek oversaw United for 5 years, decreased organizational performance using every metric, broke federal laws, and got a check well into the 8 figures when he was canned). However, most executives aren’t CEOs – they’re VPs or other C-suite execs. Many of those jobs are in older companies with “mature bureaucracies,” and these execs aren’t actually decision makers with a degree of latitude to change policies or practices (thereby improving financial results significantly by taking risks), but instead, are essentially managers, executing a defined job with narrow latitude.
2) The problem isn’t the level of compensation execs receive, but rather, they all too often don’t add value for that money. During her tenure at HP, Carly Fiorina lost more than half the value of HP for investors (during a span when the S&P was down only 15%), and was still well-compensated.
3) This is also a problem in professional sports, another “pay-for-performance” industry where actual $ don’t correspond to production very often. I’ve often wondered why sports teams don’t pay a minimum base salary, and incentives based on team and individual performance (say, 30% base salary, 30% if the team plays well, and 30% for meeting certain individual metrics).
4) To actually use compensation as a performance tool, you need to be explicit about goals ex ante. The problem is, executive pay is determined by boards, most of whom seem at best, borderline competent.
5) If boards did clearly define CEO pay based on such metrics, they should be made public, because this would clearly show investors what the board of a company (and its CEO, if s/he cares about pay) thinks is important.
6) Of course, the difficulty there is that relying on pre-defined goals is this does finish redefining the role of CEO from a decision-maker seeking out new strategies to increase value to one of simply trying to find a way to e.g. increase a stock price by 3% a quarter.