Executive Salaries

Last year the Times published a table showing the 2012 pay of the chief executives of public corporations with revenues of at least one billion. It is fascinating and depressing.

The median compensation, including salary, bonuses and other perks was $14 million. You are reading that correctly, $14,000,000 last year. Of course, many CEOs received much more. At some of these corporations those who were not the chief executive also received more.

Larry Ellison the CEO of Oracle was the highest paid: $78.4 million, more than six times the median. What has he done to justify this shocking sum? Has he done that much more than the workers who produce or design his products?

CEO total compensation for last year was about 3% higher than it was the year before. Base pay increased by 16% over the previous year. Did your salary increase by that amount?

Consider what 3% means on a meager $1 million: $30,000. It is $420,000 for the median CEO compensation. Are you earning that much more this year? Why not? As George Packer writes on the New Yorker website, There must be a social or economic theory somewhere that explains why all this is necessary and just. The well-informed Packer doesn’t know what it is. I sure don’t either. I wonder if Ellison or the top paid CEOs do?

The chief executive of JPMorgan Chase, Jamie Dimon, was awarded $20 million in compensation for 2013. That’s a $20,000,000 bonus for a year in which the company was assessed stiff ($13 billion) penalties for what is referred to as “soured mortgage securities.” And, mind you, that’s in addition to his yearly salary of $1.5 million.

It is said that it is the innovators, the creative types, the job creators who deserve to earn the most. But what about all those hedge fund managers who rake in those multimillion dollar salaries year after year? The 25 highest paid hedge fund managers took in a total of $21.15 billion in 2013 according to Institutional Investors. And that was a year in which most hedge funds fell short of market returns.

David Tepper, the founder of Appalossa Management earned $3.5 billion last year. Hard to believe, isn’t it? According to Paul Krugman (Times 5/8/14) “Last year, those 25 hedge fund managers made more than twice as much as all the kindergarten teachers in America combined.”

They don’t create jobs or useful innovations. They are in the business of financial investment, of increasing the wealth of the already rich shareholders, including themselves, of course.

So why is the American worker, indeed, the general public, so passive in the face of these enormous instances of financial inequality? Where are the groups that are expressing outrage or seeking legislative remedies? Sure, the chances for any change are close to zero. But that is often true of most large-scale protest movements.

Perhaps Americans don’t fully appreciate the magnitude of the enormous gap between the rich, including the very rich, and the poor. If they did, maybe there would be less silence and more outrage. To find out Michael Norton and Dan Ariely undertook a study (Perspectives on Psychological Science, 6, 2011) of popular beliefs and the distribution of wealth in this country.

They asked a nationally representative sample of 5,222 individuals, equally divided between males and females, to estimate the current distribution of wealth in the US and then their ideal level of inequality. Before beginning the survey they asked each person to read the following definition of wealth:

“Wealth, also known as net worth, is defined as the total value of everything someone owns minus any debt that he or she owes. A person’s net worth includes his or her bank account savings plus the value of other things such as property, stocks, bonds, art, collections, etc., minus the value of things like loans and mortgages.”

The individuals in the study vastly underestimated the actual level of wealth believing that the wealthiest “quintile” held 59% of the wealth when the actual number is closer to 84%. It may very well be that this widely divergent perception from reality accounts for the lack of widespread public objections to the large and growing economic inequalities in this country.

Norton and Ariey also asked their subjects to state their ideal distribution of wealth in the US. They found a slight preference for some inequality, rather than perfect equality, but by no means close the degree currently present in the US.

When given examples of the distributions in other countries, they expressed a preference for the distribution that most closely resembled Sweden’s, where the top wealth quintile holds 36% of that countries wealth and the lowest 11%.

Finally, Norton and Ariely noted there was a considerable, and to them surprising, consensus among different demographic groups in this country--gender, income level, voting history, etc. in both their estimates of actual and ideal wealth distribution in this country.

These findings were recently confirmed (Perspectives on Psychological Science, Vol. 9, 2014) in data from 16 countries that revealed that people dramatically underestimate actual pay inequality. This was also true regardless of demographic group and political beliefs.

The study also reported that underestimation was particularly pronounced in the US. The actual pay ratio of CEOs to unskilled workers (354:1) far exceeded the estimated ratio (30:1), which in turn exceeded the ideal ratio (7:1).