Value & Compensation
A brief analysis of the relationship between value and wages in the American economy.
Americans believe that wages correlate to value. Those who give more, we believe, get more. We discuss various elements of value on which they believe our economy is based, such as moral value, contributions to society, and risk. Here we evaluate what part each of these plays in the American system of compensation.
If our economy were structured around moral value who would be paid the most? The majority of Americans have expressed that they believe that good mothers, good teachers, nurses, and rescue workers have very high moral value. Yet none of these are highly compensated fields. In fact, these fields frequently command pay below the national average.
If moral value were the basis of our economy who would be paid the least? Those, who for selfish gain do intentional harm to others. We all know that "criminals" are put in jail, so we might conjecture that moral compensation does occur. However, in America, those who eliminate jobs, destroy product diversity through predatory competition, and fight to maintain environmentally unfriendly production methods receive the highest compensation. So we can conclude that moral value has very little connection to the American economy.
Contributions to Society:
A common argument in America is that those who contribute the most, receive the most. Our pay is based on what we contribute. That sounds like a great idea but is it true?
When we look at the low end it appears to be true, those who are not producing are not receiving. But by this philosophy who would receive the most? Engineers do the most to produce higher quality, safer, products, using more efficient means of production. So they should receive the most. But they don't. Farmers and laborers do the most to produce the real material goods that we all need; so they should be highly compensated. But they are not.
If contributions to society were the basis of compensation who would be paid the least? Those who through errors or selfish choices destroy the things that the rest of us depend on. But those who destroy jobs and eliminate product diversity are the highest compensated in America.
So in America, contributions to society are at best poorly correlated, and at the extreme salaries, are not correlated at all.
Many Americans claim that risk is intangible, but should be highly valued, and thus, highly compensated.
Do we reward risk in America? If we did who would we pay the most? Soldiers, police officers, and fire fighters have extremely high risk jobs, yet they are not highly compensated. Coal miners and steel workers have high risk jobs, and they are not highly compensated. Entrepreneurs, who start up new businesses do take economic risks and when they succeed they are well compensated.
But who receives the highest pay in America? CEOs of large corporations. Due to the nature of American business law, the greatest risk CEOs take is falling to the same level the rest of us are at. In short, they take no real risk at all. For example by 1980 the greatest risk that Bill Gates faced would be falling to the same compensation level as other software engineers. The heads of Enron, and other troubled corporations did not even fall to the level of upper middle class but profited greatly off of driving the companies under.
In America, the highest risk jobs are poorly compensated, and the highest paid jobs involve no real risk. Thus overall, risk is not a factor determining the compensation level in America.
In feudal societies, those born as lords (high status) remain lords. And those born as serfs remain serfs until they pass some test, by which they may have lordship conferred upon them. In a status based economy those who are at a high status remain high status, and wealthy, regardless of the decisions they make or what they produce. Those who are at a low status must pass a great test before they can gain status.
Americans are convinced that our Revolution against the feudal King George, and our Civil War, against slavery eliminated this type of societal ill. But what do we observe in the American economy?
In America, corporate executives continue to increase their salaries even when they eliminate jobs, undermine the product viability, and make decisions that drive their companies under. For example, Enron executives received tens of millions even while they made decisions that bankrupt their company and cost their workers theirs jobs and their retirement accounts. George W., born rich, continued to be given higher status positions even after having a series of ventures fail.
In a status based economy, the workers are the pawns of the lords (rich) and they are at risk of having their lives shuffled as pawns in the status games of the rich. Since the mid-1970's most American workers have been laid off, subject to pay cuts, or forced to relocate, even while they worked diligently for their companies. While the security of the American worker remained low, or even fell, the wealth of the corporate executives increased dramatically.
In America, there is very strong correlation between status and compensation, much stronger correlation than for any other elements of value.
In America, the primary basis of wealth and compensation is status. Wealth and compensation are clearly NOT based on risk, contributions to society, or moral value. Compensation frequently has a negative correlation to moral value, risk, and real contributions.
It is ironic that Americans are so proud of our Revolution against Great Britain and its feudal tyranny, yet we have reestablished an economic system based on preserving the status of our corporate lords. Many Americans look down on the British worship of the royal family, even while the same Americans worship our corporate lords.
It is also ironic that Americans are so proud of the Civil War believing the Civil War to be the end of Slavery. In Dixie slave owners were expected to make sure that their slaves were fed and housed from birth to death, where the Yankee corporate robber barons shows no long-term accountability to his employees, and may freely dispose of them for personal gain. With this change in systems, our corporate robber barons have acquired greater wealth from the work of their employees, than the slave owners of Dixie had acquired from their slaves.
Most Americans have complete faith in the moral correctness of the wars we have fought against other peoples. But in some of those wars, the "immoral" people we fought against showed greater respect for their working class than we currently do.
The author of this article is neither anti-rich, nor anti-corporation. He is actually in favor of having those who contribute materially, or morally, being well compensated. He is in favor of letting those who take great risks for the benefit of others become rich. The author did at one time in his life believe that the American economy worked on these principals. But two decades in the work force have taught him that it is currently otherwise.
Anecdotal Case Studies:
#1: A small engineering firm in Pennsylvania
A Pennsylvania firm through an unfortunate sequence of events was bought out by a larger firm. As the declining economy of the late 1980s forced many companies to cut back, the manager of the PA plant invested a significant sum of the company's funds to buy out manufacturer of a similar product that had failed to stay competitive and was going under. Then engineering team then had to re-engineer those products to match the requirements of the products that the company already produced. This buy out cost the company a lot but did not help its profitability, so the manager laid off workers including a few engineers and designers. By laying off these workers the manager was able to maintain his own quarterly bonus.
What the manager did was invest company funds in purchasing the rights to, and re-engineering outdated noncompetitive products. After this move failed, he sacrificed his workers. He could have spent far less money, and created far more potential profitability keeping his engineers and developing a team to read the market and develop the next generation of products that could dominate the market as the economy recovered. The company rewarded him for laying off workers to cover his own errors that reduced profitability.
If we evaluate this in terms of moral value, his behavior had very low moral value. He made others pay with their security for his mistakes, while he took a profit for his own errors. If we evaluate this in terms of contributions to society, he did more harm than good, by reducing the company's profitability then laying off workers. If we evaluate in terms of risk, he took little, if any, real risk. If we evaluate using the status model, the company rewarded him for making decisions that would preserve the status of those at the top. Variations on this story repeat throughout the American economy.
|wage distribution of the 1980's||minumum wage vs. maximum ratio|
|IRS statistics||AFL-CIO executive pay watch|
|economic feedback||bank failures and banker pay|