Problems in American Executive Compensation: The Ethical Dimension

According to The New York Post, 66% of the income growth in the United States between 2001 and 2007 went to the top 1% of all Americans. In 1950, the ratio of the average executive’s paycheck to the average worker’s paycheck was about 30 to 1. By the year 2000, that ratio had exploded to between 300 to 500 to one. Because American executives tend to be paid more in total compensation than do their European colleagues, the ratios are lower in in the E.U. Hence one might ask what is behind the trajectory in the United States. 

Does a shift from manufacturing to knowledge-based industries occasion a widening economic gulf? Even as late as 2010, the United States still had the largest manufacturing sector in the world. I suspect that the change is not so much tied to the number or even proportion of factory workers as it is to changes in executive compensation. Specifically, in the 1990s stock options took off as a part of such compensation because boards wanted to tie executives' compensation to long term firm performance. Even if the alignment of incentives was strengthened, a side effect was an explosion in the overall level of a given executive's compensation. In other words, if an executive's company did well, so too did his or her total compensation package. This byproduct in turn raised the ethical issue of fairness.  Specifically, is a CEO's work really worth tens of millions in a given year to a firm or to society at large?  Is a CEO's effort really so much more than that of a mid-level manager or an employee in operations?  

To obviate any ethical violations of fairness, which human beings seem able to detect innately, boards could reduce the overall compensation packages of executive managers even as the proportion in stock options is increased.  Lest it be argued that the market demands the higher amounts, it could be argued that that market is an oligarchy rather than being competitive. If so, there might be a legitimate role for the U.S. Government as an umpire establishing and protecting competitive markets. Otherwise, an oligarchy can become a self-perpetuating club that functions primarily in the interest of its members, which occasions the ethical objection of fairness.

Source:

"So Long, Middle Class," New York Post, August 1, 2010.

Efficiency, Corporate Social Responsibility and Full Employment: Squaring a Circle

The New York Times reported that President Obama urged American businesses on February 7, 2011 to “'get in the game' by letting loose trillions of dollars being held in reserves, saying that they can help create a 'virtuous cycle' of more sales, higher demand and greater profits that will put people back to work and turn around the sluggish economy.” Obama continued, “If there is a reason you don’t believe that this is the time to get off the sidelines — to hire and invest — I want to know about it. I want to fix it.” In the speech at the U.S. Chamber of Commerce, Mr. Obama said that companies have a responsibility to help the economy recover. The trouble is that responsibility is a rather vague term that can be variously applied. This is one reason why the corporate social responsibility concept could mean providing society with the products and services that are sought via the marketplace (e.g. Milton Friedman of the Chicago school) while meaning for others increasing corporate philanthropy to alleviate a society problem such as poverty. In other words, responsibility can be made concrete in various ways that can accommodate and indeed reflect the ideologies of those applying the term.

It could be predicted, therefore, that the President's application of responsibility might have differed from some of the business managers in the audience. Indeed, Obama’s suggestion that businesses could help the economy recover by spending their reserves was met, according to The New York Times, “with skepticism by some in the audience.” For example, Harold Jackson, a executive at Buffalo Supply Incorporated (a medical supply company), called the President's suggestion naive. “Any business person has to look at the demand to their company for their product and services, and make hiring decisions,” Jackson said. “I think it’s a little outside the bounds to suggest that if we hire people we don’t need, there will be more demand.” In effect, Jackson was defending Friedman's application of corporate social responsibility from that of the President's.

To President Obama's assumption that American businesses were still sitting on the sidelines, it can be asked, in what sense? The President was pointing to what he viewed as excessive retained earnings. Yet John Schoen of MSNBC reported the same day that the American manufacturing sector was “roaring back” after the recession. Schoen reports a sustained rise in factory orders in five of the last six months, which prompted manufacturers to boost hiring. The Commerce Department had reported a few days before Schoen's report on February 7, 2011 that the manufacturing sector had added 49,000 new jobs in January. Yet this is hardly a roaring comeback in terms of new jobs. Schoen reports that businesses have figured out how to make more widgets with the same number of workers, resulting in higher productivity and profits. Investing reserves in automation, for example, raises productivity by making products faster and better. According to Schoen, “Productivity is a pretty simple concept: It’s a measure of how much stuff a worker makes in a given number of hours. . . . Productivity has also risen as American manufacturers have moved to specialize in more valuable products, sending manufacturing of cheaper goods overseas where wages are lower. As the value of American-made products has risen, so too has the average level of output per worker when measured in dollar terms.” Schoen reports that according to the U.S. Labor Department, the level of output per hour worked rose by 2.6 percent in the last three months of 2010. Even if it is not in the interest of labor, such improvement is in line with the logic of business, given how business is designed and how a competitive marketplace works. Spending retained earnings beyond that which can be expected to raise productivity simply does not make sense to a business practitioner.

In general terms, the (nearly) “jobless recovery” can be seen as pointing to a major difference between the interests of business and society—the latter being represented by the President at the Chamber of Commerce. Given the nature of business enterprise in a competitive market, it is only natural for managers (and boards) to work toward (and reward) greater efficiency (i.e. productivity). Business managers thus understand or apply responsibility in this way. As per Harold Jackson's point, to hire labor beyond the optimal efficiency point in order to solve the wider societal problem of unemployment would run against a firm's telos, or goal. Ultimately, such over-hiring would compromise a company's continued viability (which could result in the loss of even more jobs).

One cannot blame a manager for thinking in line with his or her company's logic, or raison d'etre, any more than one can blame a shark for hunting for food and eating like a shark. A shark is a shark, and a business can also be viewed as a feeding machine. To posit or impose responsibilities onto a machine does not make sense either to the machine or to those who operate it (in their functioning as operators). To an operator, responsibility means operating well—which, by the way, is virtue in the ancient Greek sense. The President's use of responsibility extrinsic to a business calculus simply would not register. It would be like trying to get ought out of is. Even within business functionality, responsibility even as in fiduciary duty to the stockholders is simply translated into “try to get as much profit as possible, now or later.” In other words, ought does not compute in a business technical vocabulary. The term is extrinsic, like societal problems and goals. To come from a societal standpoint and impose “be responsible” to a business practitioner is like shouting at a deaf person. The business person is apt to simply look curiously at the person as if wondering why he is speaking in a foreign language while assuming he is being understood nevertheless. “How odd,” is perhaps the most honest response that one could give to such a display.

The difference between the President's application of responsibility and that of Jackson can also be understood as the difference between the interest of a subunit and the system as a whole. It is only natural for a part of a whole to operate in the interest of the part itself rather than necessarily the whole. The interests of the latter can thus fall through the cracks. Government regulation is an attempt to plug such cracks, but regulations, like firms, are particular. On the issue of unemployment, the societal question is whether even a fully-operational economic system can supply full employment. If not, it may be the government's responsibility to supply the surplus employment, directly or indirectly via subcontracting. Crucially, this supply must be designed such that it does not reduce the employment provided by the private sector. The surplus jobs must be functions that the private sector does not and would not address. The President's error in his speech to the Chamber of Commerce could be that he was assuming this surplus is the responsibilities of “parts” of the system (i.e. individual companies) rather than of the system itself (i.e. the government).

In sum, responsibility is a dubious concept to apply to business; the term is too vague to have much traction in discussing such vital matters as affect our economic livelihoods and the related viability of our economy. It seems to me that the priority ought to be that every able-bodied and minded adult has a job (or, otherwise, a means by which he or she can have sufficient economic wherewithal to survive in this interdependent society), whether through business, non-profits or government. Ideologies, including responsibility itself, ought to be relegated as luxuries with which we can play on the margins once full employment has become a fait accompli. That is to say, ideologies might contribute to improving full employment, rather than being depended on to reach it or allowed to keep us from it. Of course, it could be countered that ideologies are part and parcel of this entire discussion and thus cannot be dissected from it. That may well be. Even so, I submit that ideologies such as laissez faire and corporate social responsibility ought not be allowed to thwart us in how we constitute full employment as a societal fact. That is to say, we ought to direct full employment by whatever means necessary then work from there (once attained) to improve it. Simply put, for some reason, we don't treat full employment as necessary.; rather, we treat it as a goal.  "How odd," an alien from another galaxy might say (in its own language, of course), should one visit us and want to study us.

Sources:

Michael D. Shear, “In Speech to Chamber of Commerce, Obama Urges Businesses to ‘Get in the Game,’” The New York Times, February 7, 2011.

John W. Schoen, “Factories Boom, but with Few New Workers,” February 7, 2011, NBCNews.com.

Does Opportunity Justify Economic Inequality?

From 1993 to 2010, the incomes of the richest 1 percent of Americans grew 58 percent while the rest had a 6.4 percent increase.  In 2010, the first year of an economic recovery, the top 1 percent of Americans captured 93% of the income gains. Beyond the danger to the American republics in there being an economic elite so far removed from the vast majority of the population is the question of whether the trend is baleful, economically speaking. It is not clear that even such an income gain being snagged by so few registered in the minds of the general populous as a problem. The key to any concern would seem to be whether opportunity for the many is compromised as a result of extreme economic inequality.

In 2011, inequality was not exactly the top priority of American voters: only 17 percent thought it is extremely important for the government to try to reduce income and wealth inequality, according to a Gallup survey. That is about half the percent who said reigniting economic growth was crucial. However, 29 percent said it was extremely important for the government to increase equality of opportunity. More significant, 41 percent said that there was not much opportunity in America, up from 17 percent in 1998. The question is whether the concurrent increase in economic inequality was viewed as causing the decrease in opportunity. According to David Hume’s naturalist fallacy, a correlation does not itself mean a causal relationship exists. The fact that economic inequality was increasing as opportunity was decreasing does not in itself mean that the increasing inequality was reducing opportunity. There might be a causal relationship, but more is needed to support it than a correlation.

According to the New York Times, comparisons across countries “suggest a fairly strong, negative link between the level of inequality and the odds of advancement across the generations. The link makes sense: a big income gap is likely to open up other social breaches that make it tougher for those lower down the rungs to get ahead. And that is exactly what appears to be happening in the United States, where a narrow elite is peeling off from the rest of society by a chasm of wealth, power and experience.” Additionally, that elite can use its wealth as power to reserve the opportunities itself. For instance, donations to universities (and lobbying government officials) could be used to keep financial-aid-based admissions down to a certain level such that there are plenty of spots available for children of the well-off. Appeals seemingly in the interest of the masses can even be utilized, as in wanting to reduce subsidized student loan programs because students are suffering from too much debt.

In my view, the business-government dynamic is crucial to why increasing economic inequality is harmful both politically and economically. Minimizing the harm to reduced opportunity ignores the injustice that comes with the inequality itself. Wealth can easily be made into power, which in turn can be used in political, economic and societal realms in self-serving ways. The primacy of opportunity assumes that anyone can be rich if he or she just works hard enough. Both on account of the way the system is designed and the differences between people, not everyone will succeed even if given the opportunity.

Furthermore, conditioning one’s objection to economic inequality in society on whether one’s opportunity is affected can be viewed as self-centered as well as rather narrow because one is indifferent to the negative effects of the inequality on others apart from any decreased opportunity as long as one believes that one’s own opportunity is not adversely affected. Put another way, too many Americans are willing to look the other way on how the elite can unfairly use their advantage aside from restricting opportunity. The right of the elite to so much wealth is tacitly acknowledged as long as opportunity is still thought to exist.  As long as it does, society has no right to take from the rich even if they compromise the republics themselves. This is a very minimalist notion of social contract—one that the 1% benefit from. This is hardly an accident—political ideology established in society being in the interest of the relatively few beneficiaries of the vast majority of income gain.

Therefore, whether increasing economic inequality causes less opportunity for the masses is a question that can be relegated to the more important question of whether the inequality itself is inherently unfair and/or a threat to the republics, the economy, and even society. How the wealth has been and is gained as well as used are relevant to the ethical question of fairness, and thus to whether the concentration of wealth is legitimate. Crucially, a focus on opportunity misses this point. Besides its ethical dimension, absolute or relative economic inequality could be harmful in building up pressure of resentment and even revolution, as evinced in the Occupy Wall Street Movement (which has been safely marginalized—with its own complicity). As the interests of the elite and the masses diverge and the elite (e.g., Goldman Sachs) gains more and more power, the strangling of the lower and lower-middle classes may ensue—a development that could not be good for a society’s stability. A focus on opportunity recalibrated in terms of being promoted to manage a McDonalds’ restaurant misses this point. In short, we are missing the iceberg coming up in front of our ship because we are satisfied if we can still get a deck chair.

Source:

Eduardo Porter, “Inequality Undermines Democracy,” The New York Times, March 21, 2012. 

Christianity and “Social Capitalism”

The SEC charged Ephren Taylor with a fraudulent $11 million Ponzi scheme in April 2012. According to Reuters, “Taylor fraudulently sold $7 million of notes said to bear 12 percent to 20 percent annual interest rates, to fund small businesses such as laundries, juice bars and gas stations.” He “had conducted a multi-city ‘Building Wealth Tour’ in which he spoke to congregations” on the importance of “giving back.” He called himself a “social capitalist.” In actuality, he used the money on himself and his wife’s attempt to become a singer.

The congregants’ susceptibility to Taylor can be understand from grasping the larger historical trend within Christianity wherein the prosperity gospel—in which it is believed that God rewards “true believers” with material wealth—had replaced the anti-wealth view wherein being rich and saved is like a camel getting through the eye of a needle. In other words, the shift in historical Christian thought from a close coupling of wealth and greed to an outright rejection of such a linkage made it more likely that the lay Christians would view investing in “social capitalism” as sufficient to justify having wealth beyond subsistence living.

Secondly, Taylor’s assumed conflation or mixing of Christianity and social performance in business enabled the congregants to open their wallets presumably for religious purposes in line with a social conscience. It is worth pointing out that camel is not given a pass for using wealth in a socially responsible manner. In other words, if simply having wealth is indicative of underlying greed, how one uses the wealth is not sufficient to undo the linkage and justify having the wealth in the first place.

Moreover, fidelity to a social norm such as corporate social responsibility is not religious. Even though Unitarians maintain that certain social structures are the object of their faith, the religious domain contains a transcendent referent.  That is, faith in a religious sense is oriented to an object that lies beyond the limits of human cognition and perception.  Specific social structures do not qualify because they are in our human domain.

In fact, to advocate a particular social norm is not to justify ethically with ethical reasons.  That is to say, corporate social responsibility is not business ethics.  The difference can be explained by referring to David Hume’s naturalist fallacy, which holds that what “is” the case cannot justify what “should” be. In other words, you can’t get ought out of a melon. You need ethical reasons, such as “it is fair because x,” to justify what one should do. To advocate a social norm is not to provide an ethical reason; more would be needed to provide support for why a certain norm that can exist should exist.

Therefore, I question Taylor’s linking “social capitalism” to religion (and Christianity in particular). The application cannot even be justified under the rubric of religious ethics. In addition, the congregants were too gullible because they had applied or bent Christianity too far from its native turf.

See: God's Gold, available in print and as an ebook at Amazon.

Source:

Jonathan Stempel, “SEC Charges Ephren Taylor II ForAllegedly Bilking Churchgoers In $11 Million Ponzi Scheme,” The Huffington Post, April 12, 2012.