What could possibly justify pay differentials this wide? Well, if CEOs in America’s peer nations — like the UK — were raking in rewards at rates somewhere close to U.S. executive suite levels, then corporate flacks in the United States could argue that American corporations, to be competitive, simply have to pay the going rate for CEOs with the skills that a globalized economic order demands.
But CEOs elsewhere in the world are making nowhere near what U.S. CEOs are making, as the latest British corporate pay figures show. And British CEOs, we know from other research, are actually making more than their peers in Japan, Germany, and the rest of the industrial world.
So what can we do to restore some basic fairness to executive compensation in the United States? We can start establishing limits on the gap between CEO and worker pay, as the British labor leader Frances O’Grady and many other observers of our contemporary economic scene have urged.
We could, for starters, subject corporations with outrageously wide CEO-worker pay ratios to higher corporate tax rates. We could deny government contracts to corporations with out-of-whack ratios. We could place pay-ratio strings on the billions in subsidies U.S. taxpayers annually hand to major corporations.
Action on these fronts has already begun. Two cities in the United States, San Francisco and Oregon’s Portland, have enacted measures that tie CEO-worker pay ratios to business tax rates. Similar proposals are pending in a number of other states and at the federal level as well. Inequality.org’s CEO-Worker Pay Resource Guide is keeping tabs on the progress these initiatives are making.
Moving seriously in the direction these initiatives are pointing us toward, we need to remember, would be more than a matter of simple fairness. We need our corporations to be both fair and effective, and decades of “effective enterprise” research has established that these goals go hand in hand.
This research has explored a core question of modern economic life: How do we turn hundreds or thousands of people who don’t know each other — and may not even know much about the work they’ve been hired to perform — into an operation that efficiently produces goods or provides services? Over a century ago, industrial engineer Frederick Winslow Taylor thought he knew the answer. To make enterprises effective, he preached, managements needed to manage — down to the most minute details of the work to be done. Taylorism — the notion that workers need to be carefully scripted, motion by motion — would go on to flourish in the new 20th century.
Today, a century later, the nostrums of Taylor’s “scientific management” seem a quaint, even barbaric, relic of a distant past. No contemporary business leader would dare suggest, at least not in polite company, that employees only do good work when management tells them exactly what to do and how to do it. Instead, modern execs orate, at every opportunity, about empowering workers.
In the old days, this corporate empowerment mantra goes, enterprises could prosper churning out the same product by the millions. In the new Information Age, by contrast, enterprises only do well when they customize products to what customers want. And who knows what customers want? The workers at the front lines, the employees who interact directly with consumers.
The effective enterprise, the mantra continues, also values workers on the production line, because modern production operations must be constantly changing to keep up with evolving consumer preferences. Who better to help figure out how to change, how to produce products ever faster, smarter, and more efficiently, than the workers actually involved in the producing?
Noble sentiments. All regularly ignored in Corporate America’s day-to-day operations. Only a small fraction of the companies that claim to be empowering workers, one Journal of Business study has found, were actually engaging in any serious empowerment. Another study, in the Administrative Science Quarterly, has concluded that top execs are essentially just going through the empowering motions.
What’s stopping American business from creating the employee-empowering “new logic” enterprises the Information Age so clearly demands? Many observers sum up the obstacles to enterprise effectiveness in one word: bureaucracy.
Bureaucracies, sociologists tell us, grow naturally — and inevitably — in enterprises organized along hierarchical lines. In the classic corporate hierarchy, workers sit at the base of a steep pyramid. Above them rest layers upon layers of management. The more layers, the steeper the pyramid, the greater the distance between actual workers and ultimate corporate decision-making authority. To succeed in the Information Age, analysts contend, enterprises need to “flatten” these towering pyramids.
But enterprises in America have done no such thing. Hierarchies in Information Age America have turned out to serve a real purpose. They help ensure that excessive executive pay remains excessive. They amount, in essence, to income-maintenance programs for top execs.
Peter Drucker, the father of modern management theory, described this income-maintenance dynamic decades ago. In any hierarchy, Drucker noted, every level of bureaucracy must be compensated at a higher rate than the level below. The more levels, the higher the pay at the top. Hierarchies would remain appealing to executives, he argued, so long as they prop up and push up executive pay. His solution? To make hierarchies less appealing to execs, limit executive pay. No executives, Drucker urged, should be allowed to make more than 20 times their worker compensation.
Those who care deeply about building effective enterprises have drawn one clear conclusion from the work of Peter Drucker and like-minded analysts: Enterprises that crave the best their employees have to offer ignore gaping differentials in corporate compensation at their peril.
So what’s the best way to pay people in a modern corporation? Fortune magazine has boiled down the apt advice of corporate critic Alfie Kohn: “Pay well, pay fairly, and then do everything you can to get money off people’s minds.”
Extreme inequality, within the enterprise, keeps money on people’s minds. Deeply unequal enterprises have never been effective over the long haul. They never will be.
