Executive Compensation As the Driver of Inequality

A well reported Washington Post story makes a solid case

The Washington Post leads off its new series on inequality with a killer anecdote:

It was the 1970s, and the chief executive of a leading U.S. dairy company, Kenneth J. Douglas, lived the good life. He earned the equivalent of about $1 million today. He and his family moved from a three-bedroom home to a four-bedroom home, about a half-mile away, in River Forest, Ill., an upscale Chicago suburb. He joined a country club. The company gave him a Cadillac. The money was good enough, in fact, that he sometimes turned down raises. He said making too much was bad for morale.

Forty years later, the trappings at the top of Dean Foods, as at most U.S. big companies, are more lavish. The current chief executive, Gregg L. Engles, averages 10 times as much in compensation as Douglas did, or about $10 million in a typical year. He owns a $6 million home in an elite suburb of Dallas and 64 acres near Vail, Colo., an area he frequently visits. He belongs to as many as four golf clubs at a time — two in Texas and two in Colorado. While Douglas’s office sat on the second floor of a milk distribution center, Engles’s stylish new headquarters occupies the top nine floors of a 41-story Dallas office tower. When Engles leaves town, he takes the company’s $10 million Challenger 604 jet, which is largely dedicated to his needs, both business and personal.

The Post uses Dean Foods to illustrate the story of how skyrocketing executive compensation has been the primary cause—at the top, anyway—of the fast-growing gap between rich and poor over the last three or four decades. That gap has the U.S. closer to the third world than to its rich peers in inequality.

Peter Whoriskey backs this all up by relying on academic research out last year that examined tax filings by those in the top 0.1 percent of earners to find out how they made their money—something that apparently hadn’t been studied. It found that about 60 percent were executives or managers.

The Post misses a bit by not telling us how much or whether that percentage is up. In fact, it’s not different. In 2005, 61 percent of top one-thousandth of earners were executives or managers, barely changed from 60 percent in 1979, according to the paper by Jon Bakija, Adam Cole and Bradley T. Heim. But in keeping with the financialization of the economy since then, today’s best-paid executives are much more likely to be in the financial industry. Non-finance execs and managers in the top 0.1 percent decreased from 49 percent in 1979 to 43 percent in 2005, while finance execs and managers jumped from 11 percent to 18 percent.

The flipside of the compensation eruption at the top is what’s happened to those executives’ workers. The Post notes that income has gone nowhere for 90 percent of the country and shows it through the workers at Dean Foods:

Over the period from the ’70s until today, while pay for Dean Foods chief executives was rising 10 times over, wages for the unionized workers actually declined slightly. The hourly wage rate for the people who process, pasteurize and package the milk at the company’s dairies declined by 9 percent in real terms, according to union contract records. It is now about $23 an hour.

That’s smart reporting to go digging through union records to figure out how much workers have made over the years.

The paper sets aside room to go to 30,000 feet too:

Inequality, economists have noted, is an essential part of capitalism. At least in theory, “the invisible hand,” or market system, sets compensation levels to lead workers into pursuits that are the most productive to society. This produces inequality but leads to a more efficient economy.

As a result, economists have noted, there is an inherent tension in market-oriented democracies because while society aims to endow each person with equal political rights, it allows very unequal economic outcomes.

“American society proclaims the worth of every human being,” economist Arthur M. Okun, former chairman of the Council of Economic Advisers, wrote in his 1975 book on the subject, “Equality and Efficiency.’’ But the economy awards “prizes that allow the big winners to feed their pets better than the losers can feed their children.”

And it asks the big question and attempts to answer it:

So what happened since the ’70s that has sent executive pay upward?…

The case of Dean Foods appears to bolster the argument that executive compensation moves with company size: The profits for Dean Foods in 2009 were roughly 10 times what they were in 1979, adjusted for constant dollars. Engles’s compensation has averaged 10 times that of Douglas.

“It’s a different company today,” company spokesman Jamaison Schuler said. He declined to comment further.

But some economists have offered an alternative, difficult-to-quantify explanation: that the social norms that once reined in executive pay have disappeared.

The Post reports that back in the day, Dean Foods CEO Kenneth Douglas thought he was overpaid making what would now be a million bucks a year. He turned down raises from his board. The paper quotes a 1975 Forbes interview with ITT’s CEO who talks about the social pressure keeping his pay in check.

If you need further evidence of the amount of reporting that went into this piece, look at how Whoriskey tracked down Dean Foods board members from the 1970s to talk about Douglas:

“He would object to the pay we gave him sometimes — not because he thought it was too little; he thought it was too much,” said Alexander J. Vogl, a members of the Dean Foods board at the time and the chair of its compensation committee. “He was afraid it would be bad for morale, him getting a big bump like that.”
“He believed the reward went to the shareholders, not to any one man,” said John P. Frazee, another former board member. “Today we get cults of personality around the CEO, but then there was not a cult of personality.”

It’s worth noting for our audience that those cults of personality were created in large part by the media, particularly the business press, and particularly business magazines.

While the Dean Foods anecdote is tremendous, this piece could have been made even better by adding another example or two.

And I probably would have also zeroed in on the fact that despite falling 9 percent over thirty-five or so years, Dean Foods workers are still averaging $23 an hour. That’s about $46,000 a year, what we consider a very good wage these days, particularly for blue-collar workers.

That shows that Dean workers have been some of the few lucky ones, even while its benevolent and paternal leadership turned into one that held its wages in check while lining its pockets. Unlike a lot of other things, it’s hard to offshore milk production, packaging, and distribution to folks making fifty cents an hour. And that’s where the anecdote comes up missing: The Dean workers aren’t representative of what’s happened to American workers over the last thirty-plus years.

Maybe that’s coming. Here’s looking forward to the rest of this series.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum. Tags: , , , ,