Sunday, June 19, 2011

Breakaway Wealth: Why the very rich are pulling away from the rest of America

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 evolution of executive grandeur — from very comfortable to jet-setting — reflects one of the primary reasons that the gap between those with the highest incomes and everyone else is widening.

For years, statistics have depicted growing income disparity in the United States, and it has reached levels not seen since the Great Depression. In 2008, the last year for which data are available, for example, the top 0.1 percent of earners took in more than 10 percent of the personal income in the United States, including capital gains, and the top 1 percent took in more than 20 percent. But economists had little idea who these people were. How many were Wall street financiers? Sports stars? Entrepreneurs? Economists could only speculate, and debates over what is fair stalled.

Now a mounting body of economic research indicates that the rise in pay for company executives is a critical feature in the widening income gap.
Read the rest here.


Visibilium said...

Yeah, in our litigious and regulatory society, CEOs face more risk. Make the jack while you can....

DNY said...

It's not just CEO's. This is the Western version of Milovan Djilas's critique of Communism: "the New Class". And one face of what I have called "the Era of Bad Stewards".

Professional managers (be it corporate managers, mutual or hedge fund managers, government bureaucrats, non-profit managers,. . .) now function as a social class. They look after their own and each others interests before the interests of those on whose behalf they in theory manage things
(be it the shareholders, citizens or donors/beneficiaries of a non-profit). People rotate among parts of the managerial class -- in and out of government, from managing for-profit businesses to managing NGOs.

In commerce and finance, they vote each other fat bonuses and set up "golden parachutes" so that even if they drive an enterprise into the ground and destroy shareholder value, they, well (how shall I say it?) make out like thieves. In academe, administrator pay rises along with tuition even when faculty salaries and faculty hiring are frozen. A remarkable number of top government bureaucrats manage to accumulate surprising wealth while purportedly pursuing the public interest, or soon thereafter.

How much risk does a CEO with a golden-parachute in his compensation package assume? None, the shareholders still bear the risk. Enron and Worldcom are unusual only in that the same sort of ethics -- no longer "the public be d*mned, I work for my shareholders", but "the public and the shareholders be d*mned, I got mine" -- strayed from mere immorality into actual illegality.