Economic policy

Reviews | Keeping the working poor voluntarily is a terrible economic policy

The CEOs of America’s largest low-wage employers now earn an average of 670 times what their typical workers earn.

In most of these companies, the managers wasted millions buying back their own stock instead of giving the workers a raise.

But we don’t just get an injustice when a boss can earn more in a year than a worker could earn in more than six centuries. We get clumsy and inefficient businesses.

Management science has been clear on this point for generations, since the days of the late Peter Drucker.

Management theorists credit Drucker, a refugee from Nazism in the 1930s, with elongate “the foundations of management as a scientific discipline.” Drucker’s classic 1946 study of General Motors has established it as the leading national authority on business efficiency.

This efficiency, Drucker thought, had to be based on fairness.

Companies that pay their CEOs at far higher rates than workers create cultures where organizational excellence can never take root. These corporations create ever larger bureaucracies, with endless layers of management that only serve to prop up huge paychecks at the top.

Drucker argued that no leader should earn more than 25 times what their employees earn. And, in the two decades following World War II, leading American business leaders generally accepted Drucker’s view.

Their companies shared the wealth when they bargained with the powerful unions of the post-war years. In reality, Remarks the Economic Policy Institute, the CEOs of large American corporations in 1965 made only 21 times the salary their employees were pocketing.

Drucker died in 2005 at the age of 95. He lived long enough to see Corporate America scoff at his 25-to-1 standard. But research since his death has consistently reaffirmed his view on the negative impact of wide pay gaps between CEOs and workers.

The 28th Annual Institute for Policy Studies just released Management Surplus ReportHe explores these wide gaps in revealing detail. The report focuses on the top 300 U.S. companies that pay their median workers the least.

At those 300 companies, the average CEO salary last year jumped to $10.6 million, some 670 times their median salary of $24,000.

In more than 100 of these companies, workers’ compensation was not even keeping up with inflation. And in most of those companies, the executives wasted millions buying back their own stock instead of giving the workers a raise.

Just as Drecker predicted, this unfairness led directly to performance issues. Many of our nation’s most unequal companies, from Amazon to federal call center contractor Maximus, have seen repeated walkouts and protests from rightfully aggrieved workers.

Congressional lawmakers, the Institute for Policy Studies points out, could take concrete steps to limit extreme wage disparities. They could, for example, raise taxes on companies with shockingly large pay gaps.

But with Congress unlikely to act, the new report from the Institute for Policy Studies also highlights a promising move the Biden administration could make on its own. The administration could start using executive action “to give companies with tight pay ratios preferential treatment in government contracts.”

That would be a big step forward, since 40% of our biggest low-wage employers hold federal contracts. If the Biden administration denied lucrative government contracts to companies with pay gaps greater than 100 to 1, these low-wage companies would have a strong incentive to pay workers more fairly.

Various federal programs already provide a head start in contracting to targeted groups, typically small women-owned businesses, disabled veterans, and minorities.

“Using public procurement to address extreme disparities within large companies,” adds the IPS report, “would be a step towards the same general goal.”

And a step in that direction, as Peter Drucker told readers of The Wall Street Journal in 1977, would pay homage to the great achievement of American business in the mid-20th century: “the steady narrowing of the income gap between the ‘big boss’ and the ‘worker'”.