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Money Cannot Be the God of Life: How CEO Pay Drives Inequality

Lawmakers have failed to keep the wage apace with inflation so that its value is now less than it was five decades ago.
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A year ago this August, a 32-year old woman named Maria Fernandes was found dead in her car in a Wawa parking lot. She had asphyxiated on carbon monoxide and gasoline fumes while napping between around-the-clock shifts at three different Dunkin' Donuts locations. Her co-workers described how she would sometimes go days without sleeping, and often had trouble paying the rent. They also said she earned just over $8.25 an hour - the required minimum in the state of New Jersey.

The minimum wage was established in the late 1930s to set a baseline for fair wages and a decent quality of life for working people and their families. Since then, lawmakers have failed to keep the wage apace with inflation so that its value is now less than it was five decades ago. Since costs for housing, food, medical care, and other basic needs have gone up, sometimes dramatically, people like Fernandes have been forced to (literally) work themselves to death, just to get by.

Headlines designated Fernandes as "the face of the recession," but the truth is, incomes for everyday Americans were in steady decline long before 2008. The income of the average middle class family is actually lower today, in real dollars, than it was twenty-five years ago. And despite the so-called recovery, about a quarter of the 45 million people currently living in poverty (including one in five children) are considered "working poor."

Meanwhile, in the other America, Dunkin' Donuts CEO Nigel Travis (Fernandes' boss), gave himself a huge raise, more than doubling his pay from $4.3 to $10.2 million--about $5,000 per hour to Fernandes' measly $8.25.

He was not alone. The CEOs of America's 500 largest companies collectively got a 16 percent raise this past year, totaling over $5 billion. The year before, those at the top firms made 303 times that of the average worker; and compared to minimum wage earners, 774 times more. Long term, average wages went up 11 percent (over the last three to four decades), but executive pay increased a jaw-dropping 997 percent, almost double the country's stock market growth over that period.

That kind of extreme income inequality is not just ethically reprehensible, it's economically unsustainable.

Government officials knew that when they signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, meant to re-regulate Wall Street and curtail runaway speculation. Among the bill's expansive list of regulations was a requirement that corporations disclose pay ratios between their highest and median pay-level employees--a kind of recognition that excessive executive pay is a major driver of income inequality.

Dodd-Frank hits its five-year anniversary next week, but the pay transparency provision remains on hold. The delay has been attributed to intense pressure from corporate lobbyists, like the U.S. Chamber of Commerce and the Center for Executive Compensation, who argue that the costs of implementation far outweigh benefits to shareholders. Given the complexity of today's multinational corporate (MNC) structures, they argue, such ratios are too difficult to calculate. Some also claim that disclosure will needlessly fuel class war, and popular envy of the rich.

It's true that calculating MNCs' pay ratios could prove tricky, especially for those who pay sweatshop wages to their overseas workers. Factoring a dollar a day wages could, after all, seriously broaden pay ratios to obscene levels. It's also true that many of us envy the rich, and that the more people become aware of their own exploitation, the more likely they are to rise up against it.

But reining in executive pay is not about jealousy or killing incentives, as free market ideologues contend. It's just good economics. Top economists, like Joseph Stiglitz, Robert Reich, and Thomas Piketty, have all argued that acute income inequality leads to declines in consumer demand and investment, job creation, and tax revenue--and fosters social unrest and personal tragedy. It's also a considerable drain on public resources, as executive compensation tax deductions cost the U.S. Treasury an estimated $7.5 billion per year.

Plus, Dodd-Frank's disclosure provision is really aimed at excessive equity pay - the kind that helps execs get rich quick, but also incentivizes them to fraudulent behavior and too much risk, often on the public's dime.

Besides questions of economic utility, pay fairness is about America's soul. A new study by Harvard Business School researchers found that consumers actually prefer to buy products from companies with lower CEO-to-worker-pay ratios, and are even willing to pay more for them.

This implies that excessive CEO pay violates Americans' sense of what's right. And it arouses hope that outside the framework of consumption, people might actually believe that "money cannot be the god of life," as Sen. Bernie Sanders rightly put it on CBS' Face the Nation.

A version of this post originally appeared on Democracy Daily, the online "news magazine" of the Bernie 2016 campaign.

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