Income inequality hurts us all

Paying CEOs exorbitant salaries for paper pushing is not only unfair, it's also unsustainable.

Paying CEOs exorbitant salaries for paper pushing is not only unfair, it's also unsustainable.

Jeff Stibel, chief executive of Dun & Bradstreet Credibility Corp, wrote an interesting piece titled A Tale of Two Cities in Harvard Business Review a year or so ago. He was talking about the US economy but his thoughts apply equally to New Zealand today.

“We’re in an economic recovery, but it is a recovery characterised by asymmetry,” Stibel wrote. “Banks and major corporations are flush with capital – large businesses are recording record profits – but job growth is tepid, unemployment remains high and small businesses are struggling.”

In other words, the economic largesse isn’t being equally spread, hence the reference to A Tale of Two Cities. To extend Stibel’s analogy, if Charles Dickens were to turn up today in Auckland’s leafier suburbs, he’d understand what’s going on with soaring property prices. He would surmise that because the same upward price pressure isn’t applying in Otara, let alone Napier, it is a localised phenomenon reflecting the widening gap between the haves and the have-nots. There’s a very cogent line of thinking that posits the origins of the French Revolution didn’t lie in the abject poverty of the poor as much as their revulsion at the wretched excesses of the rich aristocracy.

Meanwhile, in urban Auckland you can bet your bottom dollar that those currently snaffling the plum properties are white-collar workers who shuffle paper in the city, not blue-collar labourers grinding out their lives in the factories of East Tamaki. The country’s demography is polarising, with the middle class being squeezed. Some obscene and unsustainable salaries are being paid in unproductive sectors while wages in the productive sector have hardly moved at all.

It’s one of the reasons why we’re seeing retail closures and vacant shops in the high street. You could argue retail is being hurt by online shopping and while that’s true to an extent, at a more fundamental level not enough people are making enough money to support the wide variety of stores we want in our cities.

When there’s insufficient revenue generated in the productive sector to keep the denizens of the service sector employed, they won’t be able to pay off their mortgages in the trendy suburbs and the real estate bubble will burst again.

In 1985 the disparity between the average wage and the top reported corporate salary was a factor of 15 times ($35k vs $550k). Today the difference is by a factor of around 120 times ($54k vs $6.5m). The explosion in top rates drags all other CEO salaries along with it.

You can’t tell me that any CEO, no matter how smart they are, hired to do a job in an established business they didn’t found or fund by the sweat of their own brow, is worth 120 times more than someone on the factory floor. The CEO will make as much in one day as one of their lesser employees would in four months.

The top quartile of income earners are getting too much of the economic cake and those in the bottom two quartiles are not getting enough. Consumer spending is down, and when the velocity of money slows down, the whole economy contracts.

It’s not fair and it can’t last. We often hear it said, particularly by those in HR, that we need to pay exorbitant salaries in order to attract top talent (the ‘smartest guys in the room’) and compete on the world stage. I beg to differ. I believe there are plenty of candidates who would welcome such corporate leadership roles at more realistically sustainable salary levels. It’s challenge rather than money alone that motivates good people. When we look at the shocking corporate performance of companies run by overpaid parvenus, it’s obvious that they’re not worth their remuneration. With a more equitable spread of salary levels, which would see a lot more people getting a little bit more, we’d all be better off than if a few people get a whole lot more.

It’s worth remembering it was the so-called ‘smartest guys in the room’ who caused the global financial crisis. It’s a tragedy that governments around the world have bailed out greedy investment banks in the belief that they’re too big to fail. We see the ironic and humiliating spectre of democratic institutions (i.e. governments) pumping money into totalitarian, non-democratic oligarchies (i.e. corporations) to pay them off and ensure they survive the chaos they caused in the first place – all with no strings attached. No-one’s learnt anything from the experience – we’re still living in a fool’s paradise because we’re not out of the economic woods yet.

If the issue of income disparity isn’t addressed in the next few years, our children will inherit a world of ballooning debt, increasing social welfare costs, high unemployment and rioting youth. Look at the mayhem in the streets of Greece and the chaos of the Arab Spring – it isn’t so much a symptom of earnest political activism as the lunacy of unemployed youths with an excess of testosterone and nothing better to do than throw Molotov cocktails. Don’t believe it couldn’t happen here!

Young men living without hope, unable to reap the rewards of making a good living, will get their rush from destroying the property of those who do. It’s an idle guy thing.

Mike Hutcheson is a former Saatchi & Saatchi grand fromage, a director of Image Centre, and has never made a Molotov cocktail