Maximum Wage Ratio

Steven Johnson (via Daring Fireball): “Steve Jobs, Jony Ive, Larry Page, Sergey Brin, Travis Kalanick—these people didn’t just accumulate wealth [by inventing technology]; they accumulated dynastic wealth, wealth that could keep their descendants in the one percent for centuries.”

It’s clear that those startup founders are brilliant people, but it’s equally clear that those people by themselves were not responsible for creating millions of times more value than the thousands or millions of other people who helped make their companies possible — from scientists working under government funding to invent the Internet and GPS, to open-source programmers creating widely-used code libraries, to finally all of the employees who worked to create better products, year after year.

As Clayton Christensen and others have noted, one reason we compensate executives so extremely is because we make the attribution error that top managers actually have significant control over company performance. That is, we thank the CEO when an organization is performing well, and several years later when it’s crashing we blame the very same CEO for causing the problems. (Much of Christensen’s research into the causes of success and failure grew out of his dissatisfaction with the theory that the very same CEO is brilliant one year and an idiot the next.)

“Over the past 40 years, the average pay ratio — the gap between the highest and median employee — inside an American corporation has increased from 30:1 to more than 300:1. […] If you want to defend Silicon Valley in a discussion about inequality, [note] that Silicon Valley has a much more sensible pay ratio than most other industries in the United States — closer to 40:1, not so far from the ratio that predominated in the age of Big Labor. [Also,] the top 100 tech companies granted 19% of their total ownership to non-senior-executive employees (i.e., everyone excluding the CEO and four lieutenants). For the rest of corporate America, that number was 2%.”

“Let’s say we decided as a society that no private company should have a pay ratio above 40:1. That would lead to a radical decrease in income inequality, and it wouldn’t involve a cent of additional taxes.”

Sounds reasonable. And even if this particular idea turns out to be impractical, it raises the point that there’s a lot of creativity to apply to the problem of income inequality.

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