The income gap

How far off the charts has compensation for America’s top corporate CEOs soared? Let’s use Peter Drucker as our reference point.

Management theorists today generally give Drucker, a refugee from Nazism in the 1930s, the credit for essentially laying down “the foundations of management as a scientific discipline” after World War II. Drucker’s classic 1946 study of General Motors established him – for leaders throughout business and academia – as the nation’s foremost authority on corporate enterprise effectiveness.

That effectiveness, Drucker believed, had to rest on fairness. Corporations that compensated their top execs at rates that far outpaced worker pay created cultures where a systematic commitment to organizational excellence could never take root.

In the two decades after World War II, America’s leading corporate chiefs by and large accepted Drucker’s perspective. They may have felt they didn’t have much of a choice. From distinguished thinkers like Drucker outside corporate boardrooms came exhortations for fair-minded pay policies. From unions inside the nation’s most powerful corporate empires came fierce pressure to share the wealth.

And that wealth did get shared. In 1965, the Economic Policy Institute notes, major corporate CEOs in the United States were only realizing 21 times the pay their workers were pocketing. That gap would remain fairly modest over the next dozen years, only reaching 31 times in 1978.

But this relatively slight upward nudge unsettled Drucker. Corporate outliers, he believed, were beginning an about-face from America’s post-war corporate pay consensus. A relative handful of top corporate execs, Drucker noted in a 1977 Wall Street Journal analysis, were actually taking in pay packages nearing an until-then unimaginable $1 million a year.

For Drucker, the rationales corporations offered for these new enormous pay packages amounted to “nonsense” and “pure hokum.” Companies faced no unforgiving “need” to pay “market price” for their execs. Stock options did not “promote performance.”

Those options and other maneuvers designed to escalate executive take-homes, Drucker added, were doing “enormous damage.” Excessive rewards for top executives, he explained, nurture the bureaucratic structures that undercut organizational effectiveness.

How so? In any bureaucracy, every level of hierarchy must get compensated at a higher rate than the level below. The more levels, the higher the pay at the summit. Endless levels of hierarchy would remain appealing to executives, Drucker argued, as long as they prop up and push up executive pay. His solution? To make bureaucratic hierarchies less appealing to top execs, limit executive pay. No executives, Drucker believed, should be allowed to make more than 25 times the compensation of their workers.

“A ratio of 25 to-1 is not ‘equality,’” Drucker acknowledged. “But it is well within the range most people in this country, including the great majority of rank-and-file workers, consider proper and indeed desirable.”

Drucker lived long enough – he died in 2005 at age 95 – to see Corporate America make a mockery of his 25-to-1 standard. But research since his death has consistently reaffirmed his take on the negative impact of wide CEO-worker pay differentials on organizational effectiveness.

Excerpted: ‘The ‘Secret’ That Gets CEOs Rich: Keep Workers Poor’. Courtesy: Counterpunch.org