The Unit of Caring

Anonymous asked: In your post you say that "most businesses have fairly narrow margins". granting that, it often seems to people that they have very large margins, b/c they observe that executives sometimes give themselves bonuses while their employees get min wage. I am aware that it is probably more complicated than that, & i think a lot of people are, but it's hard for me to find out *how*, b/c i don't know what questions to ask to answer that question. could you point me the right way?

So, first thing, CEO pay could be way lower and the whole system would work fine. We know that because CEO pay was much lower until pretty recently, and it seems to have been at least part well-intentioned government incentives that drove it through the roof. 

Second thing, this does very nearly nothing for low-wage workers. Starbucks has 250,000 employees. Last year their CEO made $21.8million. If we took away all his pay and gave it to the workers, they’d each get an extra $7/month. If we took away all the money all the executives earned and found executives who’d work for minimum wage, each worker’d get maybe an extra $25/month. Now, I wouldn’t turn down an extra $25/month, but it will not solve the problem.

So, I’m all in favor of reversing the silly incentives which drove a spike in CEO pay (though keep in mind that it was well-intentioned efforts to decrease CEO pay that got that result in the first place, and that we should maybe learn something from that about how sure we can be that our well-intentioned incentives will do what we want them to do). But it won’t free up the money to pay low-wage workers well, because even $20million is only a tiny tiny fraction of the wealth of a company. 

The other way it’s more complicated than that is that companies are making hiring decisions on the margins. Do we open this new franchise which will be smoothly profitable if wages are $10/hour and slightly profitable at $11 and unprofitable at $12? Well, we do open it if wages are $11 and we don’t open it if wages are $12. All the laws in the world about CEO pay won’t change this decision.

(Also, several people asked about ‘no employee can earn more than 15 times the wage of the lowest employee’. I would not expect this to raise employee pay, because you’d be spending hundreds of millions of dollars extra every month for an increase in your own salary. I think mostly execs would just find loopholes. It’s probably less distortionary and less bad for low-wage workers than a $15/hour minimum wage, though.)

• 8 July 2017
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