How Should Wages Be Distributed?

From a business ethics perspective, a modern society striated by extreme income or wealth imbalances provokes questions:

• How should wages be distributed?
• What counts as compensation?
• What’s the difference between a star system and crony capitalism?
• Why do we want to be stars?

Beginning with the question about wage distribution, in today’s economy a multitude of architectures may determine compensation levels for individuals at work. The appeal to market forcesThe determination of prices, wages, and similar in accord with basic economic laws of supply and demand. is the most straightforward. When the question is “How much should Bill Gates get?” the direct answer is whatever he can find a way to earn. This rationale has nothing to do with how hard Gates works. He may well struggle mightily, but it could also be that he sat down for a few mornings, jammed the lines of code composing the Windows operating system into his computer, and he hasn’t done a thing since. He’d still be fully justified in claiming his billions because people are willing to pay his company to get the product.

Expanding the logic that people should receive whatever they can get someone to pay them, no one thinks twice about applying that way of thinking to paintings. The worth of a Picasso that goes on sale tomorrow is no more or less than what the highest bidder offers. So too, the argument goes, should wages be determined.

This subject will be returned to later, but provisionally it may be stated that this method of apportioning money fits well with the contemporary star system. It fits because if some few people find ways of accumulating huge sums in the open marketplace, that’s not a problem or an injustice. If anything, it’s an indication that the market economy, which privileges individual initiative and freedom, is working as it should.

Another way of thinking about how wages and wealth should be distributed is value generated for societyAs a formula for wage distribution, the assignment of wages to reward those performing tasks that provide happiness as measured across an entire community.. Under this formula, few would deny that Bill Gates—whose software contributes mightily to making our lives easier—deserves healthy compensation. However, does he deserve more than the top-notch elementary school teacher who every year sends thirty children forward, ready to contribute to society? What about a paramedic? It’s true that Gates has touched most all our lives, but he hasn’t saved any.

With respect to ethically justifying this form of wealth distribution, it fits together well with the utilitarian ideal of acting in the name of the common welfare. When economic incentives are put in place to highly reward those performing tasks that provide for happiness when measured across an entire community, even those who don’t care about anyone but themselves will find their efforts channeled toward the general welfare.

On the question, finally, about gaping imbalances in income and wealth distribution, deciding to apportion money in terms of value added for society may not shrink the disparities. It’s true that Wall Street speculators may have a harder time justifying million-dollar bonuses, but others may claim their place on the spectrum’s upper end (Scientists? Teachers?). And with respect to someone like Gates, he’d stand on solid ground demanding huge riches based on his role in software development.

A third structure for dividing wealth is effortAs a formula for wage distribution, the assignment of wages to reflect number of hours or amount of force exerted toiling., measured by, say, number of hours toiling or amount of measurable work done. American Apparel employs this formula when dividing up wages among sewers at its Los Angeles factory. The sewers are grouped, and each member receives a respectable hourly base wage, and then a bonus depending on how many garments their team produces. Some groups produce faster than others and so make more money, but no individual rises above the pack as drastically as financier Stephan Schwarzman did on Wall Street when he earned $702,440,573 in one year. To underline the difference, if Schwarzman worked twenty-four hours every day of the year, he’d be getting $80,000 an hour. No sewer at American Apparel gets anything close to that.

Ethically justifying a structure for wealth distribution based on pure effort may lead toward the duty to fairness. If there’s broad agreement that all individuals should have an equal opportunity to pull down a big paycheck, then aligning the paycheck with effort makes sense. It works especially well by eliminating advantages some people have over others as a result of luck. Someone born with a knack for math may do better on Wall Street than another born without, but both have it in their power to work equally hard. If, consequently, we want to ensure that all society’s members have the same shot at becoming wealthy, setting paycheck decisions to accord with effort may function well.

With respect to a star system, finally, it’s immediately clear that this method of dividing wages drastically suppresses income differences. It may be that Wall Street maven Stephan Schwarzman works harder and longer than any sewer at American Apparel (or he may not), but there’s no way he works $80,000 an hour harder.

A still flatter system of wealth distribution is precisely flat wealth distributionA formula for wage distribution where everyone gets the same amount.—that is, everyone gets the same check at the end of the month. Retirees collecting Social Security approximate this reality. Though it’s true that Social Security payments vary depending on factors including how much individuals contributed during their working lives and how early they began accepting benefits, there’s no room whatsoever for a star system. Near-blind equality across the board, in fact, is one of the main principles guiding the Social Security system.

Of course, one reason people are willing and, for the most part, happy to participate in Social Security’s relatively flat payment system is that they aren’t working. When people are working, when they receive a check for labors accomplished during preceding weeks, it becomes difficult to justify giving everyone the same amount regardless of how many hours they may have put in or effort exerted. In a certain sense, it actually becomes impossible because such a distribution breaks the link between work and payment (even someone who sucked their thumb all day would receive the same wage as the dedicated nurse) and so the entire discussion about dividing up salary levels evaporates. Dispersing money to the population becomes a political task more than an economic one. It is, it must be underlined, quite possible to ethically justify a flat wealth distribution system; it’s just that the justification would rest on social and political grounds, not economic and business ones.

The last structure for wealth division is in terms of needA formula for wage distribution where everyone gets the funding necessary to maintain a quality of life comparable with that of everyone else.. Everyone gets the funding necessary to maintain a quality of life comparable with that of everyone else. A gesture in this direction is made in the United States by government welfare programs, a notable example being food stamps (about 40 million Americans, or 12 percent of the population, receive them). The idea behind the benefits is that those unable to afford the grocery store should receive a supplemental income to guarantee a sufficiently stocked kitchen cabinet. There are many and heated debates about the extent to which government institutions should be redistributing wealth by channeling tax revenue. It is clear, however, that giving to all members of society in accordance with their need will eliminate the star system. It may be true that some will receive vastly more than others (for example, those with serious physical disabilities), but there wouldn’t be any outsized accumulation of wealth; there wouldn’t be any Bill Gates out there with $50 billion in the checking account.

Conclusion. The star system in American business life is not necessary; other systems of wealth distribution are possible and justifiable. However, the star system does fit together well with the proportioning of wealth through open market forces.

What Counts as Compensation?

The president of the United States receives “only” $400,000 annually. Then again, he also gets a brass band striking up a tune in his honor every time he goes out the front door. Michael Bloomberg spent 108 million of his own dollars to be elected mayor of New York City in 2010. Since the job’s salary is $225,000, he’d need to work 480 years just to break even. On the other hand, with a police escort he has a lot less trouble with the cross-town traffic frustrating so many New Yorkers, no matter how wealthy they may be. On Wall Street, quants are quantitative analysts: people who use mathematical algorithms (among other tools) to buy and sell stock. Their compensation can reach astronomical heights, which explains why some people who have the talent to be math professors at universities give up campus life for the world of finance. Others, however, decide against finance and in favor of the campus and a paycheck that struggles to reach six figures. In 1993, basketball superstar Michael Jordan left the game and signed up to play minor league baseball with the Birmingham Barons. Not everyone, reality teaches, wants to be a star, at least not in purely financial terms.

It’s also true, however, that most people who could be financial stars forgo that possibility only because they get what they perceive to be a better offer. The better offer may not appear so wonderful to many—it takes a certain kind of person to choose minor league baseball over the NBA, or campus life instead of glittering Wall Street—but the decision nonetheless makes sense for the deciders (and to enough outside observers for the choice to avoid being labeled insane). The point is that compensation, what you want to get back for doing your job, comes in many flavors, and it’s hard to put a universal price tag on them. Many would thoroughly enjoy the perks of being president, but probably few see why living a life of the mind at a remote university is preferable to being rich in New York City. Regardless, one of the difficulties in gauging and fully delineating the star system as it exists in professional life is accounting for the kinds of benefits that don’t appear on paychecks.

What’s the Difference between the Star System and Crony Capitalism?

Cronyism is partiality to others because they’re friends and allies. Normally, cronyism also includes some expectation of reciprocity: favors are exchanged. Crony capitalismDecisions made on the basis of personal relationships and loyalties more than unbiased judgments and purely professional considerations. is an insiders’ game in business, one where decisions are made on the basis of personal relationships and loyalties more than unbiased judgments and professional considerations.

About cronyism, everyone engages in it to some extent. When children come around in December selling gift wrap to raise money for their school, one girl may knock on the door and give a tremendous presentation along with some discount options, but you still buy more from the boy who mumbles and forgets most of the samples because he’s your sister’s son and also because you hope that when your children get older, your sister will do the same favor for you.

In the neighborhood and on a small scale, it’s difficult to object to outbreaks of personal allegiance at the cost of economic purity. In fact, an ethics of care—one that sets the preservation of social and family bonds as the highest moral good—actually endorses this kind of cronyism. The problem comes further up the scale when personal relations guide decisions about other people’s money, either directly or indirectly. One example is the bailout of Boston’s OneUnited Bank. It was located in the district of a powerful congressman and led at one point by the husband of a powerful congresswoman. When the bank collapsed under the weight of bad loans, it should’ve been put out of business. In fact, the Federal Deposit Insurance Corporation, a regulating arm of the US government, ordered the bank to stop making loans. Still, after a string of telephone calls stretching from the bank to the congresswoman and then on to the congressman in charge of doling out government bailout funds, a $12 million check got written. The incompetent bankers at OneUnited got to keep working, and US taxpayers got a seven-figure bill.John Stossel, “Crony Capitalism,” John Stossel’s Take (blog), Fox Business News, December 23, 2009, accessed June 9, 2011, http://www.foxbusiness.com/on-air/stossel/blog/2009/12/23/crony-capitalism.

The purely economic description of this kind of bailout is “privatizing the profits and publicizing the losses,” meaning that when a company does well, the private sector people—the managers and shareholders—keep the profits, and when money is lost, the bill is charged to the public sector, to taxpayers. This kind of practice may well encourage wealth accumulation among a few people with powerful friends in government since their insider connections grant them a tremendous advantage on the economic playing field: they can bet everything knowing that if they lose, they’ll just get their stake back to try again.

Ethically, a number of arguments may be quickly mounted against cronyism:

• In terms of basic duties, including the duty to fairness, cronyism fails because economic players aren’t getting the same opportunity to succeed. In the banking example, the duty to fairness doesn’t mean all bankers necessarily succeed equally, but it does require that the difference between winning and losing gets determined in terms of the skills of banking (attracting depositors, correctly determining which loans are good and which should be avoided, and similar). Cronyism replaces banking expertise with social and political maneuverings at the core of success, which is unfair by definition, just as it would be to screen applicants for a bartending job by asking them all to participate in a running race.
• Another duty-based argument against cronyism is that it can be construed as a form of stealing. When political friends provide taxpayer dollars to a business, there’s no one person who can claim to have been robbed, but as a collective, taxpayers find someone has taken their money.
• A utilitarian argument against crony capitalism would succeed by showing that an economic system distorted by political favoritism is less efficient, and therefore, less supportive of the general welfare than one where only those who are best at one or another activity gain rewards.

Conversely, and in support of crony capitalism, an ethics of egoism could be mustered. Viewed from the perspective that whatever is best for me personally is also ethically recommendable, it’s hard to find fault with individuals in the world seeking to use all their resources—including friendships and discreet deals with government bigwigs—to succeed. An argument could even be made that if everyone simply accepted that we should all use every resource at our disposal, there might be a balance in the distribution of favors and underhanded advantages.

Regardless of the ethical defensibility of crony capitalism, there are important differences between it and a star system, at least a star system conceived in its purest form. The central contrasts:

• The concentration of income in the hands of a few within a working star system generally traces back to their professional talents, as opposed to their personal connections.
• The income concentration frequently results from an economic system allowing for successes to be transparently replicated on a tremendous scale, as opposed to sneaky, back-room deals.

An illustrative example of the difference comes from the top of the Forbes 400 list. The world’s two wealthiest individuals, according to the ranking, are Carlos Slim and Bill Gates. While everyone knows Gates, few people outside of Mexico have heard the name Carlos Slim, which isn’t remarkable given that he’s never invented anything, participated in the providing of an improved service, or even found a way to get typical goods and services to market more efficiently than anyone else. What Slim has done very well is pay off politicians.

In the early 1990s, Mexico, like many developing nations, was selling off inefficient state assets. One of them was Telefonos de Mexico (Telmex), the sole provider of telephone services for the country. Slim, together with a group of investors, bought the company in a shady deal (it’s not clear how much, if any, money the Mexican people received in exchange for the company their taxes built) and then got national legislators to grant them an effective monopoly. With no competition, the new directors of Telmex were free to charge whatever they wished for phone service, and they didn’t hesitate. They also didn’t bother investing in system improvements, so, until recently, multiline technology was not even introduced in the country. People and businesses who wanted to have more than one line had to have a second (or third, or fourth) line physically wired to their location. As the telecommunications industry around the world exploded—the demand for services including Internet shooting through the roof—people in Mexico had to wait for a crew to come out and run a wire. The wait was months or more. The people at Telmex were in no rush since their friends in the national legislature were busy assuring that no competitor could sweep in and take the client. The result, twenty years later, is that Slim is one of the world’s wealthiest individuals, and Mexicans pay among the world’s highest phone bills for abysmally poor service.

Except for the accrued wealth part, Slim’s story is completely different from Bill Gates’s. Though defenders of Apple enjoy pointing out that Microsoft’s Windows operating system came after, and looked suspiciously like the early Apple operating systems (almost as though it was a copy with just enough changes to claim originality), few deny that Windows, along with MS Office, have responded nimbly to consumer demands, and responded more skillfully than comparable offerings from competitors. And in a world where software can be mass-stamped as a small plastic disc or downloaded rapidly over the Internet, the Microsoft success has galloped across the economy: the Windows operating system along with MS Office almost immediately went to the extreme of creating a monopoly in America and elsewhere. No payoffs to politicians or other cronyism-stoking was necessary. The lesson is that in at least some parts of the interconnected world, quality differences (even small ones) between competing products can translate quickly into huge business success because consumers across the spectrum almost all make the same buying decision.

Something similar could be written about Walmart, as well as other companies. Though it’s true that the price difference between a Walmart cart of items and one from a competitor isn’t too great, the fact that there’s even an incremental difference quickly leads to a slaughtering of huge chunks of competition because there’s no difference between winning by a little and winning by a lot. In an interconnected world, most people hear very quickly that Walmart is cheaper, and overwhelmingly respond by going there. What’s important is that whether the company is Microsoft, Walmart, or a similar enterprise, market domination—along with the associated enrichment of a few individuals—has followed from genuine quality as determined by consumer decisions flocking together in an open market.

Both crony capitalists and the leaders in an economic star system build mountainous wealth, but the former do so at the cost of others by denying consumers choices or by short-circuiting the market’s natural functioning, while the latter do so by satisfying consumer demands and taking full advantage of a smooth-running market economy.

Do We Want to Want to Be Like the Stars? The Psychology of Envy

Though questions about envy—“What is it?” “What causes it?” “Is it OK to feel it?”—generally belong to studies in psychology, they’re inescapable in the economic world when a few participants have money flowing in so fast that it’s not worth the five seconds of their time required to bend down and pick up a twenty-dollar bill they dropped.

In sweeping terms, there are two broad emotional—as opposed to ethical—reactions to the hyperrich and the question about whether the rest of us want to be like them. The first response is, “Yes, obviously.” This makes sense. Most of us have lists of consumer goods we’d like to buy—an iPad, a new dress, a vacation trip—and it’d be nice to swipe the credit card without worrying about the balance. This reaction, it should be noted, isn’t just a pleasant thought: it may also contain traces of envy or, stronger, of resentment and even anger. Anyone who internalizes what it would mean (and how great it could be) to receive a wage that exceeds by thousands of dollars per hour the one we currently get, is going to be vulnerable to disliking or even hating those who have so much more.

The other way to make sense of the star system’s vast wealth disparities comes from a proposition on the subject found in Aristotle’s Rhetoric, book 2, chapter 10. There, Aristotle proposes that envy of others decreases as their distance increases. These distances may include years: few of us envy the medieval kings and queens of Europe. We know they had servants waiting on their every desire, but that doesn’t make us want to be them or get angry at their privileged lives. No one’s mad at Henry VIII; he’s just someone we see portrayed on the History Channel. Alternatively, the distance separating us from others who have more than we do could be measured in space and culture. We feel less envious of those people we hear about who may be tremendously wealthy but who live in some far-off place we’ve never visited and speak a language we’ll never understand. We may read about their exotic lives in a magazine, but it doesn’t affect us emotionally. Finally, the distance can also be economic: Aristotle’s proposition is that the hyperwealthy—Bill Gates, Warren Buffett—are so far away from us that we don’t feel stung and angry when confronted with statistics about their wealth. Their lives are just too different to relate with.

We only sense envy, Aristotle affirms, for those who come from similar backgrounds, for those who desire and chase similar things, and for those whose economic and social status isn’t too far above our own. We need, in other words, to already be like others in some ways in order to want to be like them in others. For this reason, it can drive you crazy when your next door neighbor gets a sparkling Mercedes, but when a Saudi prince buys his seventh Rolls Royce, you don’t bat an eye.

Why is envy distance limitedAs a conception of envy, the idea that we only feel jealous of those who are like us in important ways.? According to Aristotle, when those who are like us end up getting more than we do, it’s a reproach to us: it’s our fault that we didn’t get the promotion or the better-paying job at the start-up company. If we’re like our neighbors in most every way except for the fact that they’re bringing in more money, that means we somehow blew the chance to get that much ourselves.

Finally, these two very different reactions to astronomically wealthy members of our society have important consequences for the ethical verdict reached about the star system. One of the criticisms launched at modern economies characterized by extreme wealth disparities is that the disparities poison society with rancor and envy. No matter, the argument goes, how positive the inventions of a Bill Gates may be, the social welfare his work generates is cancelled by the sourness and resentment his personal wealth creates. If that’s true, then maybe we should impose limits on the economic success of individuals.

On the other hand, if Aristotle is right and we don’t rage when we find ourselves dwarfed by giant wealth, the star system becomes much easier to justify on the grounds that the prospect of endless money incentivizes people to invent goods and services that make all our lives better.