Wages, Capitalism, And Morality: Part II

Wages, Capitalism, And Morality: Part II

Leoxiii(Note: Part I documented that the minimum wage harms the very people it is designed to help and the popular alternative—letting capitalism work, unencumbered by regulations—encourages practices that cry out for reform. It concluded by suggesting that a new approach is needed, one based on a discipline that economists seldom consult—ethics.)

The division of knowledge into particular fields of study and the tendency to narrow specialization within each field have led many scholars to assume that nothing outside their disciplines is relevant to those disciplines. That is a mistake that narrows their perspective and deprives them of valuable insights. Some areas of knowledge have important applications in most disciplines. The most obvious example is logic, which concerns the quality of our thinking about all subjects. Another is ethics, which concerns the quality of our treatment of others in the widest array of contexts.

The subject of wages is not merely economic or political but also, and more fundamentally, a matter of ethics. Accordingly, the principles and criteria of ethics should inform any discussion of it.

The fundamental principle of ethics is respect for persons. Historically, three criteria have been associated with that principle: obligations, ideals, and consequences. Thus, an ethical action may be defined as one that demonstrates respect for persons by honoring relevant obligations and ideals and producing desirable consequences.

One moral ideal has received much attention in recent decades, the ideal of justice, particularly in what has come to be known as “social justice.” This term, unlike the original term “justice,” is linked to an expansive view of rights. For example, the right to pursue prosperity is inflated to the right to be prosperous. That perspective has led to programs for the “redistribution of wealth” and assertions such as this from President Obama: “If you’ve got a business, you didn’t build that. Somebody else made that happen.” That statement is a great oversimplification because it takes all credit for success away from the individuals most responsible for it.

Had the President been thinking more clearly, he would have said, “You didn’t build it alone but had help from others.” This assertion would have been a valuable reminder of the role of mutual, complementary effort in the success of most large enterprises, rather than a derogation of initiative.

To apply ethics to the question of wages, we should avoid the extravagant claims of “social justice” concerning rights and entitlements. One way to do that is to recall Pope Leo XIII’s prescient argument in Rerum Novarum (1891) that the key to overcoming the disparity between rich and poor is not to take away from some and give to others, which “neither justice nor the common good allows,” but instead to provide opportunity to all.

A central theme of Leo’s encyclical was that giving alms to the poor is a requirement of charity rather than of justice. In other words, the reason for giving to those in need not that we have a specific debt to them but that doing so is an act of loving kindness, a way of living the Golden Rule and treating the poor as we would be treated.

The subject of this essay, of course, is not about our treatment of the poor but, instead, about employers’ treatment of employees. Even so, a similar argument to Leo’s can be made here: Sharing the fruits of an enterprise with all who play a role in producing those fruits is a matter of fairness rather than of justice. The value of this argument is that it escapes the progressive expansion of entitlements and focuses on what should be done rather than what must be done.

Fairness is also an ethical ideal, of course. Like justice, it signifies nobility of spirit and is therefore desirable. But unlike justice, it does not concern people’s rights, so it is not something that government can be expected to guarantee.

Some people object to the idea that workers should be allowed to share in their companies’ profits because they regard the problem solving and decision making of management as of a higher order than the tasks done by the workforce.

Pope John Paul II offered an interesting challenge to that way of thinking in Laborem Exercens (1981) He suggested that the word “dignity” in the often-used phrase “the dignity of work” refers to an inherent quality of the person performing the work rather than to the work itself.  He went on to say, “The basis for determining the value of human work is not primarily the kind of work being done but the fact that the one who is doing it is a person.” And he added, “Such a concept does away with the very basis of the ancient differentiation of people into classes according to the kind of work done.”

If John Paul was correct in asserting that it is the worker who brings dignity to the work and no job has more dignity than any other, then it is reasonable to conclude that the scale of compensation in a company should reflect this reality. Of course, CEOs, directors, and other executives carry greater responsibility than other employees and their performance has a more profound impact on the company’s fortunes than does the performance of other employees, so they should receive greater compensation.

The question is, what is a fair scale of compensation? As I noted in Part I of this essay, in the United States CEO compensation is on average 63 times greater than that of the average worker, whereas in Japan it is only 16 times greater. Which better reflects the ideal of fairness?

Board of directors’ compensation in the US is less that that of CEOs but still impressive. According to mercer.com, the total direct compensation in 2011 was, on average, $216,700. Some individuals, it should be remembered, serve on more than one company’s board, so a person who served on three boards would make about 12 times the compensation of the average US worker and more than the average Japanese CEO. (According to Professor G. William Domhoff, “about 15-20% of corporate directors sit on two or more corporate boards” and fewer serve on “three, four, five, or six boards.”) According to salaryexplorer.com, the compensation of “executives and management” below the level of CEO is on average $93,500 a year, or roughly 1.7 times the compensation of the average worker.

I submit that, in light of the concept of fairness discussed above, US executive/management compensation is reasonable, board of directors’ compensation is overly generous, and CEOs’ compensation is clearly unfair. In fact, if we make the salary comparison not with the average worker’s salary but with the twenty-five percent of US workers who earn $11.06 or less per hour, CEO compensation is not 63 times higher but slightly over 120 times higher!

Now for the most difficult question of all: How can the unreasonable disparity in compensation be significantly reduced without creating other, perhaps more serious, problems? The following ideas are intended to provide, not a definitive answer, but only a helpful starting point for a much-needed discussion:

  1. Three lessons of the last century and a half must be clearly understood. One is that management, when unrestrained, tends to take advantage of labor. Another is that government is generally inefficient, often to the point of profligacy, in running anything. A third is that labor unions are a blessing at first but soon become a curse—that is, they begin by making reasonable demands but, when those are achieved, they then proceed to make unreasonable ones. (Ideally, unions would be formed when the need for them arises and then disbanded once they achieve fairness for their members. But it is hard to imagine that such a system could ever be implemented.)
  2. Because overcoming the disparity in compensation is a matter of fairness rather than justice, it should be voluntary rather than compelled by government, as the minimum wage is. However, governmental policy can encourage companies to choose fairer policies and reward them through tax credits when they do.
  3. Programs to achieve fairness should reduce the compensation of CEOs and directors and increase the compensation to low-wage employees, especially those who have been with the company for a period of time, as opposed to those newly hired. The model for such programs might be the 16 to 1 ratio of Japanese companies or, instead, a slightly more generous ratio of 20 to 1. The latter would mean an annual compensation of slightly over $1 million for US CEOs, which would yield, on average, $2.5 million dollars for distribution to low-paid employees. Cutting directors’ compensation by half—that is, to roughly $108,000—would add to that total. (Of course, smaller companies have fewer (if any) directors and their compensation is usually far less than the figures cited above.) The specifics of distribution will vary among companies according to their individual circumstances and may, for example, take the form of salary increases, bonuses, profit sharing, or matching 401K contributions. In cases where higher salaried employees already enjoy such benefits, the benefits to low-wage employees can be formulated so that higher salaried employees retain their advantage.
  4. In publicly traded companies, programs aimed at increasing fairness should in no circumstance compromise the rights of investors, for example by reducing their dividends. Neither should such programs, regardless of the size of the companies, be allowed to inflate the pricing of products. The sole aim of any fairness program should be to overcome unreasonable disparity in employee compensation.
  5. The federal government should pass legislation providing a tax credit to any company that adopts and maintains a compensation fairness program. The credit could, perhaps, be structured as a deduction, much like the deduction available for research and development, and it should be generous enough to motivate companies to embrace the concept of compensation fairness. (Lawmakers need not fear a substantial loss of revenue because the additional taxes received from workers will make up for much of the loss in CEO taxes. Granted, workers are taxed at a lower rate than CEOs; however, they do not have access to the kinds of loopholes used by executives to reduce their tax liability.)

Well-designed programs of the kind I have outlined in this essay will not only move American business closer to the ethical ideal of fairness in compensation. It will also help to overcome the common perception that capitalism is a heartless system unconcerned about workers as human beings. Although that perception is largely a stereotype fostered by socialism and communism, there remains in many cases an uncomfortable measure of truth in it.

Finally, such programs will tend to inspire in workers a new respect for, and loyalty toward, their employers—sentiments that could in time lead to a new and most desirable kind of solidarity, not just between worker and worker, but between workers and management.

Copyright © 2013 by Vincent Ryan Ruggiero. All rights reserved

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Vincent Ryan Ruggiero