Executive Pay and Donald Trump.

IB BUSINESS & MANAGEMENT AND IB ECONOMICS.

From ‘Brexit’, to the election of Donald Trump as US president, a number of recent world events have surprised and shocked many people.

Can we link anything on the IB Economics and IB Business & Management syllabuses to these profound changes in politics, society and economics? Can business and economics explain anything about these happenings?

Of course it can!

Let’s look first at executive pay (Section 2.4 of the Business syllabus, salaries and remuneration) . As Ha-Joon Chang points out in his masterly book “23 Things They Don’t Tell You About Capitalism“, the salaries (or more accurately the compensation packages) of senior US company executives has increased dramatically over the past few decades. In Chapter 14 of his book, “US Managers Are Overpriced”, Chang produces some astonishing statistics to back up his claim in the title of the chapter. He says that in the 1960’s the ratio of CEO compensation to average worker compensation used to be in the region of 30-40 to 1; in the 1990’s this ratio rose to about 100 to 1, and in the 2000’s to an astonishing 300-400 to 1 (P150).

How do economists explain such a huge rise in executive pay in US corporations? Demand and supply of course!  (Section 1 of the syllabus, Microeconomics) The reason why executive salaries have risen so high, they say, is that the demand for such skilled and able managers far exceeds their supply . Companies have to pay these managers such high salaries because,  if they don’t, they would be poached by their competitors. Moreover, these high salaries just reflect the ‘ contribution’ (read productivity) that these executives give to the companies that employ them.

Chang comprehensively debunks this argument. He points out that it is mainly neo-classical, or free market economists (Section 2 of the syllabus, Macroeconomics), who believe this. US Executives would have to be ten times more productive than equivalent personnel just a generation ago and this is extremely unlikely (P151).

Moreover, why have average US worker wages remained stagnant? Is this because their productivity has remained unchanged over the past two or three decades? Again highly unlikely, says Chang (P152).

Average hourly US wages have remained stagnant since 1972. Source: Economic Policy Institute, “Wages and Compensation Stagnating,” 2011, based on Bureau of Labor Statistics data.
Average hourly US wages have remained stagnant since 1972. Source: Economic Policy Institute, “Wages and Compensation Stagnating,” 2011, based on Bureau of Labor Statistics data.

Chang also points out that US executives, in comparison to their foreign counterparts, are excessively paid. In 2005, Swiss and German CEO’s were paid 64 and 55 percent of their US counterparts’ salaries; Swedish and Dutch CEO’s were paid 44 and 40 percent respectively, and the Japanese a measly 25 percent (P152).

So what has all this got to do with the election of Donald Trump? A lot. Trump ran on a ticket saying that he was going protect the American middle classes and the jobs of working class Americans. He fed off the justifiable anger that many middle class and poor Americans feel about the stagnation of their wages and the consequent fall in their living standards.  He used the language of ‘them and us’ –  it is us against the ‘global elite’.

Source: Congressional Budget Office, Average Federal Taxes by Income Group, “Average After-Tax Household Income,” June, 2010.
Source: Congressional Budget Office, Average Federal Taxes by Income Group, “Average After-Tax Household Income,” June, 2010.

The diagram above shows how the after-tax income of the richest one percent of the US population has increased dramatically since 1979, while the income of the poorest twenty percent (or poorest forty percent)  has hardly changed. 

Who is this ‘ global elite’? According to Chang, it is composed of super-wealthy business executives, who for years have paid themselves bigger and bigger salaries and better and better compensation packages at the expense of their own employees (and indeed of their own citizens and  own societies).

“ The power of this managerial class has been most vividly demonstrated by the aftermath of the 2008 financial crisis. When the American and the British governments  injected astronomical sums of taxpayers’ money into troubled financial institutions in the autumn of 2008, few of the managers responsible for their institution’s failure were punished. Yes, a small number of CEO’s have lost their jobs, but few of those that have remained in their jobs have taken a serious pay cut…” (P155).

Sources of the diagrams: http://keepthemiddleclassalive.com/

Author: Mark

I was born in a developing country in Africa (Malawi), and have spent over 15 years living and working outside the UK as a teacher in international schools. I currently live and work in beautiful Brazil, the land of bright sunshine, amazing tropical beaches, dazzling football, eye-wateringly strong caipirinhas, and the sensual rhythm of samba.