0.4 Income distribution  (Page 18/18)

A second reason offered by Piketty for growing inequality of income is sharply increased compensation (“supersalaries”) for the working rich. However, the author presents scant quantitative evidence to support this claim.

In past centuries, the prime reason for inequality in income distribution was the pronounced inequality of wealth: the growth on assets of the rich and powerful, especially the emergence of high remuneration of the summit of the wage scale, Piketty, Capital in the 21st Century , p.___ in particular top managers of large firms, the “working rich”.

The growing assets of this group, according to Piketty (land, bond holdings, ownership of enterprises) generated high returns for them, while the working poor, and middle income families possessed little wealth.

Not prominently mentioned among the “working rich” are stars of show business (from movies to music to T.V.) and top professional athletes also have reaped unusually large compensation since about 1985. Paul Krugman (2014, September 30), “Taking a True Picture of our Invisible Rich, Houston Chronicle . The view that supersalaries have been significant in driving inequality is shared by economists such as Paul Krugman and Robert Solow Robert Solow, June Lecture, Lexington, MA. Solow calls the phenomenon the growth of “supersalaries”. . [MG See Wall Street vs. Main Street]

“Supersalaries” of the rich have indeed grown rapidly in the past 20 years. Total CEO salaries (and stock options and other benefits) in 2012 was $52 billion for the Fortune 500 largest firms. For the 500 largest firms in the U.S. (the Fortune 500 firms), average salary of CEOs was $8.5 million in 2010. By 2012, average salaries in the 500 largest firms were $10.5 million; of the $10.5 million average CEO “salary” in the largest 500 firms, $3.5 million was salary and bonuses, $3.2 million from exercising vested stocks (stock options) and $3.8 million “other” ( Forbes Magazine ). The highest paid was the CEO of McKesson, who earned $6.3 million in salary plus $112.0 million from exercising stock options. This amounts to less than one-half of one percent (0.4%) of total personal income in the U.S. in 2012, hardly large enough to constitute a major cause of rising inequality.

However, not all very highly paid executives are employed by the largest Fortune 500 firms. Consider Hedge Funds of the largest 500 firms the 391st largest is Blackstone, which is not wholly a hedge fund. In any case, the claim has been made, the top 25 hedge fund managers received compensation on average, of almost $1 billion each. Source: ___________ If so, their earnings of this group would have received almost $25 billion. Thus the total of salaries paid to CEOs of the 500 largest firms and that paid to the top hedge fund managers would be $77 billion, or about 0.6% of personal income.

And if the total compensation of professional athletes (football, basketball, soccer) and all motion picture, T.V. and music stars Paul Krugman, “Why We’re in a New Gilded Age”, (retrieved from http://www.nybooks.com, May 8, 2014) were as much as CEO compensation for the Fortune 500 firms, then all the “supersalaries” for these CEOs, plus the top 25 hedge fund managers would amount of $129 billion or about 0.09% of personal income.

And if the total 2012 payrolls in all professional athletics (football, baseball, basketball, soccer etc.) and all motion picture, T.V. and music stars Top linebackers and defensive ends in the U.S. National Football League (not to mention quarterbacks) routinely earn between $20 and $40 million annually. Television stars in popular sitcoms earn up to $40 million or more per year. And in 2013 two country music stars each made in excess of $33 million. The total payroll for the 10XXXX According to the Wall Street Journal (September 31, 2014) major league baseball teams was $105 million. Fifteen of the players on these teams with contracts greater than $100 million. was also as much as 0.4% of personal income then these “supersalaries” would have, together with CEO salaries, and hedge fund rewards accounted for less than 1% of total personal income.

Piketty, Piketty and Saez, Piketty&Saez, 2001. Krugman and others attribute the rapid growth of CEO salaries in large firms to governance issues in U.S. business firms. They argue that Boards of Directors are too timid to resist extravagant CEO salary demands. In Piketty’s book, Capital in the 21st Century, he states that the reason that highly paid corporate CEOs pay themselves so handsomely is because they can, given weak governance, especially by Corporate Boards. Piketty and others make little or no mention of skyrocketing compensation of athletes, and entertainment stars. Supersalaries and superearnings for professional athletes have been largely to the rapid growth in television payment especially in professional football, basketball and baseball.

A 2014 study by economists from the University of Cambridge and the Hong Kong University for Science and Technology questions the claim that generally CEOs are grossly overpaid.

Their study of the “pay premium” in compensation of American senior corporate objectives covered 149 firms from 1991-2008. The measure used in the study was the changes in firms’ share value when the CEO or other very senior executives die suddenly. The authors posited that when an overpaid CEO dies, investors will expect his successor’s pay fall to erase the “pay premium”, and will therefore bid up the company’s shares. See “The Final Reckoning”, Economist, September 6, 2014. By their measure, 42% of the senior executives were not overpaid. Indeed, those with the highest compensation were found to have boosted their company’s stock market value by at least the amount of the pay premium. There are unquestionably egregious examples of inflated CEO salaries. A case in point was the CEO of Cheniere Energy, based in Texas. The CEO’s executive compensation in 2013 was $142 million, including stock grants and salary. This was the highest CEO salary in 2013. This was 46 times the salary paid to peer CEOs, about 5 times that of CEO pay for energy giant Exxon. It is notable that shareholders voted 53% to 47% against Cheniere, but the vote was non-binding. It is also interesting to note that the company’s shares increased from $3.09 in January 2010 to 84.46 on September 18, the day the salary was announced. This amounted to an increase of 27 fold over 4 years. Source: “Cheniere Shareholders Say No on Pay” (2014, September 19), Houston Chronicle .

While “supersalaries” may have contributed marginally to a widening income gap in the U.S., this source of income inequality was even less evident in Europe, partly because of governmental and private pressures to restrain tendencies toward escalating salaries for CEOs. Nor is there, to date, any plausible evidence suggesting that supersalaries have been significant in emerging nations in increasing inequality.