Wednesday, January 4, 2012

Income Inequality

The Harvard Business School runs a website called “Working Knowledge.” The site has links to current research and thinking at the Harvard Business School. One of Harvard’s professors, Jim Heskett, asks a question on the site each month for the readers to comment on. This month’s question was on Income Inequality.

Although the article discussed the question in more detail (you can see the full question and all the responses here), the shortened version of Prof. Heskett’s question went like this:

“Does income inequality promote or stunt economic growth? Inequality can serve capitalism as an incentive, but too much of it is not good for markets...What's the right amount of income disparity?”

I thought I'd share with you my answer to his question.

Three Short Stories come to mind:

1. I was talking to a top executive of Enron shortly before their collapse. I said that Enron had a reputation for working its employees through insanely brutal hours and pressures--all for a potential shot at insanely high stock options. I asked if they had trouble finding people to put up with such a harsh work environment. I was told that they had lots of applicants, especially from investment bankers.

2. I saw a survey once which asked investment bankers if they would stay in the profession if their insanely high levels of compensation went away and they got more "normal" wage levels. Somewhere around 75 to 80% of the investment bankers said they would leave the profession under those circumstances.

3. I was to interview for a job at one of the largest banks in the US shortly before the banking collapse. The headhunter wanted to pre-screen me because she said the bank had "a particular culture" which is not a good fit for many people. In the course of the pre-screening it became apparent that the "particular culture" was people focused on greed, status and conspicuous consumption.

And of course, Enron, the banking industry and investment banking have since gone into terribly poor situations. As Willie Sutton said, he robbed banks because that was where the money was. In the same way, modern-day "robbers" seek out jobs with obscenely high rewards (where the money is). And they leave destruction in their path.

What you want is people running businesses because they want to run that business. If they are only there for personal gain and really do not care about the profession, then you get the Enron and banking collapses. Pay less and you only get the people who want to be there and want to serve (rather than those who are bribed to be there—and would not otherwise be there).

What is that amount? It varies by person. The idea is to look at when motives switch from serving to grabbing.

An executive at a company told me they had to pay such high salaries in order to get that caliber of executives. Since I was not impressed by the caliber of his executives, I responded, "Does that mean that if you paid less, you'd get a different—and better—caliber of executives?" I still stand by that statement.

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