Earlier this month, Jeff Bezos posted a Ralph Waldo Emerson quote to Twitter, writing: “Love this quote. It’s been on my fridge for years, and I see it every time I open the door. #Emerson.” The quote reads: “To leave the world a bit better, whether by a healthy child, a garden patch, or a redeemed social condition; To know even one life has breathed easier because you have lived. This is to have succeeded.”
The backlash from the Twitter mob was swift. “Beautiful passage. Pay your employees a living wage, Jeff,” one user tweeted. Another replied with a link to a news story: “Amazon puts 7,000 jobs on hold because of a tax that would help Seattle’s homeless population.” A third said: “Here’s a quote: your employees should be unionized.” As the likes and retweets snowballed by the tens of thousands, so did the righteous outrage. “You ‘earn’ your average employee’s yearly salary in 10 seconds. Tell us all about redeeming a social condition.” “How much do guillotines cost on Amazon? Asking for a friend.”
With his stratospheric power and wealth, Bezos is hardly your average CEO. But the reaction to his tone-deaf tweet should echo in the ears of corporate leaders everywhere. After decades of sluggish wages, Americans are losing patience with the robber barons of capitalism. As one user gamely tweeted, we are tired of “the humble bazillionaires” who “won’t pay their employees or their taxes but are virtue signalling to everyone else on how to improve the world.”
The uproar also hints at something deeper: what FT columnist John Authers has called “a toxic national mood of disaffection” with capitalism itself. Frank Luntz, a right-leaning pollster, agrees. Speaking before a business-friendly audience at the Milken Institute this month, Luntz said words like “metric”, “process-driven”, and “capitalism” all now come with negative connotations, implying you put profits over people. The word “CEO” can inspire fear and loathing: “They’re the people who fire you,” Luntz quipped.
Luntz advised his audience to avoid these words altogether, or risk alienating the public. He tweeted: “‘Capitalism’ is becoming a dirty word, as more Americans see it as greedy CEOs ripping off working-class people.”
Young Americans have especially soured on capitalism. In a Harvard University poll conducted in 2016, 51% of 18 to 29 year-olds in the US said they opposed capitalism; only 42% expressed support.
We quote Grayson Sussman Squires, a college student interviewed by Bloomberg: “I’ve seen the failings of modern-day capitalism. The notion of a well-functioning capitalist order is something recounted only by older people.”
The latest figures on CEO pay will only confirm these perceptions. According to the WSJ’s annual analysis of pay for S&P 500 leaders, median pay reached $12.1 million for CEOs of the biggest US companies in 2017. That sets a new post-recession record, as corporate profits and stock prices soar. In the US, S&P 500 companies boosted their earnings in the first quarter of 2018 by more than 26% compared with a year ago, according to Thomson Reuters.
At the other end of the spectrum, American wages grew a meager 2.6% year-over-year, according to last week’s jobs report. That amounts to an additional $230 a year for the average worker (see WILTW May 10, 2018).
The WSJ’s analysis teased out other inequalities. For instance, CEOs working in industries dominated by just a few companies—namely, pharmaceuticals, media, technology, and finance—took home some of the largest paychecks, dominating 16 of the top 25 pay ranking spots. If these numbers are accurate, this suggests a clear correlation between industry consolidation and outsized CEO pay (see WILTW January 19, 2017). As an example, six corporations now control 90% of the media in America, down from 50 in 1983. Les Moonves, chairman of CBS, took home $69.3 million in 2017, despite a negative shareholder return of 6.2%.
Moonves is hardly an outlier in terms of mismatched pay and performance. In a study published last week in the journal of Management Research, researchers analyzed the earnings of 4,000 CEOs over the course of their tenures against numerous performance metrics. They found that “CEO pay and performance were decoupled”, with practically no overlap between the top 1% of CEOs in terms of performance and the top 1% of highest earners. Among the top 10% of performers, only a fifth were in the top 10% in terms of pay.
“Stars are often underpaid, while average performers are often overpaid,” said Herman Aguinis, a professor of management at George Washington University School of Business who co-authored the study.
But it is employees who actually suffer. Recent research from economist Simcha Barkai shows that rising corporate power robs workers of roughly $14,000 in income per year.
Stock buybacks, and the move towards stock-based compensation, further drag on wages. S&P 500 companies that reported earnings for Q1 of this year have already bought back $158 billion of their own stock, according to S&P Dow Jones Indices. That sets a new high for any quarter going back to 1998.
Meanwhile, as Nick Hanauer observed in The Atlantic, “the shift towards stock-based compensation has helped drive the rise of the 1 percent by inflating the ratio of CEO-to-worker compensation from 21-to-1 in 1965 to about 300-to-1 today.”
Bezos has been one of the biggest beneficiaries of stock-based compensation. Despite ranking as one of the lowest paid CEOs, he is worth an estimated $132 billion as of this month, thanks to a sharp rise in Amazon’s shares. While the median Amazon employee’s salary is $28,000, Bezos often makes more than that in 10 seconds—about $275 million a day, according to the Bloomberg Billionaires Index.
What are the solutions? Can the market be trusted to correct itself, or has capitalism, as it functions in the US and other parts of the developed world, broken the economy? We quote Authers, who argues convincingly that profit growth will likely continue to outstrip wage growth, unless populist politicians intervene:
If capitalism really is a dirty word then there is a chance that direct political action could peg back corporate profits. Such an event is unlikely in the US before 2020 at the very earliest, but the rise of harder leftwing parties elsewhere, particularly the UK Labour party of Jeremy Corbyn, might act directly to cut profits.
In the U.S., Sen. Bernie Sanders has unveiled a bill that he says will boost the nation’s sagging wages by restoring power to the unions and protecting gig economy workers. Sen. Cory Booker has introduced a bill that would curb buybacks by requiring companies to give workers a slice of the profits. The Economist recently argued that Karl Marx’s ideas are “more relevant today than they have been for decades,” despite their catastrophic history. “Most American workers say they have just a few hundred dollars in the bank. Marx’s proletariat is being reborn as the precariat.”
Meanwhile, John Della Volpe, polling director at Harvard, has said of millennials and capitalism: “They’re not rejecting the concept. The way in which capitalism is practiced today, in the minds of young people—that’s what they're rejecting.”