Isn’t it okay to be just rich and not filthy-uber-super-disgusting rich?

One time when I was in elementary school, my teacher asked us what socio-economic class we thought we belonged to. We lived in one of the richest suburbs in our state, and yet almost all of us said we were either “middle-class” or “upper-middle-class.” No one said “I’m upper-class,” but our teacher insisted anyone living in our town was by definition upper-class. Where did we get this idea that we’re “only” upper-middle-class? Even though relatively few people in the world make over US$120,000 per year for one household, the people who do just make that mark don’t often have a yacht, a second home, a third home, or an exclusive country club membership. They are rich compared to most people, and they live very comfortably, but they can’t just spend money without thinking. Everything at that level still has to be budgeted.

Beyond upper-class… I don’t know what you’d call it—aristocracy?… there are the folks who just make such an insane amount of money that the interest they make on that money is more than most people make in a decade, donating mind-boggling sums of money actually makes them money in tax breaks, and hiring full-time employees (personal assistants, housekeepers, chaffeurs) does not even make a small dent in their savings.

Why is life like this? We’ve all heard the expression the rich get richer and the poor get poorer. I’m not trying to espouse communism here. Not everything has to be equal. But does the difference between the haves and the have-nots have to be so huge? Right now the disparity seems more painful than usual as we see politicians trying to balance budgets by cutting salaries and jobs of government employees who are barely making it while not giving themselves similar salary cuts, and as we see failing corporations giving bailout money to their top execs while laying off thousands of low-level employees.

These tough economic times got me thinking about the tour I took of the Ben & Jerry’s ice cream factory in Vermont. Before you take the tour, they show you a little video about the history of the company. I don’t remember all the details. One thing stuck in mind, though—the attempt Ben & Jerry’s initially made to prevent this ever-widening wealth gap. For years, they had a policy that the highest-paid employee could not make more than five times what the lowest-paid employee made. Of course, in 1994, they dumped that to be competitive in hiring a new CEO. I find that sad. I like the idea of no employee being paid more than five times another employee. I mean, the highest paid employee is still the highest paid, right? And not just the highest, but five times higher than the lowest. Just think how much better things would be if all companies took this approach.

Let’s look at a hypothetical scenario. Let’s say a company has 500 employees with 10 earning an average of $10 million per year, 20 earning an average of $1 million, 25 earning $500,000, 75 earning $100,000, 170 earning $50,000, and 200 earning an average of $25,000 per year.

If the $25,000-a-year employee works 50 weeks out of the year (let’s say there are two weeks of vacation), that’s about $100 per day… before taxes. In this hypothetical scenario for this hypothetical US company, almost half of the workers are pretty close to the poverty line (the poverty-line salary for a 4-person family in 2009 is supposed to be $22,050), with 2% of the company living in the lap of luxury. If you make $10 million a year, you can easily send all your children to private school, you can have fancy cars for everyone in your family, you can own several homes, you can travel often and eat dinners out often, you can donate to charity, you can buy things at auction… and you still probably have plenty leftover.

Something’s wrong with this picture. This is the picture of a company that has the highest-paid employee making 400 times what the lowest-paid employee makes.

But what if we took the same amount of salary money and distributed it so that the highest-paid employees earn 5 times what the lowest-paid employees earn? Let’s say 10 employees make an average of $1 million per year, 20 make $900,000, 25 make $750,000, 75 make $380,000, 170 make $225,000, and 200 make an average of $200,000 per year.

In this new scenario, the highest earners still outearn the lowest earners. $1 million per year is nothing to sneeze at. You can live a very comfortable lifestyle with that kind of salary. And the best part is that the lowest wage earners would be earning the median income in the upper-class town I grew up in.

If this kind of approach were the norm, instead of having the rich and the poor, we’d have only the rich and the richer.

Of course, I know I’m naive. All the economics majors out there are going to say “You don’t understand. This system isn’t sustainable. With the highest earners making only five times what the lowest earners make, there’s little incentive for the best CEOs to go to this company. They’d all go to a company that would pay them more.” Well, it couldn’t just be one company that does it. It’d have to be a bunch of companies, and they would have to “sell” the new scheme to any potential employees. There’d have to be a movement behind it, a snappy name for it, like “organic, locally grown food” or “fair trade coffee.” The idea would be that this is for justice. It’d be like Google’s “Don’t be evil” motto… but for real.

And it doesn’t even have to be this extreme. I was using a hypothetical example going from 400 times higher to only 5 times higher. What if it went from 10,000 times higher to only 100 times higher? In some ways, salaries are a zero-sum game, but the economy and living do not need to be. If everyone can have the basics (food, health care, shelter, and education), I’m fine with a handful of people having more. Right now we don’t have the basics, though. We have a handful of people getting paid billions of dollars and then putting hard-working minimum wage folks out of jobs.

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8 Comments

  1. “Right now the disparity seems more painful than usual as we see politicians trying to balance budgets by cutting salaries and jobs of government employees who are barely making it while not giving themselves similar salary cuts, and as we see failing corporations giving bailout money to their top execs while laying off thousands of low-level employees. ”

    165 million dollars of bailout money is ultimately less money than thousands of low-level employees. A bonus is for now, a liability is for many years. :-)

    At the moment, I am straddling the poverty line, but I have absolutely no problem with the current arrangement of things. People are paid $n+1/year, where n is a ridiculous number, for a good reason. It reflects supply and demand. Even in a totally communist system, supply and demand exists, except with the additional burden of trying to allocate resources without a price system. There’s no getting away from it.

    And you absolutely do have to competetive in hiring a new CEO, especially with a company like Ben & Jerry’s. I’m not sure how much they’re worth, but I know they’re owned by unilever, who have to handle 40,000,000,000 GBP a year. Could you imagine having to manage all those resources? It’d be a nightmare.

    A person with the ability to handle all that and more importantly, with the experience to back it up, would be in ridiculously high demand – and in any competetive market, you can bet they’ll be priced fairly. :-)

    (Interesting stuff nonetheless. You’re always a good read, aysiu. Keep up the good work – I hope the great market in the sky prices your services fairly. :-))

  2. back in the day, it was unionisation that brought some modest levels of pay equity to our labor markets. today, unions seem to have a bad reputation and nobody is interested in unionising our newer industries.

    if things get bad enough, i think people will organize again. i’m afraid that these things happen in cycles and it will take a majority (or a large enough minority) of people feeling uncomfortable before the revolution comes. (-:

  3. Ultimatly getting rich happens not by how much you get paid but by what you do with the money after you get it. If you save with every paycheck and don’t use credit for anything eventually you will be rich no matter how much you make.

  4. Over here in the UK, you cannot become upper class by being fabulously rich, or living in the right district, though both are common by products. It’s principally about hereditary. You can drag yourself up from the slums, become a multi billionaire, get a knighthood and rub shoulders with royalty, but you will still be a working class boy who made good.

    Another thought – it is the actions of some of these highly paid “best” CEOs on both sides fo the Atlantic, who are responsible for the economic mess we find now ourselves in.

    Final musing – to the families in the gutters of Mubai even a fraction of $22,050 pa would be a fabulous fortune. Somewhere along the line we lost our way. See Jesus’ radical teaching in Matt: 6 v 19-34

  5. I know it’s late, but this has been on my to-read “list” in my feed reader for a while. Finally getting the time to go back and read things.

    I also am not one to say “I know the answer” to this, but there are issues that cannot be solved without a large lump sum of money coming from one place. With more equal pay, there would be no one who could fund expensive research that the government refuses to fund. Space-X and other similar ventures (expensive and/or experimental new industries, projects, and other things that definitely help the world) that would be unable to exist without extremely rich people funding them. There would need to be too many people to agree with how to run things and what the goals are. Having one person with all the money guide things helps it go smoothly.

    With the increasing gaps between rich and poor, the poor also get dragged up as well. It’s a consequence of the exponential distribution (well, really, that as the poor get richer the richer get richer faster). Poor people today are at least a magnitude richer than poor people a century ago.

    I’d recommend reading Paul Graham’s essays[1] for more insight.

    This is anecdotal, since I do not know the source, but my one professor stated that personal “fun/dollar” from income levels off after $300,000 a year since the time it takes to make anything past leaves even less time to enjoy it. This does not mean that it should be a ceiling since the former argument still stands.

    From the same professor, and also without a hard source, CEO:worker income ratios:

    USA: 300
    Europe: 30
    Japan: 3

    Anything more (at least in Japan) and the exec is shunned from exec groups. Honor code at work I assume.

    @Eric: Most people wouldn’t live long enough.

    [1]http://www.paulgraham.com/

  6. Having a huge disparity between the wealthiest and the poorest is actually very bad for everyone, but especially the rich themselves.

    I was in Guatemala peacekeeping with the UN in the late 1990s. There the richest 1% of the population owned 99% of the country’s wealth and land, leaving most of the rest as very poor. The rich had to live in gated villas and estates, with guards armed with machine guns and walls topped with electrified barbed wire everywhere. They had to travel mostly by helicopter, as did their children, to avoid assassination and kidnapping attempts.

    In the neighbourhood where we stayed in Guatemala City one rich man had been shot and killed by his own hired guards. I guess he didn’t pay them enough.

    That was just the small stuff however. When I was there the country had just come through a 16 year civil war because the obscene wealth disparity had resulted in a popular communist guerrilla uprising that took all the government’s resources to contain. I was there as part of the UN force overseeing the subsequent ceasefire to the civil war.

    In many countries the rich live like zoo animals, caged in and guarded, afraid to go out lest the poor, whom they have created by hoarding so much wealth, kill them.

    I have learned that in an equitable society, where the gap between rich and poor is smaller, that both rich and poor are better off and safer, too.

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