Calla Wright
MOB
Prof. John Clinton
23 September 2008
Income Disparity:
A Review and Analysis of the Current Problem
A Review and Analysis of the Current Problem
Introduction
Compensation disparity has long been a problem in U.S. organizations. It is also a growing problem, with income inequality worse today than in decades past. Guerrera and Pimlott (Oct. 2007) noted that CEOs today make on average twice as much as the people working directly below them. According to Wessel (Nov. 2007), women still only earn about 77% of what their male counterparts earn. John Rogers, the African-American CEO of Ariel Investments, said that the top 100 hedge fund firms have no African-Americans or women on their boards (as cited in Brewster & Freeland, June 2008). Reporters and managers alike agree that this disparity is prominent. However, there are a vast number of opinions and theories about why this is the case and if it is justifiable.Examples of Disparity
A striking example of this income disparity is seen within the ARAMARK Corporation. Chan and Hughes (Mar. 2008) explained that the ARAMARK food service providers assigned to the cafeteria in the Goldman Sachs building, a prosperous Wall Street firm, make an average of $21,000 a year. In contrast, the average employee compensation at Goldman Sachs is a whopping $660,000 a year. One could argue that because the ARAMARK employees are not technically a part of the Goldman Sachs organization, the income disparity highlights disparate practices in two different companies. However, according to Chan and Hughes, Goldman Sachs is part owner of ARAMARK. A spokeswoman for ARAMARK explained that employees are paid “competitive wages and benefits for the industry” and went to state that 30% of the hourly workers are union members (as cited in Chan and Hughes Mar. 2008). This information highlights the discrepancy in pay between industries. This is an “organizational status quo,” as Grey (2005) explains in his Studying Organizations (p. 7). If looking at the situation from a Critical Management perspective, it is important to ask questions about why income inequality is permissible in such cases. Why should someone in the food service industry earn, on average, less than 1/30th of what someone in a Wall Street firm earns? Additionally, is it acceptable for less than 1/3rd of company workers to be union members when this means more than 2/3rds of hourly workers are not?
Compensation disparity is not a phenomenon seen only when comparing different industries. It is also visible when comparing top executives’ salaries with the salaries of those directly below them. Guerrera and Pimlott (Oct. 2007) reported on the income discrepancy in both the Hershey and Black & Decker companies. In the former example, the CEO’s “total compensation was nearly seven times higher than [the chief financial officer’s.]” In the latter, the chief executive’s salary was more than four and a half times that of the chief financial officer’s. A spokesman for Black & Decker reasoned that the disparity is due to the number of years each man has been with the company–– while the financial officer had held his position a mere seven years, the chief executive had held his for over twenty (as cited in Guerrera & Pimlott Oct. 2007). Can one justify a difference in $8-million annually because of a few more years of loyalty to a company?
Wage disparity is also seen between people holding similar positions in different sectors. Preston (Nov. 2007) suggested that companies in the nonprofit sector “often struggle to retain the top leaders they do have because of the low pay and high stress that characterize so many nonprofit jobs.” In an attempt to counter this, the Evelyn and Walter Haas Jr. Fund has begun funding nonprofits specifically with the aim of helping them retain their top staff. The foundation “has awarded $4.3-million over three years for such purposes,” Preston reported.
Why Such Disparity?
Of course, everyone has an opinion about why the income gap is so large. Wessel (Nov. 2007) and Rogers (as cited in Brewster & Freeland, June 2008) both pin the blame on education. Wessel contended that as the income of men and women is slowly but surely converging (in the early 1980s women made 66% of what men make as opposed to 77% in 2006), the income gap between “economic winners and losers of either gender is widening.” Wessel claimed that “the noteworthy gap is between workers with education and workers without.” Rogers agreed that education is the issue, but focused his attention on the public school setting. In an interview with Brewster and Freeland he explained ,“I would encourage more resources to go to inner city public education to try to create an even playing field for people who haven’t had the opportunities that I’ve had; and to make sure that we have financial literacy curriculum in all our public schools throughout the country.”
Cowen (May 2007), professor of economics at George Mason University, also concurred with the education theory. He asserted that since 1980 the relative returns for schooling “skyrocketed.” “For the first time in American history, the current generation is not significantly more educated than its parents,” wrote Cowen. “Those in need of skilled labor are bidding for a relatively stagnant supply.” Thus, the rules of supply and demand apply. The supply of skilled labor is stagnant, so companies must pay more to hire such laborers. Income distribution, Cowen declared, depends on a balancing out of access to post-secondary education with technological advances. In other words, when more workers become available to perform such skilled labor, the supply will go up and prices will go down.
Education is only one theory about the income divide. Ip (Oct. 2007) explains that many scholars attribute the widening gap in income to globalization and/or advances in communication, which bring the faces of ‘“superstar” performers to a global audiences, increasing their annual income. According to Preston (Nov. 2007), many workers in the nonprofit sector agree that globalization is the culprit; it is squeezing out the middle class. Preston relayed the general feelings nonprofit organizations seemed to share at the 2007 annual meeting of Independent Sector. Here, questions and speeches on whether or not nonprofits are doing enough to fight income disparity caused by globalization were common.
A lack of equal education opportunities, globalization and a lack of action from the nonprofit sector are all potential factors affecting wage inequalities. Yet Christopher Ailman, who manages funds for the California State Teacher’s Retirement System, blamed nothing other than ‘weak corporate control.’ He said that CEOs making “an excessive amount compared to their number twos is a warning signal that the chief executive may have the compensation committee sewn up and that the board is not doing a good job of the succession plan” (as cited in Guerrera & Pimlott Oct. 2007). In the same article Guerrera and Pilmott noted people in other companies, the Council of Institutional Investors and MVC Associates International, that agreed with Ailman’s sentiment: directors should focus on pay inequity with an ultimate goal to fix the problem.
Beyond Income
The entire discussion of inequality has, thus far, been a financial one. Cowen (Jan 2007) offered a more societal driven definition of disparity. He stated that “income is not the only–– or even the most–– important measure of inequality.” He went on to explain that consumption, happiness and the amount of fun a person has are not necessarily income based aspects of life. Wealth is only “one measure of societal value.” This opinion is not about economics, but about the way people perceive themselves in society. To an extent, Michael Watson, senior vice president of human resources at the Girl Scouts of the USA, would agree with Cowen. He is cited in Preston’s (Nov. 2007) article explaining that good management, and not high wages, is the key to retaining staff. His company values good management so much that it has begun evaluating employees based on “how they treat their colleagues and subordinates.”
This highlights what Grey (2005) wrote about economics being unsuccessful at mapping people’s behavior because “people were often not that rational” (p. 11). When someone makes a decision about a specific job or career path, money is not the only deciding factor. Perhaps wage may seem like the rational deciding factor in today’s market-driven society. However, people cannot be expected to act ‘rationally’ if they enjoy the free time that comes with taking a lower paying job or if they truly respect their manager.
Conclusion
With the varying opinions out there, it is hard to say exactly what the cause of vast income disparity is. It is probably truest to say that there is no single cause. Sexism and racism still linger, making it hard for women and minorities to land high paying CEO jobs. Through globalization and outsourcing the U.S. has lost a number of blue collar jobs. Education is still not widely and equally available to train everyone for the new high tech jobs which have replaced blue collar jobs. Additionally, CEOs and managers may not effectively police income disparity. These issues have contributed to the growing problem of wage inequality that all organizations must address in today’s world. References
Brewster, Deborah, & Freeland, Chrystia. (2008, June 13). VIEW FROM THE TOP :JOHN ROGERS, chief executive of Ariel Investments. Financial Times,14. Retrieved September 20, 2008, from ABI/INFORM Global database. (Document ID: 1494459081).
Chan, Sewell, & Hughes, C.J. (2008, March 6). Food-Service Workers Rally to Press Demands With Operator of Cafeterias. New York Times (Late Edition (east Coast)), p. B.4. Retrieved September 20, 2008, from ProQuest National Newspapers Premier database. (Document ID: 1440664301).
Cowen, Tyler (2007, January 25). Incomes and Inequality: What the Numbers Don’t Tell Us. New York Times. Retrieved September 20, 2008 from http://www.nytimes.com/2007/
01/25/business/25scene.html?_r=1&scp=8&sq=wage%20inequality&st=cse&oref=login
Cowen, Tyler (2007, May 17). Why Is Income Inequality in America So Pronounced? Consider Education. New York Times. Retrieved September 20, 2008 from http://www.nytimes.com/2007/05/17/business/17scene.html?_r=2&sq=wage%20inequality&st=cse&adxnnl=1&oref=slogin&scp=26&adxnnlx=1222180467-WIfixXRNgkMruVep5cVn/g
Grey, Michael (2005). A Very Short, Fairly Interesting and Reasonably Cheap Book About Studying Organizations. London: SAGE Publications.
Guerrera, Francesco and Pimlott, Daniel (2007, October 8). CEO pay disparity rears its head :[USA 2ND EDITION]. Financial Times,p. 21. Retrieved September 20, 2008, from ABI/INFORM Global database. (Document ID: 1360524981).
Ip, Greg (2007, October 12). Income-Inequality Gap Widens; Boom in Financial Markets Parallels Rise in Share For Wealthiest Americans. Wall Street Journal (Eastern Edition), p. A.2. Retrieved September 20, 2008, from ABI/INFORM Global database. (Document ID: 1363170021).
Preston, Caroline (2007, November 1). Nonprofit Leaders Debate 'Whether or Not All Philanthropy Is Equal.' The Chronicle of Philanthropy. Retrieved September 20, 2008 from http://philanthropy.com/premium/articles/v20/i02/02006601.htm
Wessel, David (2007, November 1). CAPITAL: One Pay Gap Shrinks, Another Grows. Wall Street Journal (Eastern Edition), p. A.2. Retrieved September 20, 2008, from ABI/INFORM Global database. (Document ID: 1375369051
The reference page got messed up. I am not bothering to fix it. If you care a lot about a source, you figure out the reference. Also, the paragraphs are no longer indented.
Love, Calla and obviously Prof. John Clinton for giving me a good grade.
(This is where the kitties hide from the vacuum sometimes)
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