Monday, January 20, 2014

How Much Is Too Much?

A letter in Friday's Star Tribune suggested that the problem of income inequality and the minimum wage could be solved by decreasing the gap between the lowest-paid employees in a company and the highest (usually the CEO). The writer,  Jeff Moses of Minneapolis, asked:

Is there an optimum difference between the incomes of the wealthiest of us and the poorest? Is there a point where the income difference becomes dangerous to a healthy economy? When some executives make 400 times more than their employees, have we passed that point?
What would be a good limit to set on this ratio?

I think part of the problem with this thought experiment is that numbers like 200 and 400 don't sound that unreasonable... they're not large numbers, we can grasp them, we can even visualize something in those quantities. I think there's even a tendency for the mind to think of them as 200 or 400 percent more, rather than 400 times.

Because let me tell you: If a CEO makes a $1 million a year and the lowest paid employee makes a bit over the minimum, $8 an hour, that's only a 60:1 ratio (basing that on each person working 2,080 hours a year, the federal definition of full-time... yes, I know, it's possible the CEO works more than that, but this is a for-instance).

A ratio of 60:1 is already a huge difference because really, who needs to make even a million dollars a year? I'm not talking about having a million dollars in savings for retirement, or a million dollars in assets, including your house. A million dollars in income. A year. Other than gold-plated doodads, what could you find to spend it all on that comes close to being something you actually need?

Two hundred times $8 an hour is more than $3.3 million a year. Four hundred times is just about six-and-two-thirds of a million dollars.

After thinking about this, I've come up with a ratio that I'd like to implement in my ideal country: 30:1.

Lots of room there to encourage people to get ahead and be the one to earn the top money, but not ridiculously. If the CEO wants to make a million dollars a year, s/he can pay the lowest-paid workers $16 an hour.

That doesn't seem like too much to ask.


After writing this, I came across a New York Times commentary by a former Wall Street trader, titled For the Love of Money. He describes the need to continually earn more and more millions of dollars as an addictive behavior and then puts in perspective the idea that those who earn hundreds of times more than others must be doing something inherently more valuable:
I made in a single year more than my mom made her whole life. I knew that wasn’t fair; that wasn’t right. Yes, I was sharp, good with numbers. I had marketable talents. But in the end I didn’t really do anything. I was a derivatives trader, and it occurred to me the world would hardly change at all if credit derivatives ceased to exist. Not so nurse practitioners.


Michael Leddy said...

I read something about this several years ago: the management sage Peter Drucker recommended a maximum of 20:1.

It’d be interesting to apply this principle in college life (with football coaches, in many schools, at the top).

Daughter Number Three said...

Wow, Drucker went with 20:1, huh? I think the ratio during the 1950s-1970s was a bit higher than that, but probably not higher than my 30:1.

And they paid more in taxes, too.