Is Bigger Always Better?

 dollarimage.jpgProbably more so than any other country, Americans love big business. Big businesses help drive our economy and provide millions of jobs. But they are also a major factor behind the rising inequality we now see around the world. As a percentage of revenue, big companies pay less in taxes pay their top executives far more, and pay many of their workers less, than most small businesses.

From 1945 to 1975, income grew at about the same rate across all groups in the United States, roughly doubling over 30 years. Then things started to change, and top earners began to pull away from everybody else. Inequality began to grow, and grow and grow. Today, the top 3% own over half the wealth of the United States. We are now at the point where even conservative economists are beginning to realize we have a problem with inequality in the United States.

incomegains.pngIn 2013, average CEO compensation at Starbucks, McDonald’s and other major fast-food companies was $23.8 million, more than 1,000 times what the average worker made, according to Demos, a New York public policy group. Perhaps even more disturbing is the fact that the industries with the greatest pay inequities are precisely the ones that are driving most of the job growth in the United States. Inequality is getting worse as the economy “improves”.

On average, corporate executives now make over 300 times median worker pay at large corporations. This is now a worldwide phenomenon. Furthermore, the actual CEO-to-worker pay ratio far exceeds what most people think the “ideal” ratio should be. Despite enormous differences in culture, income, wealth, and social status, people throughout the world think corporate executives are overpaid. In the United States, CEO pay is more than 50 times higher than the “ideal” CEO level.

whatworkersshouldbepaid.png Peter Drucker, the famous management guru, warned that a CEO-to-worker pay ratio above 20:1 would “increase employee resentment and decrease morale.” Yet every country on the list above has a pay ratio above this level, and the United States is the highest of all.

While many factors contribute to inequality, the biggest factor is tax policy. The game has been rigged in favor of the giant corporations. On average, small businesses have much lower CEO-to-worker pay ratios than large businesses. One reason, of course, is that smaller businesses can’t afford to pay anyone such outrageous compensations. Simple economics forces small businesses to operate more fairly; there just isn’t enough money to pay such inflated executive wages.

But other factors also come into play. Small business owners are closer to their employees. Rather than treating employees as fungible revenue production units, they value them as human beings, so they tend to pay them better, at least when compared to management.

Small business owners also have closer ties to their local communities. They depend on local vendors and suppliers, send their kids to local schools, and give more to local charities. Between 1981 and 2013 CEO pay increased by 140 percent, compared to a DECREASE of 5% for employees at companies with at least 10,000 employees.  Over the same period, smaller company CEO pay rose by 49%, compared to a median pay increase of 30%.

As Arthur Bloom, a professor of economics at Stanford, says, “There used to be a premium for working at a big company, even in a lower level job. That’s not true anymore. The people who have really suffered are lower-level employees at big companies.”

There are literally hundreds of things one can do at the local, regional and federal level to tilt the playing field back in favor of small business. Increasing transparency, perhaps by requiring large companies to disclose compensation ratios, might lead to better behavior. Lowering taxes on small businesses, while increasing them on large businesses, would also help.

While big businesses talk about corporate social responsibility, small businesses often get more done with much less talk. Just one more reason to support Local First Chicago.