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Executive Times |
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2007 Book Reviews |
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The New
American Workplace by James O’Toole and Edward E. Lawler, III |
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Rating: |
**** |
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(Highly Recommended) |
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Click on
title or picture to buy from amazon.com |
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Data Back in 1972,
before many of today’s workers were born, Secretary of Health, Education
Welfare Elliott Richardson commissioned a study of the American workplace. O’Toole,
Lawler and others conducted a comprehensive study from their perches at USC,
and published it a year or two later as “Work in America.” The authors have
updated the study in their new book, The New
American Workplace. Most of what you read on these pages will be
familiar. What the authors accomplish on these pages is to make what is known
more orderly and systematic, and supported by data. Here’s an excerpt, all of
Chapter 10, “Compensation,” pp. 115-120: Here’s the headline: Median
family income in the United States grew about 22 percent from the mid-1970s
to 2004.1 And there’s an important subhead attached to the story:
productivity grew 65 percent during the same time period. Looked at another
way, a larger economic pie was created as productivity growth outpaced growth
in wages and incomes, and the gains in corporate profitability went mainly to
shareholders and executives. One result is that there is far greater income
inequality in the United States today than there has been in decades. As the
relative incomes of the top quintile of Americans improved dramatically, one
in four American Workers in 2004 were earning $18,800 or less per year.2 There is also less economic
mobility: among families starting out in the lowest income quintile in the
late 1 980s, more than half were still there in the late 1990s. 3
Two key drivers of lower mobility are that now-familiar duo: the shift to
knowledge work and the increase in global competition. There also is an
increasingly strong correlation between the education level of Workers and
their incomes: those with less than a college education tend to earn lower
wages and have greater difficulty moving into higher-paying jobs. This may be
an inevitable by-product of a knowledge economy in which people are paid for
their skills and expertise rather than for their physical labor, but the
trend most certainly is exacerbated by globalization, as low skilled,
relatively high-paying manufacturing jobs are now exported. The net result is
that the wages of those who have the least bargaining power are stagnating,
and there is little reason to believe that situation will change in the near
future. GENDER GAP On the bright side of the
income ledger, over the last three decades there has been a marked closing of
the male-female wage gap, in part as a result of women spending a greater
part of their adult years in the paid workforce. The narrowing is most noticeable
among younger women who, by the late 1990s, earned 94.2 percent of the wages
earned by younger men.4 Strikingly, the gains made by women were
achieved at a time when the overall distribution of wages was shifting
against people in low-paid occupations. Hence, significant changes in women’s
wages have resulted from federal legislation with respect to gender equity
and the concomitant movement of women into jobs that were traditionally the
province of men. In particular, women are far more likely to be in
higher-paid managerial, technical, and professional occupations as a result
of increased levels of education: the percentage of MD degrees earned by
women rose from 6.7 percent in the 1960s to 38 percent in the late 1990s, and
similar increases have occurred in the graduate law, business, and dentistry
degrees. WAGE VARIATION Increase in the variation
among the incomes of workers with similar demographics and in comparable jobs
has been a relatively unnoticed trend. In one respect, the data appear
contradictory: On one hand, job level, type of work, and, especially, education continue to be major predictors
of how much one will be paid; on the other hand two people (in the same firm
or in different companies) who do the same type of job and have the same
level of education are increasingly likely to receive different amounts of
pay. The best explanation for this phenomenon is that wages are increasingly
being determined by pay-for-performance practices. The implication for
workers is clear: as corporations shift toward greater use of bonuses,
incentives, and skill-based pay, there will be increasing dispersion of
compensation among those who are similar in everything but their performance.
In business terms, companies are doing a better job managing their rewards
systems. From a societal perspective, rewarding people based on their
relative performance is an indicator of a healthy meritocracy. EXECUTIVE PAY Trends in executive pay
seem anything but healthy if the measure of fair compensation is the degree
to which it is linked to relative contribution to organizational performance.
In 1970, average total compensation (in
1998 dollars) for the CEO of a Fortune 100
corporation was $1.3 million, which was thirty-nine times that of the average
worker’s ($32,522) at the time.5 Thirty years later, the average
CEO was pocketing about $10.8 million per year, some four hundred times what
their front-line workers earned ($35,864). During the 1990s, CEO pay
increased by 571 percent while the average worker’s grew by 37 percent. No
matter how one cuts the figures, even moderately well-paid CEOs of large
corporations make about as much in a day as their average employee makes in a
year. Even if the point of
reference is the more modest salaries of CEOs of midsize American companies,
the average for them in 2004 was some thirty-four times that of industrial
workers. (Comparable ratios were 13 to 1 in Germany and 11 to 1 in Japan.) In
evaluating these salaries, keep in mind the $35,864 total compensation earned by the average American worker is exactly
that, an average that includes the
astronomical bonuses of CEOs, Sports figures, and Hollywood celebrities on
the high end, and the take-home pay of $5.15 per-hour minimum-wage earners on
the low end who, if employed full time, make about $10,000 a year. The pay of
CEOs in the United States is high not only relative to the pay of American
workers, it is high relative to the earnings of executives in the rest of the
world, even when corporate size and profitability are taken into account. In
England, where the economic system is much like ours, million-dollar
executive salaries are rare. Depending on the countries being compared,
American CEOs make at least six times more than their international
counterparts; in some cases, they earn twenty times more. As a result of increasing
CEO pay, there also has been a concomitant boost to the incomes of other
members of the executive suite and, in turn, those of other top managers in
corporations—although these trickle-down increases have been far less
dramatic than the raises at the very top. Two explanations offered for the
explosion of executive pay in America are inadequate oversight by board
compensation committees and the creation of numerous innovative compensation
“vehicles,” such as the granting of restricted stock and stock options. While some economists argue
that many executives more than earn their extraordinary incomes (and a host
of perquisites, including private jets, personal loans, and assorted
“lifestyle” benefits) as just rewards for the wealth they create for
shareholders, in a recent issue of the Conference Board’s Across the Board, business writer Jim
Krohe asked, “Why, in a nation that thinks of itself as a bastion of the
common man, do people tolerate social stratification more typical of
eighteenth-century France?”6 Krohe calculated that “if wages
overall had risen at the same pace as that of CEOs since the 1980s, the
average worker would today be pulling down more than $184,000 a year, rather
than today’s not quite $27,000, and the minimum wage would now be almost $45
an hour.” (Note: Krohe’s figure of $27,000 is the average salary; the $35,864 figure cited above
is average total compensation, including
benefits and bonuses.) One obvious reason why the astounding increases in
executive compensation haven’t caused more of a backlash among shareholders
is that they represent a relatively small percentage of total corporate
expenses: given the total dollar cost of doing business in a giant
corporation, even large changes in executive compensation have only a small
effect (typically a few pennies a share) on company earnings. It is easy to
see why directors, and even large shareholders, have not made a greater
effort to keep executive salaries under control A rarely researched issue
and one more germane to this study is the degree to which executive pay has
a negative influence on the morale and be havior of corporate employees down
the line. If such a reaction exists, it might surface as resentment among the
lowest-paid members of the work-force. Instead of seeing their senior
executives as leaders committed to the organization—and credible when they
speak about what is good for every one in the company “family”—workers might
see the people at the top as self-serving exploiters of the efforts of those
down the line. Although a 2002 Gallup poll found that 87 percent of Americans
agreed that executives had “gotten rich at the expense of ordinary workers,”
we could find little hard evidence that the compensation gaps between those
at the top and bottom of large corporations do in fact lead to low morale or
strong protests among the rank and file, except perhaps in unionized
companies. The best explanation for this, offered by Arthur Okun, the late
chairman of the President’s Council of Economic Advisors, is that most
Americans believe in the “jackpot theory” of career success. The essence of
that belief is that luck is the main difference between those who “hit it
big” and those who don’t, and therefore those who are luckiest are to be
envied, not resented.7 As a footnote, we would be
remiss in not mentioning the 1990s practice of granting stock options
widely, often across the board, in an effort to create alignment between
company goals and employee behavior. In plain English, it was argued that
everyone would work harder if all employees made money when the price of the
company stock rose. (This belief was stimulated by the dot-com phenomenon in
which workers at all levels at such companies as Amazon and Yahoo! became
millionaires.) But the practice seems to have ebbed with the recent
accounting requirement that corporations “expense” options. While executives
in 2005 still received their options—although perhaps less frequently and in
smaller numbers—many companies eliminated or greatly reduced employee grants.
The result once again was a gap between what is good for executives and what
is good for their employees. EMPLOYEE STOCK OWNERSHIP Since the 1970s, there has
been a major increase in employee stock ownership. It is estimated that
roughly twenty-three million Americans own stock in the companies at which
they are employed; perhaps ten million hold stock options (these are not
necessarily separate groups).8 Workers own company stock in
several ways, increasingly through 401(k) retirement plans (to which their
employers make fixed contributions) and through emPloyee stock option plans
(some 11,000 U.S. companies have ESOPs, covering 8.8 million workers, or
about 6 percent of the private sector workforce). Perhaps two to three
million Americans work in companies that are wholly or majority
employee-owned. It is further estimated that over two thousand companies,
employing some eleven million workers, are primarily invested in their own
stock in the 401(k) plans they offer as benefits.9 And about four
thousand companies offer stock purchase plans to help employees buy their
stock at a discount, including Wal-Mart, UPS, IBM, Kroger, and Home Depot,
covering some 15.5 million
employees. Hence, large and growing
portions of the American labor force are practicing capitalists, at least to
some degree. A great deal has been made of this fact, and it is often said
that it has enormous implications for the attitudes and behavior of workers.
Indeed, some evidence does link the amount of stock owned by employees to
company performance, although no causal relationship between how hard
employee-owners work and the price of their company’s stock has been proven.
Nonetheless, as noted previously, employee-owners are more inclined to
exhibit positive behavior on the job, to stay with a company as a result of
their equity interest, and to pay more attention to its financial
performance, all of which are positive behaviors from a company point of
view. Yet, as we discuss later with reference to United Airlines, few large
corporations have taken advantage of the promise of employee ownership by
changing their organizational practices to reflect the desire of employee
owners to assume greater responsibility for the management of their
enterprise. For workers, there are
pluses and minuses associated with ownership. On the plus side, the United
Airlines example notwithstanding, significant degrees of employee ownership
often increase the likelihood that workers can influence how their company
operates. On the negative side, the main problem with employee ownership is
that it concentrates employees’ risk: not only do their jobs depend on the
continuing success of their employing company; their retirement depends on it
as well. In sum, we conclude that the attractive promise of employee stock
ownership is largely unrealized, both for workers and for companies; its
coverage is still limited and it has not yet had a significant impact on the
way most American corporations are managed. As the excerpt
shows, the authors relate what readers think they know with the data, and
present conclusions in clear langauge. The New
American Workplace will affirm many perceptions, and root them in fact. This
fact-based approach leads to a high recommendation for The New
American Workplace. Steve Hopkins,
February 23, 2007 |
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·
2007 Hopkins and Company, LLC The recommendation rating for
this book appeared in the March 2007
issue of Executive Times URL for this review: http://www.hopkinsandcompany.com/Books/The
New American Workplace.htm For Reprint Permission,
Contact: Hopkins & Company, LLC • 723 North Kenilworth Avenue • Oak Park,
IL 60302 E-mail: books@hopkinsandcompany.com |
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