The Validity of Pay Inequality

A recent speech by US Federal Reserve Chairman, Ben Bernanke, addressed the growing disparity in pay between the top and bottom levels of society. In economically dispassionate terms, Bernanke summarised the evidence that validates executive pay increases that are out of proportion with increases to other workers in the economy.

In summary (for the full text of his speech and the references he cites, see here), economic research supports the contention that higher skill based workers reap disproportionately more productivity from technology than lower skill based workers.  Therefore, in economic terms, pay is probably rising in accord with the value produced. 

While this argument has some validity for the increase in executive pay, the jury is still out on whether this can explain the extent of executive pay increase relative to other workers.

Some economists have argued that the observed increases in CEO pay packages can largely be justified by economic factors, such as changes in the relationship between the CEO and the firm that have led to shorter and less-secure tenures for CEOs and to a greater tendency to hire CEOs from outside the company. Others note that substantial increases in the size and scope of the largest corporations have raised the economic value of skilled corporate leadership. However, critics have responded that poor corporate governance may have amplified increases in CEO pay, including the substantial influence that some CEOs appear to have had over their own pay, particularly in the US.

This debate will no doubt continue.

© Guerdon Associates 2024
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