What is more important, how well we live or how we live in comparison to others? If we have a life with decent food and clothing, access to healthcare, comfortable housing including heating and AC, transportation, a cell phone and a TV with multiple channels, does it matter if Warren Buffet is worth $87 Billion?
That’s the subject of today’s 10-minute podcast.
“The only person you should try to be better than is the person you were yesterday.” -Unknown. Lots of people are going to say this person or that person first or most famously said this; the point is we all know this to be one of the major guiding truths in our lives. Or at least it should be. So why then is there an ever-increasing amount of conversation focusing on inequality, perhaps the most dangerous form of comparing ourselves to others?
Let’s ask a few setup questions. Inequality in what?
Frederick Herzberg, was an American psychologist who became one of the most influential names in motivation and management. He separated what he called hygiene functions from motivational factors. His work showed that once certain functions, the hygiene functions, have been satisfied, advancement in those areas does not create significantly more satisfaction and motivation. For example, once certain compensation and work area needs were met, more of the same made little difference. After the hygiene functions had been satisfied, the motivational factors needed to take over. Things like achievement, recognition for achievement, the work itself, responsibility, and growth or advancement, and the approval of respected superiors are the key. The hygiene functions need to be in place for the motivational factors to come into play. But once the hygiene function needs have been satisfied, the motivational factors are the key to growth and satisfaction.
Governments, at best, can provide the only hygiene functions. Only individuals and other private entities can supply the growth and satisfaction that comes from adding the vital motivational factors.
Where does all this leave us with the initial question of which is more important; quality of life or comparing lives? Given that all results cannot–and should not–be the same, if we are concerned with inequality, aren’t we left trying to come up with an acceptable ratio between, say, the bottom 10% and the top 10%? There are useful examples from the corporate world. Ben & Jerry’s, the famous ice cream company, once had a 5:1 rule where the CEO’s total compensation could not be any higher than five times that of the lowest paid employee. When Ben Cohen was set to retire, and a search for a new CEO began, the ratio was increased to 7:1. Realizing the ineffectiveness of the ratio’s ability to attract, retain and motivate a valid candidate, the company decided on a 17:1 ratio in 2000. Shortly afterwards the pay cap was abandoned. More currently there was an article in the left-leaning Guardian that says that no CEO should earn more than 1,000 times the lowest paid employee. We will use that ratio elsewhere.
Any reasonably smart business is paying its employees at the market rate and is charging for its goods and services at the market rate. Smarter businesses are adding Herzberg’s motivational factors to attract and keep good employees. And no business can long pay more than market and charge less than market without going bankrupt. Only governments can do that. Smart boards pay their CEOs what is needed to get and keep a great Chief Executive. At another level, smart facilities managers pay their staff market rates as well. Top to bottom ratios have little or no place in determining corporate compensation. They pay for results.
And lavishly-paid actors and other entertainers, e.g., sports stars, are also paid for results; the primary result being the ability to attract fans to their performances, teams and sponsor’s products and services. Top performers can earn $25-30 million a year or more, often with additional money from endorsements. Employees on the sidelines can earn as little as $25K/year, with the guys hawking popcorn in the lobby or beer in the stands likely working a second job. Again, compensation is directly tied to results.
Is pay for results true of teachers’ unions comp plans? In a word, no. In fact, teachers’ unions fight both incentive pay for good work, and reductions in pay or firings for poor work. The ratio of top to bottom pay may be in line with certain thinking, but there is a poor correlation between compensation and results. The ratios may be in line, but the results with the students will suffer because of the way teachers are paid. You have to pay for the results you want to get the results you want.
With the correlation between results and compensation being well in place in any successful private company, and income and wealth ratios clearly having no place here, where might ratios have a place? Taxes. Where else?
Today’s Key point: The marketplace determines income and wealth, and governments determine tax levels. As consumers, we vote with our dollars; as voters, we vote with our ballots. I buy from Amazon because Jeff Bezos and company gives me the best value for my dollar. Walmart gives me the best prescription prices. Not a single buying decision of mine has ever been influenced by the Bezos wealth, or that of the Walton family. Both became famously wealthy for giving people what they wanted and needed. Pause for an insight: Walmart has never put a single Mom and Pop shop out of business. The customers, many of whom used to shop with Mom and Pop, decided on their own to spend their money at Walmart because they got better prices, better selection, longer store hours, etc. The customers put Mom and Pop out of business, not Walmart.
Okay, Will, now how do we tackle income and wealth inequality through taxes? The approach is clear; make the tax rates even more progressive, taxing the higher earners at even more disproportionate rates. And raise and start new taxes on what people already have. For example, Senator Warren, a candidate for the 2020 Democratic nomination, wants to tax wealth–not just profit or capital gains; wealth is the money that you have already paid taxes on. Her plan is to levy a 2 percent tax on fortunes worth more than $50 million, and a 3 percent tax on fortunes worth more than $1 billion. (And when you die, there is the estate tax on what may be left over.)
What might be a ratio that is acceptable to those who keep bringing up what they see as the inherent unfairness of income inequality? 10:1? 500:1? 1,000:1? If the minimum wage was $15/hour, their stated goal, that translates into annual earnings of about $30K/year. Ratios of 10:1 and 500:1 would limit anyone’s compensation to $300K or $15 million annually, respectively. Even a ratio of 1000:1 would mean that the top compensation for anyone anywhere in the US would be $30 million a year.
Oh, and what about wealth inequality? The median (middle) net worth of the average U.S. household is $97,300. If we applied the widest ratio in today’s podcast, 1,000:1, the most anyone in America could be worth is $97 million. And then what would Senator Warren have left for her wealth tax? To say little of robbing so many people of much of the needed motivation to build great companies.
Absent legally-driven inequalities, let’s forget things like ratios and stop doing damage by comparing ourselves to others. Here’s a closing quote: Galatians 6:4-6 (Easy-to-Read Version (ERV)) “Don’t compare yourself with others. Just look at your own work to see if you have done anything to be proud of. You must each accept the responsibilities that are yours.” Good advice from a book full of good advice
Segueing from the specifics of today’s topic to overall principles, the core, driving principles at Revolution 2.0, are:
And do it all in love; without love, these are empty gestures, destined to go nowhere and mean nothing.
If we apply those two core principles, personal responsibility and brother’s keepers, simultaneously, never only one or the other, we will always be on the right path. Depending upon what we face, one principle or the other may appropriately be given more emphasis, but they are always acted upon together.
The Founders, Revolution 1.0, were declared traitors by the British Crown, and their lives were forfeit if caught. We risk very little by stepping up and participating in Revolution 2.0™. In fact, we risk our futures if we don’t. I am inviting you, recruiting you, to join Revolution 2.0™ today. Join with me in using what we know how to do–what we know we must do–to everyone’s advantage. Let’s practice thinking well of others as we seek common goals, research the facts that apply to those goals, and use non agenda-based reasoning to achieve those goals together. Practice personal responsibility and be your brother’s keeper.
Let’s continue to build on the revolutionary vision that we inherited. Read the blog, listen to the podcast, subscribe, recruit, act. Here’s what I mean by “acting.”
Revolution 1.0 in 1776 was built by people talking to other people, agreeing and disagreeing, but always finding ways to stay united and go forward. Revolution 2.0 will be built the same way.
Join me. Join the others. Think about what we are talking about and share these thoughts and principles with others. Subscribe, encourage others to subscribe. Act. Let’s grow this together.
And visit the store. Fun stuff, including hats, mugs and t-shirts. Recommend other items that you’d like to see.
Links and References
Killing The Golden Goose (EP. 44)
As we get ready to wrap up, please do respond in the blog with comments or questions about this podcast or anything that comes to mind, or connect with me on Twitter, Facebook, and LinkedIn. And you can subscribe to the podcast on your favorite device through Apple Podcasts, Google, or Stitcher.
Now it is time for our usual parting thought. It is not enough to be informed. It is not enough to be a well informed voter. We need to act. And if we, you and I, don’t do something, then the others who are doing something, will continue to run the show.
Know your stuff, then act on it. Knowing your stuff without acting is empty; acting without knowing is dangerous.
Will Luden, writing to you from my home office at 7,200’ in Colorado Springs.