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Were Top Corporate Executives Really Hogging Workers’ Wages?

Posted on Sep 18, 2014

Photo by jbelluch (CC BY-ND 2.0)

By Andrew Kliman

(Page 2)

Let’s consider the owner-managers first. They are not supermanagers because they do not receive, in Piketty’s words, “very high salaries” or “historically unprecedented compensation packages for their labor.” [6] Instead they receive very high “business income”—profit-like income that accrues to owners of noncorporate businesses (partnerships and sole proprietorships) and S-corporations. While, according to BC&H, 94 percent of the combined labor and business income of salaried managers was labor income—wages and salaries, including stock-option income—a full 88 percent of the combined labor and business income of owner-managers was business income. [7]

Business income is not a component of employee compensation. It is a distinct kind of income and it is counted that way in government statistics. This fact is crucially important in understanding why the rising salaries of top executives had little effect on typical employees’ pay. When the business income of owner-managers rises (and BC&H’s data suggest that it rose to a whopping extent), regular workers’ share of employee compensation is not reduced; it remains unchanged. It is certainly true that when top-echelon owner-managers take in a bigger share of the income generated by noncorporate businesses, their rising share must come at the expense of something else. But it came at the expense of the interest they paid creditors and the incomes of other business owners and self-employed people, not at the expense of employees. In fact, employees’ share also rose. [8]

What about BC&H’s “financial professionals”? Some of them fit Piketty’s description of “supermanagers” since they are salaried managers as well (top managers of financial firms or financial managers in nonfinancial firms). Yet the remaining financial professionals have little in common with supermanagers. Some are owner-managers, such as hedge fund managers and managers of venture capital and other private equity firms, whose representation at the top of the income distribution seems to have risen extraordinarily rapidly. (In 2005, the top 25 hedge fund managers made as much as the top 500 corporate CEOs. [9]) Others aren’t managers at all. They work in sales occupations (as traders and brokers of stocks, bonds and commodities, for instance), as investors, in other business occupations (as accountants, financial advisers, etc.), and in computing, engineering and other technical occupations.

To gauge the extent to which growing inequality and subpar growth of typical employees’ pay can be attributed to “the rise of the supermanager,” we must therefore focus solely on salaried managers and set aside owner-managers and nonmanagerial financial professionals. Data in the published version of BC&H’s study are not well suited to this task because the published version treats all financial professionals, whatever their occupation, as a single group. But one of the authors, Bakija, kindly provided me with unpublished data from their study, in which financial professionals who are also top salaried managers are included in the latter group. By eliminating the overlap among salaried managers, owner-managers and other financial professionals, the unpublished data enable us to say precisely what percentage of “the 0.1%” and “the 1%” consisted of salaried managers, and to estimate the degree to which their rising salaries depressed other employees’ compensation. [10]

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The unpublished data reveal that, between 2001 and 2005, only about one-sixth of financial professionals in the top-income groups were salaried managers as well. Thus, when we reclassify them as salaried managers, supermanagers’ representation within the top-income groups does not increase substantially. BC&H’s unpublished data indicate that only 24 percent of the top 0.1 percent, and 23 percent of the top 1 percent, were financial or nonfinancial salaried managers—scarcely more than the 21 percent, mentioned in the previous section, who were nonfinancial salaried managers. Furthermore, they were a shrinking segment of the super-rich. In 1979, 39 percent of those in the top 0.1 percent were supermanagers, but by 2005 their size had declined dramatically to 22 percent. Owner-managers increasingly took their place, rising from 10 percent to 23 percent, while the share of those who were nonmanagerial financial professionals rose from 9 percent to 14 percent. [11] The “rise of the supermanager” to which Piketty refers therefore seems not to have occurred. 

The Rise in Supermanagers’ Compensation

By how much did the compensation of these top salaried managers rise? BC&H’s unpublished data provide an important part of the answer. The following graph, based on that data, looks at the occupations of people in “the 1%” and the shares of total tax-return income that went to them. Between 1979 and 2005, the increase in salaried managers’ income accounted for only 8 percent of the total rise in the share of income captured by “the 1%.” [12] This is roughly the same as the contributions of lawyers and of doctors and other medical professionals. Much more of the total rise in the income share of “the 1%” was due to rising incomes of owner-managers and financial professionals.


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