Cost Of Talent: How Executives And Professionals Are Paid And How It Affects America

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9780029037553: Cost Of Talent: How Executives And Professionals Are Paid And How It Affects America

The continuing uproar over top executive pay packages in American companies calls attention to an even larger and more important issue: in general, do we compensate highly educated people in the United States in ways that serve the best interests of the nation? Are some people paid too much and others too little? What effect do differences in earnings have on the career choices of the talented? Do we pay executives and professionals in ways that motivate them to work hard at the right things? In the most revealing study yet undertaken of compensation practices in the fields of business, law, medicine, higher education, teaching, and government, Derek Bok, renowned for his extensive writings on professional ethics, law, and labor relations, argues persuasively that the compensation paid to top executives, lawyers, and doctors cannot be justified, nor is there evidence that huge bonuses and other financial incentives motivate them to do better work. Moreover, Bok asserts, the lucrative rewards of Wall Street, the elite law firms, and the medical specialties act as a magnet to deprive poorly paid but vitally important teaching and public service professions of desperately needed talent. Bok argues that as our economy becomes more complex, the demand for able, highly educated people increases constantly and takes on greater and greater importance. Losing our most talented individuals to the lure of high compensation will affect the very nature of health care, the progress of the economy, the effectiveness of public policy, the pursuit of justice, and the quality of education in America. President Clinton's tax proposals to curb excessive executive pay now before Congress are only a firststep toward reform. Bok concludes that as we enter a new period of national development, we must rethink our deepest values, motivations, and priorities - reflected in our compensation practices - in order to better serve America's long-term interests.

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About the Author:

Derek Bok, former president of Harvard University and dean of the Harvard Law School, is the 300th Anniversary University Professor at Harvard. His books include Universities and the Future of America, Higher Learning, Beyond the Ivory Tower, with John Dunlop, Labor and the American Community, and with Archibald Cox (ed.), Cases and Materials on Labor Law.

Excerpt. © Reprinted by permission. All rights reserved.:

Chapter 1

THE ROLE OF COMPENSATION

In central California, migrant laborers stoop under a hot sun for hours on end picking fruits and vegetables for a few dollars a day. In Manhattan skyscrapers, scores of secretaries sit in long rows in large, windowless rooms typing letters at $500 a week. In Detroit factories, workers hurt by overseas competition operate machines for $14 an hour, substantially less than they earned a decade ago. In airplanes far above the earth, rows of business executives and lawyers take papers from their briefcases and start to prepare, at $200 or more per hour, for the negotiations that await them in Dallas, Los Angeles, or some other commercial center.

All of these people are working hard at tasks that are vital to maintaining our society and helping it to prosper. Yet each group earns a very different reward than the others. Why? Is there any convincing rationale to justify these wide variations in pay or are they simply the result of luck, convention, or arbitrary privilege?

JUSTIFYING THE DIFFERENCES

Differences in pay are ubiquitous. They go back to early civilization and extend worldwide to every kind of society and regime. Thinkers centuries ago undoubtedly puzzled over the reasons for these differences. Not until 1776, however, when Adam Smith produced his Wealth of Nations, did anyone succeed in offering a detailed, plausible explanation of why earnings varied so much among different kinds of occupations.

Smith is renowned for his analysis of how competitive markets channel the selfish desires of participants toward socially desirable ends. In the course of describing how competition rewarded different factors of production, he sought to explain why the law of supply and demand did not bring about equal wages for everyone. One might have thought, he mused, that anyone offering a wage above the normal level would quickly attract a host of laborers seeking the higher pay. This influx of workers would simultaneously allow the employer to reduce his wages while forcing other firms to raise theirs to keep the workers they needed. In this way, supply and demand would continuously force wage differences back to a common level. Yet one had only to look around to discover that no such equality existed. Why?

Smith gave several reasons to explain the persistent differences:

1. Some jobs are unusually dirty, disagreeable, or arduous to perform and thus require extra compensation to attract enough people to do the work. Coal mining and butchering were prominent examples in the England of Smith's day.

2. Other occupations carry greater risks of layoffs or unemployment. Employers must pay higher wages to compensate for these hazards. Seasonal jobs, such as construction work, are a case in point.

3. Some jobs require individuals to sacrifice income for a while to acquire special knowledge and skills. Such positions must pay above-average rates to induce enough people to incur the necessary training costs. Preparation of this kind is particularly important for the professions. As Smith put it, "Education in the ingenious arts and in the liberal professions is still more tedious and expensive. The pecuniary recompense, therefore, of painters and sculptors, of lawyers and physicians, ought to be much more liberal, and it is so accordingly."

4. Some occupations, such as scientific research, violin playing, or professional athletics, need special intelligence or special skills. Because relatively few people possess these talents, the demand for their services often exceeds the supply, and the price they can charge increases accordingly.

5. Some occupations command higher incomes because the risk of failure is far greater than normal. Here, Smith uses the example of law. For every successful attorney (he claims), there will be twenty or more who fail to finish their legal studies and build a viable practice. Because the chances of success are so small, much larger rewards are needed to induce enough young people to undertake the long, arduous process of acquiring legal training and trying to establish a successful practice. In principle, Smith argues, "the counsellor of law who, perhaps near forty years of age, begins to make something by his profession, ought to receive the retribution, not only of his own so tedious and expensive education, but that of more than twenty others who are never likely to make anything by it." In fact, he asserts, the premium earned by successful professionals is usually much less than this amount because young people tend to take too little account of long-term risks and to overestimate their own chances of success.

6. Finally, Smith gave one last explanation for high professional earnings. In his words, "we trust our health to the physician, our fortune and sometimes our life and reputation to the lawyer and attorney. Such confidence could not be safely reposed in people of a very mean or low condition. Their reward must be such, therefore, as may give them that rank in society which so important a trust requires."

In the ensuing years, other reasons for differences in pay have come to light. Many workers have managed to obtain premium wages by forming a union or otherwise limiting the supply of their labor. Many others have been forced to accept lower pay because of their nationality, their gender, their religion, or their skin color. Still others have earned less than they might because they were ignorant of higher pay elsewhere or unwilling to leave their homes and neighborhoods to find more lucrative jobs in other communities. These reasons, however, complement Smith's theories; they do not weaken his explanations or contradict his insights.

Differing rates of pay have also appeared in Communist regimes for reasons similar to those put forward by Smith and his followers. Karl Marx may have envisaged a utopia that would operate on the principle "from each according to his abilities, to each according to his needs." In practice, however, the Communist world never behaved this way. Although pay differentials may have narrowed in countries such as Cuba or China, substantial disparities have remained. There is simply no other way to attract enough qualified, motivated workers to the more difficult, hazardous, disagreeable jobs that Communist and capitalist societies alike require.

Although Smith and his followers have done much to explain many of the differences in pay we see around us, they do not offer convincing reasons for the high compensation given to many professionals. For example, the work of lawyers, doctors, and business executives is hardly more arduous or disagreeable than that of ditchdiggers, garbage collectors, or many other low-paid occupations. On the contrary, many studies show that work in the learned professions is widely thought to be more interesting and desirable than in most other occupations. Some investigators have even found that most people consider the nonpecuniary attractions of professional work several times more valuable than the greater compensation that practitioners usually command. Hence, the differences in satisfaction of various kinds of work hardly justify paying professionals even more money. On the contrary, the most vexing moral question posed by professional and executive compensation is why so many people fortunate enough to hold the most interesting, prestigious jobs in society should earn many times the pay of those condemned to work that is much more boring and disagreeable.

The answer is surely not that executives and professionals must endure unusual hazards. Police officers, fire fighters, and truck drivers routinely face much greater physical danger than lawyers, doctors, and corporate executives. Even the odds of being fired or laid off are typically worse for blue-collar workers. It is rare for a physician to lose hospital privileges

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