It doesn't take a revolution

A gentle manifesto for Wagemark

May 13, 2013

In an op-ed for The Wall Street Journal in 1977 entitled “Is Executive Pay Excessive?” management guru Peter F. Drucker decried the corrosive effect of the widely held belief that top business executives commonly enjoy lavish salaries, jerry-rigged with every manner of tax loophole, that are on the order of fifty times greater than that of the average worker. Never mind, Drucker pointed out, that such dramatic income disparities apply only to a tiny and economically insignificant cadre of top executives; the very idea of such gross inequalities damages morale and undermines the kind of social cohesion that makes for healthy and competitive companies.

Drucker’s elegantly simple solution was to make company wage policies both more rational and more transparent. “Finally, the most radical, but also the most necessary innovation,” he wrote, “would be a published corporate policy that fixes the maximum compensation of all corporate executives, after all taxes but including all fringes, as a multiple of the after-tax and pre-fringe income of the lowest paid regular full-time employee.”

The gap between elite earners and more or less everyone else today makes the inequalities Drucker worried about seem, well, quaint: in 2012, a mere four years after the worst economic calamity since the 1930s, the average Fortune 500 CEO is paid 350 times more than the average worker, and that does not even include the dizzying gap between the highest paid executives and the lowest paid full-time workers.

Top executives in the twenty-first century do not simply live more affluent lives than most, as was the case during the post-war boom years of the 1950s and 1960s, when the gap between the highest and lowest wages was narrowing; like celebrity actors, athletes, and musicians, executives now live on an entirely different planet. And with research of the kind found in Richard Wilkinson and Kate Pickett’s landmark 2009 book, The Spirit Level: Why More Equal Societies Almost Always Do Better, we are just beginning to understand the ways in which wage inequalities not only compromise the kind of we’re-in-it-together spirit that keeps businesses running smoothly and efficiently, but it shreds the social fabric on key issues like physical and mental health, drug abuse, violence, and rates of imprisonment.

Yet in an era in which sexual choice, fair trade business practices, food quality, and climate change are all an integral part of a lively public conversation, discussion of wage inequality, how much people make relative to one another, has for the most part remained taboo. That clearly has to change. And that is where Wagemark comes in.

Inspired by Drucker’s radical but necessary innovation, Wagemark is an international standard for businesses, non-profit organizations, and government agencies alike to certify that the ratio between the total earnings (including benefits) of their highest paid employee and that of the average of the lowest paid full-time employees is no greater than 8 to 1.

The registration process is easy and on-line. With a $200 fee and certified Wagemark license from a chartered accountant, an organization can use Wagemark’s Wordmark and Ratiomark (the ratio has to be at least 8 to 1, but it can be as low as 1 to 1) as a symbol of its commitment to fair, responsible, and sustainable wages.

Wagemark isn’t interested in capping profits or stemming growth—for profit companies should earn as much as the market allows. It simply claims that, as the wages of a company’s highest earner rise, so should those of its lowest earners. And unlike the fair trade moniker, Wagemark’s aim is not to directly provide consumers with more sensitive and ethical choices; it is rather a mark of distinction for the culture of the businesses themselves and a way of both enfranchising and motivating workers. This is not only a matter of social justice; it is good, far-sighted business.

There will inevitably be those who claim that limiting the gulf between the earnings of top executives and the lowest paid workers will prevent cutting-edge companies from employing the kind of talent that will lead them into the future. Yet even in the humble seventies, Drucker suggested, the skyrocketing pay grades of executives were rarely the result of company performance and more a matter of a status-driven business culture and backroom deals. In any case, businesses in places like Japan and Scandinavia, where disproportionate executive pay has always been regarded as distasteful, have hardly suffered as a result.

In addition, it may be that we are long overdue for a re-evaluation of what we mean by success in business. Studies suggest that more cooperative companies with fair wage scales were better able to survive the recent, double-dip recession. Perhaps business success should be oriented, not toward the extraction of spectacular, short-term profits, but toward healthy businesses with transparent practices, motivated employees, and the prospect of long-term, sustainable growth that everyone can benefit from.

Wagemark isn’t proposing a revolution; it is providing a modest, practical way of changing the way we do business with the good ideas we already have, and of starting a conversation about money and income inequality we can no longer afford to avoid. In a political climate where the state has pulled away from providing the kinds of infrastructure and safety nets we need, we have to think more responsibly, and from a wider and longer perspective, of the role of businesses and other organizations can play in our lives.

Wagemark is, of course, a work in progress. It may turn out that the 8 to 1 ratio, designed to close the gap between a company’s highest and lowest earners while maintaining competitiveness, will need to be adjusted in the light of more experience and more research.

As for the profits the Wagemark Foundation will receive from those who do the right thing and commit to the Wagemark Standard, it will be reinvested in the form of grants to forward thinking scholars doing research on how we can move toward a fairer, more sustainable, and more prosperous society.