Can We Ever Shrink The Evergrowing Rate Of Income Inequality? Should We Care?

A Few Strategies To “Share The Wealth” - Albeit Modestly - With “Regular People”

The growing gap between the incomes and total wealth of the “one-percenters” and the rest of us has been getting more and more attention of late, as well it should. And this is before the presidential campaign kicks into high gear, where it will get more attention - and before the just-out news that the wealth of the top one-quarter of one percent – some 250,000 people - is growing at a truly explosive rate. And just wait until the disclosures of CEO pay as a multiple of ‘regular peoples’ pay’ hit the presses, which some early-adopters are set to disclose soon.

We find ourselves amazed at how few commenters seem to understand the causes for the huge gaps here - despite how simple it really is to explain:

The problem is with us - for somehow acquiescing to the idea that virtually all of the new wealth created by public companies is somehow due to the actions of one or two people - and maybe five or six other chums - who somehow deserve to end up with the lion’s share of the new money - in the form of cash bonuses, pay raises, stock options and cushy retirement plans…while the wages of ‘regular people’ have been stagnant and “defined benefit plans” that allowed regular people to save up for retirement have mostly been eliminated…for “regular people” that is. On top of that, we have the activist investors and “financial engineers” - and their deal advisors - that put companies in play, hock them to the moon, pocket enormous piles of cash and move on - and where massive layoffs are often a main generator of the (sometimes only temporary) increased profits to boot.

And oops…No one seems to be focusing on the biggest factor of all - “the magic of compounding.” Even a mathematical dummy ought to know that a little 3% raise is small change - even for someone earning $100k a year ($3,000 - which barely keeps up with inflation) - while the same 3% (which is WAY below the average raise for a CEO making 300 times the “median wage” at his or her company) is an extra $900,000 to mostly put by, and allow to compound.

And please note that while little or no compounding takes place for regular people, since they need to spend all their money to live on, the wealthiest 1% have been watching their savings, investments, stock options and retirement packages compound at better than 6% a year…

So, inexorably, the gap will continue to grow bigger and bigger - with no end in sight. And frankly, we have to conclude that it is both mathematically and politically impossible to ever narrow the gap significantly…thanks to the magic of compounding, that widens the income gap every single day.

But here are a few things that companies CAN do to “share the wealth” a little more equitably - and maybe take some of the political and economic pressure off the table:

BRING BACK “PROFIT SHARING PLANS”:

Back when your editor was starting out, almost every public company had some sort of a formal profit-sharing plan in place. A few enlightened companies - and most of the  auto industry, in a nod to the labor unions – still have them. And we can say from first-hand experience that they really WORK to create a more motivated, committed, and productive work- force. Plus…they create not just a sense of fairness where wages are concerned…they are, indeed, a much fairer way to “share the wealth”… which can’t really be produced without some “regular people.”

BRING BACK “GLOBAL STOCK  OPTION

PLANS”… to make every employee, and not just the top five or ten percent of them, an “optionee”: We don’t know why these plans fell out of favor, especially since most of what you are “giving away” - even while “expensing it” – is peanuts relative to what an optionee could eventually earn if the stock does well. Yes, it wasn’t easy to administer such plans - especially on a truly global scale. And yes, options for the top-execs also fell out of favor vs. outright grants, or restricted stock, or plain old cash…But plans like these automatically allow workers to share the wealth, often in a very big way - if indeed new wealth is created over the years.

BRING BACK “EMPLOYEE STOCK PURCHASE PLANS” - IDEALLY AT A DECENT DISCOUNT FROM THE CURRENT MARKET PRICE, like 15%, as current laws allow: These plans too fell out of favor over the last decade or so…partly, we think, because of all the cases where employees were truly “over-invested” in company stock - and many of them lost most or all of their stakes in various market crashes. But also, so many public companies began to think of individual investors, including employee investors, as nuisances, instead of as valuable allies. A little bit of employee education can surely spread the wealth around more widely - while making  employees aware of the risks of putting too much of their wealth into company stock - while generating significant commitment to the company.

BIG COMPANIES - AND PUBLIC-POLICY MAKERS – ALSO NEED TO REALIZE THAT 401- K PLANS - EVEN WITH A FAIRLY GENEROUS “MATCH” (THAT MANY COMPANIES ALSO CLAWED-BACK OR ELIMINATED IN RECENT YEARS) WILL SIMPLY NOT PROVIDE A DECENT RETIREMENT FOR ROUGHLY HALF OF ALL THE “REGULAR PEOPLE”: Most “regular employees” start at low salaries – that have been rising slowly if at all of late. So a huge number of them opt out. And the benefits of compounding are very small ones for those who do get in. To make it worse, people in the bottom 60 or 70 percent almost always have to tap into their 401-ks prior to retirement, for a new roof, tuition or whatever…and get hit with early-withdrawal penalties besides. So we say, do offer 401-k plans - with matching corporate money - and yes, provide the regular folks with some financial education, and a decent choice of investment options….but do not delude yourselves into thinking that these are “OK substitutes” for defined benefit plans…

FINALLY, AND WE KNOW THIS MAY SOUND LIKE HERESY TO SOME…WHY NOT BRING BACK DEFINED BENEFIT PLANS? In reality, they are simply another form of compensation. And as our Mothers told most of us, “Just because other people are doing things - like dropping defined benefit plans in favor of Pie-In-The-Sky Plans - doesn’t mean that we should do them too.