Pay the Bosses Less and Pay the Employees More!

Jim Paulsen, chief investment strategist at Wells Capital Management points out that over the last two-and-a-half decades, companies have operated in an ever-globalizing economy with more competition and little pricing power. In the decades before 1990, corporate executives had a strong incentive to restart production and staff up heavily as soon as a recovery was evident to maintain market share. They could always push prices higher if they found they had increased costs a bit too quickly.  Since disinflation became the rule more than 25 years ago, CEOs have had scant confidence in their ability to drive prices higher, so they concentrated on productivity gains through technology and lean labor forces for as long as they possibly could. It was in the fourth year of the past two recoveries that efficiency gains gave way to adding headcount.  One factor Paulson fails to note which also may account for a lack of jobs is the escalation of CEO and executive compensation.  25 years ago, the top paid executives in a large company earned, on average, 40 times the income of the average employee.  Over the past 25 years, CEO and executive compensation has risen to over 400 times the income of the average employee.  There is a finite amount of money available in any organization that can go towards compensating employees.  If  "bosses" take a larger share of that money a smaller share is left for the rest of the employees. As a result, at  the same time that CEO and executive compensation was dramatically increasing, the compensation of the average employee has failed to keep up with inflation as well as failed to match productivity gains.  One of the biggest deterrents to recovery from economic downturns is the lack of demand.  In many cases, the lack of demand is the direct result of a lack of income on the part of a majority of potential consumers.  Overall, while 10% of the population is doing very well, 80%, by far the majority, is not faring so well and the inability of the 80% to afford much besides the basic necessities is as much an anchor on economic growth as any other single factor.  Unfortunately, this anchor is being ignored by all of the economic pundits as well as the various investment strategists.