Quote from Maverick74:
OK, let me deal with this argument directly.
I often hear this brought up and this argument is full of major flaws. The largest being that we are not making an apples to apples comparison.
In our society, and most others, those who take risks, add gamma to their earning potential. In other words, their income potential is squared over time and becomes exponential. Those who don't takes risks, have a more linear income stream with a fairly flat slope.
The truth of the matter is, while it often seems romantic to think of all us becoming rich and living the life of excess, most of us have no interest in taking the kinds of risks that provide that potential. The reason is it becomes somewhat of a binary bet, only without the binary outcome.
To put it more succinctly, if we had the opportunity to place a bet by flipping a coin with heads being we become filthy rich and debt free or tails we go completely broke, lose every dollar to our name and incur a lifetime of debt and humiliation. And let's say the odds of getting heads is 1% and the odds of getting tails is 99%. What would you choose? LOL. Well, most normal, rational people would choose not to flip and play the game. We would continue to live out our meager existence to avoid the extreme negative outcome that is the result of taking large risks and losing.
Some people however say, f*ck it, I'm going to flip. Who are these people? They are famous actors, musicians, artists, CEO's, traders, gamblers, writers, etc. People who become fabulously wealthy when they make it (we only hear from the winners). The losers disappear or become cautionary tales. We warn our children about these people and tell them to become teachers, salesmen, join a union, anything boring and simple, just so they can avoid the possibility of failure of taking risks.
The bottom line is, we would all love to be Brad Pitt, Tiger Woods, Michael Jordan, Donald Trump, Steve Cohen, Sam Zell, Tom Brokaw, Edward Murrow, etc. They are the winners. The risk takers. There were millions of people who tried to be them and lost.
Let's take a look at one more example, traders. Is the income distribution fair in the trading world? Not even close. In fact, it makes the CEO to worker example pale in comparison. The best traders, the Steve Cohen's and the James Simmons make nearly 800 million a year. The worse traders make nothing, in fact, worse then nothing. The worst lose money, lose everything, and go into a lifetime of debt. How many traders really make it? Maybe 5% (10% tops). definitely not fair and equitable. However, the profession is the epitome of risk taking. There is no way to even the distribution of returns to make it more fair. Doing so, would negatively impact the returns those at the top are getting for taking the risks that they do.
CEO's are usually not giving their position at birth. Most of them start out at the bottom of company. Jack Welch started out in sales and engineering at GE and worked at the bottom for nearly 20 years before he actually made any kind of money. It was only after 40 years at GE do we see him as the wealthy and successful (ex-CEO) that he is today. He is one of the "winners". How many at GE tried to do that and failed? We will never know (survivorship bias).
So you can't compare CEO's to common laborers because both parties are not taking the same risk. The common laborer gets a check every 2 weeks. He works 9 to 5. He has a job with minimal responsibility and virtually no risk. As long as he has a job, his dinner plate is full.
The CEO does not enjoy the same safety. Every day he has to take risks, take chances. If he has one mistep and his stock drops, or his misses earnings one quarter, he could be removed. He could lose his job, re-sign in humiliation and perhaps not ever be wealthy again. Surely he will go out on his own, start his own company with whatever capital he managed to save over his life, only to get bitten by some random outcome that leads to failure and bankruptcy. Meanwhile the commoner is still making the widgets in the factory and putting food on his dinner plate. He is none the wiser.
Also, let me point out that when comparing CEO salaries to that of their workers, it's not the actual salary of the CEO that is high, but rather the compensation. Most CEO's are given generous stock options and stock. If their company does well and the stock goes higher, they make billions (think MSFT). If it doesn't , in many cases they worked for free (think of the dotcoms in 2000).
The only way we can make an honest comparison to labor is if we took a wage earner from Radio Shack and compared them to a wage earner at Best Buy. My guess is their mean income will be very similar (they are both not taking any risks). Now if the worker at best buy was making 300k compared to the worker at Radio Shack that is making 30k (both have the exact same job), then we would have a serious in-equality present.
However that is not the case. The reality is one person is trying to be the next Michael Jordan, the others is simply selling Air Jordan sneakers at the local shoe store. The income distribution cannot share the same slope. One has much more curvature in their income slope then the other. At the end of the day, you have to make a choice. Do you want to flip the lop-sided coin (1% heads, 99% tails). Or do you want to be entertained by those that do? Most of us would choose to live vicariously through the ones that do and complain about their success afterward.
