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A Tip for Joe the Machinist: Better Watch Your Back

Research & Commentary
July 23, 2011

by Sam Pizzigati

Corporate America, advises one of the nation’s most prestigious management consulting companies, needs to wake up and stop rewarding employee loyalty and performance. With one exception.

You work hard. You do good work. You loyally stick with your employer through good times and bad. Do you have a right to a paycheck that rises over time?

Analysts from one of America’s top management consulting firms, Booz & Co., have an answer that the Harvard Business School last week sent reverberating through Corporate America’s upper echelons. That blunt answer: No.

The notion that good workers doing valuable work deserve to see their paychecks rise over time, pronounce Booz & Co. analysts Harry Hawkes, Albert Kent, and Vikas Bhalla, no longer rates as “tenable.” America’s corporations, the three advise, need to start attacking the “exorbitant” paychecks now going to their most prized, “steady and reliable” veteran workers.

The Booz analysts helpfully offer an example of the “significantly overpaid” worker they have in mind. They call him Joe the machinist, “a stellar employee who knows the ins and outs of the organization, the result of his many years on the job.”

This Joe the machinist has been working at that job for over two decades. His “wealth of institutional knowledge” has become a valued corporate asset. But Joe is making a lot more than he used to make, especially “compared with co-workers who have been doing the same job for just two years.”

Corporate America, the Booz & Co. advice continues, now needs to “address these kinds of wage disparities.” Companies need to start “retooling labor costs” to narrow “the gap between high wages and market value.”

A “multifaceted and tailored” retooling, the Booz analysts go on to gush, could net U.S. corporations “labor savings of 15 to 20 percent.” Of course, the analysts acknowledge, Joe the machinist “might have to take pay cuts” along the way.

But what a payoff these pay cuts would produce! Firms that retool successfully, the Booz consultants confidently promise, “will end up with larger and more sustainable improvements in their [profit] margins.”

Some business leaders are already cheering the Booz analysis.

“We infantilize workers like Joe,” former Bank of America executive Marc Effron cheerily charges, “by insulating them from the harsh economic realities by paying above market wages.”

But Corporate America, in fact, has been doing precious little “insulating” over recent years. Corporations have been depressing wages to fatten profit margins for some time, and Wall Street’s most astute observers, notes American Prospect columnist Harold Meyerson, are actively tracking the de-insulation process.

Meyerson points to an analysis that JPMorgan Chase chief investment officer Michael Cembalest sent out earlier this month to his bank’s top investors. Cembalest’s musings explore the rising corporate profit margins that U.S. companies registered between 2000 and 2007 and conclude that “reductions in wages and benefits explain the majority of the net improvement in margins.”

New research from Northeastern University’s Center for Labor Market Studies updates this “de-insulation” story for more recent years.

Corporate profits from 2009’s second quarter through 2011’s first, this research shows, have increased 39.6 percent. Over that same span, median weekly earnings of full-time U.S. workers have dropped 1 .0 percent.

Median pay for corporate CEOs, in the meantime, rose 23 percent in 2010 alone, the New York Times reported earlier this month.

This latest CEO pay hike continues a long-term trend. In the 1992-1995 years, calculates UMass Center for Industrial Competitiveness director William Lazonick, America’s 500 highest-paid executives annually averaged — in 2009 dollars — $9.0 million. In the 2004-2007 span, the top 500 averaged $27.2 million.

The Booz analysts — and their cheerleaders — want America’s Joe the machinists to swallow ever lower paychecks to help their “established” U.S. corporate employers “keep up with intense competition” from elsewhere in the world. They demand no similar sacrifice from U.S. corporate executives.

That makes no sense, particularly for analysts who are arguing we must “narrow the gap” between exorbitant pay and actual “market value.” U.S. CEOs currently take home far more than the global “market” going rate for executive talent.

CEOs at companies with over $10 billion in annual revenue, the Wall Street Journal reported back in 2008, make twice as much in the United States as they do in Europe — and nine times more in the United States than they do in Japan.

Corporate America, in other words, definitely does need some seriously aggressive “labor cost retooling” — at the top.

Sam Pizzigati, the co-editor of Inequality.Org, also edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Read the current issue or sign up here to receive Too Much in your email inbox.

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