More Questions About: “Why Do We Pay These People?”

Perhaps the better question is: Who Is Paying These People?


As mentioned in the last posting: “Questioning why we pay the 1% so much doesn’t stop with politicians and entertainers.” The posting mentioned that the ECONOMIST (12/21/2012) had an interesting article entitled “Who exactly are the 1%?”

From that perspective, the ECONOMIST presented some interesting data. It is a highbred that resembles a breakdown by occupation. Some discussion of how the 1% earn their income is productive. It indicates the role of the 99%ers as willing and often enthusiastic sponsors of the 1%’s high incomes. Basically, they give the 1% the income and then complain that the 1% have it. As discussed below, the usefulness is limited. It doesn’t provide much insight beyond some speculation about what motivates people to pay other people so much. That’s partially inherent in the data, but one suspects it is also due to misuse designed to support an editorial stance.

The three groups mentioned in the last posting (i.e., professional sports figures, entertainers, and national politicians) fall into the largest category identified as “other” in the ECONOMIST’s article. The “other” category is unfortunate because it’s such a catchall. It’s an interesting discard. It’s interesting in the sense that the people in it are interesting. Almost by definition they’re exceptional (i.e., different); a part of a small, 1%, group.

The next largest category is another catchall, but it is a bit more bounded. The category is “managers and executives.” It’s a catchall because it includes everything from the CEO of the largest public corporations to the manager of a successful small business. Needless to say, executives from private, public, nonprofit, government and government-sponsored organizations are included.

It’s not just the senior levels: as middle management has shrunk, the remaining managers and executives are more likely (larger portion) to be the well paid. The one thing we do know is it excludes finance, but it’s not clear whether they mean financial executives at all organizations, all executives at financial firms, or both.

The exact definition isn’t needed in order to reach some general conclusions about who pays these members of the 1%. To gain the most insight into who is paying the 1% who are designated as executives and managers, it helps to consider sources of income. The article points out that: “The richest 1% earn roughly half their income from wages and salaries, a quarter from self-employment and business income, and the remainder from interest, dividends, capital gains and rent.” Unfortunately, it doesn’t say anything about head counts. The same people could be receiving the 25% of income from self-employment, wage and salary income earnings, dividends, etc.?

Nevertheless, the data does tell us that, to the extent income is from self-employment, they’re paying themselves. If their business earns enough, then they end up in the 1%. If not, they’re 99%ers.

Managers and executives at public companies, by contrast, are paid by owners (i.e., stockholders). About half the 99%ers don’t have any stock exposure. Basically, they chose to be broke in the sense described in “The Only Truth About Finance.” Interestingly, it seems many of them don’t understand that what executives get paid is literally none of their business.

Of the other half of the 99%ers, a big portion delegates the decision to their pension fund or mutual fund manager. They’re are paying the executives and managers, but avoiding an explicit decision to do so. Interestingly, the pension, annuity, and mutual fund owners who delegate the decision about how much to pay the executives are delegating the decision to people in finance who may well be among the 1%. So, in effect they are paying twice to support the 1%. One is tempted to suggest that they stop complaining about the injustice of the incomes of the 1% and instead take responsibility for their decision to support them.

That leaves a portion of 99%ers (holders of voting stock) who explicitly make a decision. In aggregate, they often represent a minority of the shareholders and can easily be outvoted by institutional shareholders like pensions and mutual funds. Thus, it’s fair to say about half the 99%ers pay the highly paid executives, but many, probably most, leave the decision to others.

Medical professionals constitute 16% of the top earners. Now, recommending 99%ers stop seeing doctors and going to hospitals in order to stop paying the 1% doesn’t seem reasonable. I wouldn’t consider it, but then I’m inclined to think the 1% aren’t the problem. But it is worth considering whether the 99%ers should ask why the 1%ers in the government think the 99%ers should be taxed to expand programs to fund the 1%ers in medicine.

Another significant group is lawyers at 8% of those with incomes in the top 1%. Lawyers are useless, unless they’re pleading your case of course; then they are very valuable. There is, however, one exception. In concert with their 1% breather in government, the legal profession has figured out how to co-opt people into becoming a plaintive in class action suites. They just make it a nuisance and costly to opt out. They know it’s too much to ask the 99%ers to interrupt life to opt out of ridiculous class action suites, and in the same spirit, we’ll give 99%ers a pass.

That leaves people who earn their income in finance. As mentioned before, it isn’t clear what this means: it’s not clear whether they mean financial executives at all organizations, all executives at financial firms, or both. What is clear is that the author is concerned by the size and growth in the portion of the 1% who are in this category. This group makes up about 14% of the 1%ers. The growth of this category seems to trouble the ECONOMIST.

If assets being managed are growing, as occurs as populations accumulate, say to accommodate the approaching retirement of baby boomers, more resources will be required to manage them (i.e., finance will grow). Similarly, older populations tend to have accumulated more resources. However, probably the most important factor is the trend toward hiring financial managers. It seems to me that it’s the 99%ers who are the source of growth in demand for people in finance.

This last point illustrates why the data are only useful for such idle speculate about who pays the 1%. It doesn’t seem to occur to the authors that the percent of the 1% is a meaningless statistic in terms of their focus (which is what to make of changes in the portion of the 1% in various occupations). It says nothing about the portion of occupational category. That finance increased as a portion of the 1% says nothing if finance became a more common occupation. It may just reflect a change in industry employment in response to changes in demand.