In 2011, I posed the question “Is McKinsey & Co. the Root of All Evil ?” This was not a tongue-in-cheek query, but rather, a look at how so many recent disasters traced their origins back to McKinsey & Co.

Which brings us to the latest issue negatively affecting the United States, skyrocketing CEO pay and income inequality. The parade of bad societal effects that are related to that has been well established — especially with income mobility.(Surprisingly, Wikipedia has a good overview).

Duff McDonald has a new book coming out this Fall titled The Firm: The Story of McKinsey and Its Secret Influence on American Business. He points to you-know-who as the early mover in a number of societal ills. It should come as no surprise that CEO pay is one of them.  In terms of income & wages, Duff traces McKinsey’s influence back to 1935, when “managers sought advice about how to deal with the rising power of unions, they turned to outside advisers such as McKinsey & Company.”

That then morphed into something different entirely in 1952. That was when the CEO of Pan American World Airways got interested in a McKinsey study of stock options.

The entire We can trace the rise of CEO compensation to that date:

“Anyone who has worked in the corporate milieu knows that the arrival of McKinsey on the scene tends to not be a sign of good news for the rank and file. What is less known is McKinsey’s role in the creation of the CEO-to-worker gap itself. In 1951, General Motors hired McKinsey consultant Arch Patton to conduct a multi-industry study of executive compensation. The results appeared in Harvard Business Review, with the specific finding that from 1939 to 1950, the pay of hourly employees had more than doubled, while that of “policy level” management had risen only 35 percent. If you adjusted that for inflation, top management’s spendable income had actually dropped 59 percent during the period, whereas hourly employees had improved their purchasing power.

The “academic” imprimatur of Harvard Business School’s house organ gave the work a certain credibility and the study was suddenly an annual affair, appearing in HBR for more than a decade thereafter, at which point it moved into McKinsey Quarterly. From 1948 to 1951, HBR had one article a year on executive compensation. A few years later, the review was running five times that amount. This was actually a perfect moment for the new “field of study,” because in the post-World War II years, there was a shortage of executive talent and corporate leaders had begun poaching executives not just from the competition but also from entirely different sectors. And they had to know how much to offer, did they not? Moreover, in the post-Depression years, no one had wanted to talk out loud about compensation. But after the war, they were ready to raise the volume.”

Crony capitalism and the transfer of wealth from shareholders to insiders goes back much further than you may have guessed.

Good ideas gradually die of their own accord, replaced with better ones. Bad ideas have a death grip on society, often with wealthy sponsors benefiting from them. That’s why they seem to hang around forever…

 

Source:
The Godfather of CEO Megapay: McKinsey Consultant Arch Patton Didn’t Invent Wealth Inequality — He elevated it to an art form
Duff McDonald
NY Observer 8/13/13
http://observer.com/2013/08/the-godfather-of-ceo-megapay-mckinsey-consultant-arch-patton-didnt-invent-wealth-inequality/
 

Category: Crony Capitalists, Philosophy, Really, really bad calls, Wages & Income

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “Is McKinsey to Blame for Skyrocketing CEO Pay?”

  1. You can follow Duff McDonald on Twitter here: https://twitter.com/duffmcdonald

  2. [...] McKinsey is Public Enemy Number One in the hollowing out of the American middle class.  (TBP) [...]

  3. Petey Wheatstraw says:

    Greed has been elevated to the highest of social virtues. Whether wealth is gained by hook or crook no longer matters. The honest, law abiding capitalist is a fool and/or a pariah. In the end, money buys immunity, with a huge percentage of the “profits” remaining in the control of the immune criminal(s).

    As for being in a death grip, it’s more like a python swallowing itself, tail first.

  4. lburgler says:

    If they had paid Ron Johnson more, JCPenny would still be alive, OK?

    What are you, Barry? A job-creator-hater? Someone should pay these people twice as much, or they’ll go GALT. Really, they will leave our sorry selves to fend for ourselves.

    The undocumented laborors who do Ackmann’s landscaping are going to see their wages cut. And then where will the aggregate demand come from?

    • I am a shareholder advocate

      I hate Insiders who transfer money from the owners to themselves.

      • constantnormal says:

        While I cannot deny that there is the stench of cronyism emanating from corporate America, I think that a look at dividends vs corporate profits might dispel the notion that there is a sufficient amount being transferred to impact shareholders.

        Or maybe not, as the FRED chart I linked to shows only dividends alongside profits … stock appreciation is not in the picture and may not have grown as well as dividends have (I think it has done better, but don’t have the data to prove it).

        I think the real parties who have had their pockets emptied have been the employees, thus explaining the continued rise in profits and dividends in near-lockstep, while at the same time seeing executive compensation literally explode upward …

        But it’s hard to prove that shareholders have been impacted much by management thievery …

      • DeDude says:

        How well have the shareholders of investment banks been doing in the past decade and how well have the banksters themselves done?

      • odnalro zeraus says:

        Why should shareholders be impacted at all?
        Salary, bonuses and options are not always the only thing that they take home.
        There are many other ways to skin the corporate cat.
        Like corporate jets, real estate property to “hold company meetings’ in Acapulco.etc. etc.
        Remember one occasion when the Chairman announced that effective immediately company executives will only fly first class for flights longer than 4 hours, and a Division CEO asking him: “Are you changing the first class leather seats to regular economy seats in the company private jet too?”

  5. constantnormal says:

    McKinsey was right about “… from 1939 to 1950, the pay of hourly employees had more than doubled, while that of “policy level” management had risen only 35 percent.” However, they neglected to mention that while management’s pay was soaring by 35% atop a post-war industrial boom, the rank-and-file’s compensation was also adjusting to the feudal economic inequality of the 1880s through the 1930s being lifted from their lives, courtesy of financial reforms, prosecution of financial criminals, and the rise of effective labor unions. Management never suffered a bout of declining compensation, they only grew at a slower rate, allowing the oppressed peasants to become more complete players (and thus also valuable customers) in the economic expansion.

    A clear case of McKinsey selling a the story to the customer that the customer wanted to hear.

    If the customer had been the labor unions, doubtless the story McKinsey presented would have been different, focusing instead on the not-closing-rapidly-enough participation in the economy of workers as compared to management.

    Consultants nearly ALWAYS sell the story that the paying customer is willing (or eager) to hear.

  6. Moss says:

    McKinley tells them what they want to hear how else can they justify the fees they charge.

  7. farmera1 says:

    Got to plug John C Bogle’s (the founder of Vanguard) book: THE BATTLE FOR THE SOUL OF CAPITALISM. The main point of the book is that we as a country have morphed to Managerial Capitalism, where companies are managed to maximize the wealth of upper management vs the old way of managing to maximize the wealth of the owners (share holders).

    Don’t recall any mention of McKinsey but the book does a very good job of telling the story of CE0′s greed and destructive behavior.

    Good read.

  8. TheUnrepentantGunner says:

    Barry those last few sentences are simply brilliant. It’s amazing in how many other fields this is true, even things relatively concrete such as chess. (at least among the non professional ranks)

  9. VennData says:

    The Compensation consultants all did this handing the boards shrink-wrapped justifications of ridiculousness.

    If you don’t think this has taken money out of your dividend payments, you’re kidding yourself.

    http://en.wikipedia.org/wiki/Dividend_payout_ratio

    http://www.scia-capital.com/docs/Turning_tide91912.pdf

    “…the U.S. payout ratio has steadily declined for decades with no change in tax policy…”

    Job creators my ass! These CEOs are cookie cutter fill-ins, caricatures of ‘Caddyshack’ gold buddies. And they are talking money from your retirements and your monthly income. Keep on voting for that freedom for boards of directors to be stocked form their local drinking hole. You suckers.

  10. rd says:

    The Efficient Market Hypothesis is also to blame along with CEO deification.

    Since the 80s, the relentless focus has been on shareprice as the only meaningful measure of a CEO’s success. The accounting shenanigans that have come out of this to goose stock price and maximize the short-term value of CEO’s options has been a major problem. However, the value of this to overall shareholders is the assumption that the stock market is capable of accurately pricing comapnies in the short-run. 2000-2 and 2007-9 were emphatic declarations that this ability is not a given as many stock market darlings vanished entirely.

    It is also one of the primary reasons why many stocks have eschewed paying or raising their dividends. Sending cash out the door doesn’t do much to raise the short-term value of the company although a steady stream of dividends is a good reward for patient long-term investors..

  11. noilifcram says:

    Back in college studying corporate finance and capital markets, it seemed everyone wanted to become Gordon Gekko. “Greed is good!”

      • AtlasRocked says:

        one man’s greed is another man’s relentless drive to be the best. This idea that you guys can see into another man’s heart and proclaim it is evil is an act grand deception. No one can do that, and giving the gov’t power to do so is always abused.

        You have limit gov’t to judging citizens on what laws they break, and that is all.

        Imagine Charlie Rangel or Sheila Jackson deciding on who is greedy and should be abused by the IRS, the DHS, and the Pay Scale Committee. That should sober you up a bit.

      • Atlas rocked = one hell of a crony capitalist!

        You utterly misunderstand the concept of SHAREHOLDERS RIGHTS. When management excessively pay themselves it is a transfer of wealth from shareholders to insiders. And you defend these under performing neer do wells with your Randian nonsense.

        Stop being a tool of this class of takers. You are so afraid of government confiscating wealth by lowering rates that you miss a blatant theft right in front of your eyes.

        Quite pathetic.

        #FAIL

  12. Frilton Miedman says:

    “Crony capitalism and the transfer of wealth from shareholders to insiders goes back much further than you may have guessed.”

    I would add a second element atop this, the transfer of wealth from consumer to insiders that’s done in two forms -

    1 – As % of population that owns stocks has diminished to a smaller & smaller group, banking deregulation (removing Glass-Steagall, CFMA loopholes) has enabled corporations to tap a new source of profit, the general public.
    The housing/credit/sub-prime bubble is a perfect example of the manipulation/deception that goes on constantly in a smaller scale in energy, materials, commodities.

    2 – There’s also the effect of technology & outsourcing that results in lower production costs, but does not reflect a reciprocal change in lowered end consumer costs – those differences are used toward increasing executive salaries, while at the same time those executives abuse their influence over government to game themselves lowered tax rates.

  13. S Brennan says:

    “with the specific finding that from 1939 to 1950, the pay of hourly employees had more than doubled”

    This of course, ignores inflation, which eats 71% of that gain. But from 1920 to 1938 hourly wages went from .54 to .64 in 1939, or an 18% gain in 2 Decades*. Additionally, servicemen returning were trained by the US military in the latest technology even if the economist still considered them “unskilled”. So there is that, a much better trained/disciplined work force is part of the increased productivity enjoyed by CEO’s who “had better things to do” in WWII.

    It pays to watch how economist with an axe to grind cherry pick their dates. This one was obvious, start at the end of depression, when War production begins and huge government spending on direct investment, plus retooling for a civilian economy. If you know your history, the frequency of fraudulent “economic” arguments is laughable.

    Another one that fraudsters love is metrics, what one chooses to measure, can be used to achieve jst about any outcome an “economist” is paid to find. Yes, many economists are personable, but so too is any salesmen with something to sell.

    *
    http://www.measuringworth.com/uswage/ using 1900-2000 as dates

  14. lburgler says:

    Luckily this will resolve itself. The “free market” will prevail.

    What happens when wages don’t increase in tandem with productivity, and the excess capital is swept into the coffers of the capitalists, is that aggregate demand collapses. Prices fall. Earnings fall.

    Consumer credit and HELOC debt can mask the trend for a decade or two, but that is over. Welfare programs, SSD, and other forms of deficit spending can hide the trend further. But that is also coming to an end.

    When the capitalists finally get what they want, when the debt is exhausted, and the government programs get gutted, We/They will finally get what is coming to us. I suspect it will not be the utopia they were hoping for.

  15. mrflash818 says:

    It it ultimately the board of directors that sets CEO pay, correct?

    Is it possible to have shareholders start to hold the board of directors accountable, and remove members that do not start to lower CEO/top tier compensation?

    Lastly, can legislation be passed that provides carrot/stick incentives about worker-to-executive compensation ratios for qualifying to get Federal/State/County/City contracts?

  16. [...] Is McKinsey & Co. to blame for skyrocketing executive compensation? An excerpt from Duff McDonald’s new book The Firm: The History of McKinsey and Its Secret Influence on American Business.  (NY Observer also Big Picture) [...]