How One Employee And One Consulting Firm May Be Singlehandedly Responsible For The Stunning Pay Gap Between CEOs And Workers

How One Employee And One Consulting Firm May Be Singlehandedly Responsible For The Stunning Pay Gap Between CEOs And Workers

MAX NISEN AUG. 14, 2013, 4:35 PM 8,319 13

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McKinsey is the world’s largest and most profitable management consulting firm, as well one of the most difficult places to get hired. Over its 87-year existence it’s had a massive impact on the U.S. economy according to “The Firm,” a forthcoming book by Duff McDonald. In a New York Observer column, pointed out by Mike Dang at The Billfold, McDonald argues that the massive modern-day gap between executive and worker pay has its origin with the consulting firm.It’s a fascinating story that all started with General Motors commissioning a study on executive pay from McKinsey consultant Arch Patton. He found that from 1939 to 1950, hourly employee pay more than doubled, but top management pay went up only 35%.

The study, published in the Harvard Business Review, became a series and turned national attention toward executive compensation, promoting the idea that higher pay and bonuses were the lever to attract and retain top executives.

Patton became a superstar, hired by managers who were not surprisingly interested in hearing they were underpaid. McKinsey’s CEO apparently thought this type of consulting was beneath the firm, but wasn’t about to turn down the money.

“For several years, Mr. Patton personally accounted for almost 10 percent of the firm’s billings,” McDonald writes. “At the end of the war, only 18 percent of companies in the country had bonus plans. By 1960, about 60 percent of them did.”

In 1961 came the books “Men, Money and Motivation: Executive Compensation as an Instrument of Leadership” and “What Is an Executive Worth?

One McKinsey consultant told McDonald that Patton wrote “the same article [26] times for the Harvard Business Review.”

Because of its popularity and McKinsey’s influence, the idea became an entrenched philosophy, as did the concept that as a company grows, so should CEO pay.

While Patton’s compensation philosophy started with rigorous analysis of performance, soon it took on a life of its own, with executive pay spiraling higher and higher, while worker pay was left to languish.

Here’s where we are today, according to a report by The State Of Working America, a project of the Economic Policy Institute:

State of Working America

The AFL-CIO puts the number even higher, saying that the average Fortune 500 CEO makes 354 times the average wage of their employees. Some executives make 1,000 times more.

Of course, McKinsey and Patton weren’t the only factor. Bull markets and economic expansion help push pay upwards and encourage investors to look the other way — and once it moves up, pay is slow to move back down. Meanwhile, slack labor markets and weak growth prospects help to explain stagnant wages.

Regardless, McKinsey and Patton may have been a major driver in the gap between CEO and employee wages exploding by a factor of 10 since the middle of the century.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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