A natural result of capitalism and the free market is income inequality. Advocates of capitalism argue that inequality, to the extent that it recognizes differences in effort and results, is good. But a frequently asked question these days is: Are we exceeding the optimal point of inequality and descending into an era of a vanishing middle class and, with it, the spending power and inclination with which it fuels an economy?
A growing number of observers are saying yes, pointing to the fact that investors and managers have co-opted more than 100 percent of the economic gains of the past 30 years in the United States, other developed economies, and even the BRIC countries.
Assuming for a moment that all of this is correct, what's the answer? First, is executive pay too high, or is the problem, as compensation and governance consultant Donald Delves says, "that most people are paid so little?" How can inequality be reduced to optimal levels? Is this the responsibility of government? Or is it the responsibility of the private sector?
John Mackey, cofounder and co-CEO of Whole Foods Market, is no fan of big government and the "crony capitalism" he believes it fosters. He thinks private sector responsibility is the answer and his prescription is described in a new book, Conscious Capitalism, that he coauthored.
Conscious capitalism is made up of four elements:
- a purpose higher than merely generating profits and shareholder value;
- integration of all stakeholders in that sense of purpose;
- conscious leadership devoted to the higher purpose and stakeholder integration;
- a conscious culture with shared values that reflect the higher purpose.
Organizations that meet Mackey's criteria (in addition to his own) include Starbucks, the Tata Group, Google, REI, and UPS. All of this sounds like an answer to a "trickle down" philosophy of economics fueled by government favoritism for the most affluent.
My introduction to the concept occurred long before I read the book. On a visit to a local Whole Foods Market, I casually remarked to the person checking my groceries that the company appeared to be doing well, noting that it had just reported significantly better earnings than expected. The checker beamed, commenting that the stock price had reached a record high the day before. Then the person bagging my groceries added, "And the stock went up 10 percent in the first hour after the market closed and the earnings were announced."
This is a product of a philosophy that employees are critical, because they basically run the business. Working in teams in the company's stores, they buy some of the produce and merchandise they sell; they hire, train, and fire team members; and they're paid a salary plus a gainsharing-based bonus based on their ability to meet or exceed plan. Everyone is eligible for stock options. Everyone can know what everyone else is earning, and the highest compensated person cannot earn more than 19 times the average for all.
Is this an important answer to the inequality now thought to be burdening economies from the US to India and even China? Or is it an exercise in self-indulgence associated with a retailing strategy that would succeed in any case? If it is so promising, why do so few organizations practice it, as evidenced by macroeconomic trends? Is the basic premise even correct, given evidence from Europe, where less inequality prevails alongside slow growth? What do you think?
To Read More:
Don Delves, The Pay Problem
, The Conference Board Review, Winter, 2013.
John Mackey and Raj Sisodia, Conscious Capitalism: Liberating the Heroic Spirit of Business
(Boston: Harvard Business Review Press, 2013)
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[This article was provided with permission from Harvard Business School Working Knowledge.]