Monday, March 07, 2011

Salaries are Spatial

Because the United States does not provide universal health care -- as the governments of most other wealthy countries do -- most people who are insured purchase their health insurance, sometimes as individuals but usually as part of an employee group. Connecting health care to insurance and insurance, in turn, to employment, creates a tremendous amount of waste, confusion in the best cases, while leading to misery, pain, illness, and even death in the worst cases.

I bring all this up because it relates to a special case of a general phenomenon I have been observing for years. One reason we do not have universal health care is that its opponents (read: the American Medical Association and insurance companies) have managed, with decades of effort, to convince enough people that the words "public," "government," and "Communist" all mean the same thing. At the same time, they have convinced us that the alternative is "choice" and that this is best provided by a "free market" in health care. The shameless commodification of health care should come as no surprise in a society that seems bent on subjecting every aspect of human endeavor to whims of markets.

What is surprising is the extent to which people have been convinced that such a convoluted, artificial, and indeed rigged system is in fact a "free market" when nothing can be further from the truth. I am increasingly convinced that no free market as defined in neoclassical economics exists for any good or service, and never has. Health care as it exists in the United States should be just the most obvious of many examples.

The involvement of Blue Cross/Blue Shield adds to the cognitive dissonance in the discussion, as it bills itself (pun intended) as a network of non-profit organizations, even though it serves to generate exorbitant monetary rewards for its leaders. In Massachusetts, the stratospheric severance pay given to its recently departed CEO has raised eyebrows and has gotten the attention of our attorney general, if not our governor. Exorbitant rewards for poor performance are becoming all-too familiar, as are the excuses for out-sized pay at the top of most organizations.

In the case of severance packages -- and I have seen this up-close in a former church -- it is routinely pointed out that the executive's contract required a particular level of severance pay. Current directors have no choice but to comply with what is, after all, a binding obligation. This begs what should be an obvious question: why are such terms negotiated? I would certainly include a generous, no-fault payout in my contract if I could, but everyone knows that is impossible. Why? Because such arrangements do not come from negotiations that take place in free markets or from collective-bargaining processes. They come from a third universe of compensation decisions: executive pay.

Learn more at
Executive PayWatch


In executive pay -- and in the pay of those who work closely with executives -- free markets do not operate, at least not fully. In this arena, pay (and benefits, including severance) may be influenced by several factors, including such "market" considerations as years of experience, breadth of knowledge, level of responsibility, special skills, and so on -- in short, the scarcity of one's credentials and the level of one's commitment. These are minor in comparison, however, with one much more important factor: proximity to those who set salaries.

This became crystal clear to me more than a decade ago, when I heard an executive -- justifying large administrative pay increases while staff pay stagnated -- remarked that "these people work their butts off." In that moment, I realized that the work of those close to the top is better compensated simply because they are close to the top. The difference in pay, for example, between "executive" secretaries and other secretaries has something to do with ability, since executives will reward themselves with more talented secretaries. But the gap is enhanced by proximity to the top, even in the most honestly-run organizations. (One interesting corollary: executives who assign themselves the most talented and best-compensated support staff -- often in unlimited numbers -- enhance their own performance relative to ordinary workers who have far less control over hiring of the people on whom they rely.

Which brings us back to Blue Cross/Blue Shield. Not only is my proximity thesis borne out by Killingsworth's extraordinary; these directors took it to an extraordinary level by approving pay for themselves as members of a non-profit board. The advantages of this arrangement compared to a "government takeover of health care" are difficult to discern.

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