What Would You Give To Be In The 1%?

With another holiday in the books and the daily grind again upon us, this is a good time for the following thought exercise: Imagine, if you can, that every waking hour, of every waking day, you were working.

Maybe not doing paperwork, or laying bricks, or serving coffee, or grading essays, or repairing hard drives, but still working: solving problems, fielding calls, making decisions—big ones, potentially involving many millions of dollars and thousands of jobs.

Maybe you’re at your boy’s baseball game, your sister’s wedding, your Dad’s funeral or your granddaughter’s birth. Maybe you’re on the slopes or on the waves. Or maybe you’re lying in bed, at the edge of a dream.

But no matter where you are or what you’re doing, you’re on call—come hell or worse.

Sound like fun?

Welcome to life as a fat cat. Not the idle, trust-fund feline, but the seven-figure guy or gal who flies first class, wears perfectly tailored suits (or $300 jeans) and has a gold-plated health plan, among other trappings—all while millions of Americans pound pavement for work.

To hear the pundits, politicians and protestors tell it, fat cats are one of the planet’s most reviled species, barely above the cockroach but well beneath the snake. Their reason, above all: Fat cats make far more money than working stiffs. CEOs, for example, make roughly 260 times more than the average worker. That’s a big gap, and it’s grown bigger over time.

A common defense for the explosion in fat-cat compensation is that the companies they run have exploded in size along with their paychecks. One study by Xavier Gabaix (of MIT) and Augustine Landier (NYU) points out that the six-fold increase of CEO pay between 1980 and 2003 is “fully attributed” to the six-fold increase in market capitalization (number of shares times share price) of large US companies.

That’s a clean but insufficient explanation. As someone who gets paid to understand why people make a living in business and why they don’t, I can’t help notice an often ignored yet crucial aspect of the income-inequality debate: sheer sacrifice.

On Call

Caveats first, and they’re huge. For starters, not everyone has access to the same education (and the powerful established networks that come with it). Second, not everyone is equally talented. Third, not all industries command the same premium: Software coders and mutual fund managers will always earn more than baristas and cosmetics clerks. And fourth, as George Packer astutely and exhaustively outlines in the November/December 2011 issue of Foreign Affairs (see A Broken Contract), deep-pocketed corporate lobbyists have gradually tilted the scales in Congress over the last 40 years.

But there’s something else here—something about how people actually live their lives—that all the rancor tends to drown out: Generally speaking, the person who works 9 or 10 hours a day lives an entirely different sort of life than someone who’s life is, essentially, work—and that’s ultimately a big reason why one is paid less, and often far less, than the other.

By “entirely different” I don’t mean private-versus-public school, mansion versus a two-bedroom apartment, Cadillac versus Corolla, Lake Como versus movie night. Those are byproducts of a more fundamental difference:  the one between dealing with one boss and maybe an angry client, to dealing with all the angry clients, as well as hundreds of employees, impatient investors, swarming reporters and unctuous politicians—all who, at any given moment, can demand an answer about something.

I was reminded of this law of labor while watching Margin Call, a slick yet compelling flick about a Lehman-like investment bank in the moments before the 2008 financial crisis. You need neither be a mortgage trader nor an Occupy protestor to understand, enjoy and be outraged—all at once—by this film. The entire plot unfolds during a 24-hour period—from the night a 28-year-old analyst realizes his firm could go bankrupt in a flash should the economic tide slightly turn, straight through the next day when the firm unloads its toxic assets, craters the market and lays off most of the staff. As the night wears on, a clutch of grown-up, millionaire bankers joins the triage, including the head of the entire firm (a formidable Jeremy Irons), who literally helicopters in at 2 a.m. The unspoken assumption: No matter what they were doing—no matter what—their butts had to be in that boardroom. All night.

That’s what they get paid for, unlike those who get to sleep while others handle the problem—others, more to the point, who are expected to handle the problem. Whether they handle it well or not is another story (read on).

Pay And Performance

A big reason the work-as-life aspect of the income-inequality issue gets glossed over is that plenty of Wall Street types who got paid to be on call weren’t on the line as well. They didn’t suffer for their abominable performance—they got bailed out. Sure, their stock and options packages took a hit, but their overall level of comfort still dwarfed that of their employees lucky enough to still have jobs. That result doesn’t feel right, regardless of the long years the fat cats and their lordly lieutenants had given in pursuit of those juicy pay packages.

The same frustrating disconnect between pay and performance applies to heads of more traditional and less tarnished firms. Take Jeffrey Immelt, chief executive of venerable General Electric since September 2011: GE’s shares have fallen by roughly half during his tenure, yet he still pulls down $9.6 million in annual compensation. (Immelt has plenty of corner-office company, to be sure.) Boards of directors—and to some extent, shareholders—are charged with keeping things in check, but often they don’t.

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Entrepreneurs—the folks I’ve studied and who represent a significant chunk of “the 1%”—get more of a pass with the 99%. Like finance fat cats and public-company CEOs, entrepreneurs devote their lives to their businesses. But for as much as they love their work, trust me, they like making money, too. Those who hit it big are some of the fattest cats around: 69% of the folks on the Forbes annual list of the 400 wealthiest Americans are self-made. The difference between a managing director and the striving entrepreneur: If an entrepreneur fails, he goes hungry—sooner than later, no matter how many sleepless nights or long years he’s put in.

Smart scribes have challenged the notion that making money by moving money (Wall Street’s main function) adds much economic value in the long run. (See John Cassidy’s thoughtful piece “What Good Is Wall Street?” in The New Yorker.) After this latest fiasco, greasing the wheels of commerce may never seem as palatable as more entrepreneurial pursuits. But the point here is that being a working fat cat (whichever species) involves considerable toil and responsibility for which people will demand to be paid.

Effort And Reward

So why has the income gap grown (and grown)? Are the wealthy working even harder and sacrificing more than ever before?

That’s admittedly hard to prove, though there’s some evidence suggesting that the upwardly mobile enjoy less downtime than the rest. Professors Mark Aguiar and Erik Hurst—in a paper for the Federal Reserve Bank Of Boston –found that, like income, a gap in the distribution of leisure has also emerged. In short, folks with stagnant incomes log more leisure time than those with the biggest gains in income. (Click here for a longer article on the study, by Steven Landsburg, in Slate.)

Pity the poor fat cat? Hardly. But if we’re going to get all riled up about this massive issue, let’s at least try to understand what we talk about when we talk about income inequality. Here are two things just about everyone can agree on:

Premise #1: Work and reward are linked. A recent study, published by the Center for WorkLife Law and the Center for American Progress (see The Three Faces Of Work-Family Conflict), showed that the financial rewards for working longer hours increased substantially between 1979 and 2006. An excerpt:

“During a period when the real earnings of men who worked 40 hours per week remained essentially constant, the earnings of men who worked long hours shot up. The long-hours premium is particularly apparent in job categories with the largest earnings inequality within a given group. In other words, hours have spiraled up as men strive to ensure they don’t end up as ‘losers.’”

Premise #2: The more time you work, the less time you spend on other parts of your life. A 2006 study in the Harvard Business Review surveyed holders of “extreme jobs”—marked by 60-plus hour weeks and 24-7 client availability. Two-thirds of men and 77% of women said they couldn’t properly maintain their homes; 65% and 33%, respectively, said they had trouble having a strong relationship with their children; and 46% of both men and women admitted to under-investing in their intimate relationships.

All of which begs a fundamental question about economic growth: Would wannabe fat cats sign up for those long hours without the promise of lavish pay packages?

Some surely would. A recent study published in The Journal Of Socio-Economics aimed to parse the connections between toil, inequality and incentives. Conclusion: “The observed association between work hours and occupation wage inequality is not capturing the effect of financial incentives.” Translation: It’s not always about the money. The HBR study backs that up. When “extreme-job” holders were asked the main reasons they loved their work (multiple responses were allowed), 43% of men and 28% of women cited “high compensation”—third in line behind the opportunity to do “stimulating/challenging work” (90% and 82%) and the chance to work with “high-quality colleagues” (52% and 43%).

But here’s the thing: “Challenging work” takes time and commitment. It just does. That time and commitment lead to longer hours, more responsibility, more stress, etc. Fat paychecks may not ultimately fill the void, but they can ease the pain, at least for awhile.

Striking A Balance

The Big Question, then: What is the right amount of income inequality? And do we let markets or our feelings decide?

Here’s where I think Packer and others wax unrealistic. In the last paragraph of his Foreign Affairs essay, Packer writes:

“…inequality will continue to mock the American promise of opportunity for all. Inequality creates a lopsided economy, which leaves the rich with so much money that they can binge on speculation, and leaves the middle class without enough money to buy the things they think they deserve, which leads them to borrow and go into debt. These were among the long-term causes of the financial crisis and the Great Recession. Inequality hardens society into a class system, imprisoning people in the circumstances of their birth—a rebuke to the very idea of the American dream.”

Packer’s position is beautifully rendered and undoubtedly heartfelt. But couching the discussion of income inequality in terms of what people “think they deserve”—and all the good or bad decisions that flow from that assessment—is a dangerous course, one easily unhinged from the unrelenting relationship, however imperfect, of sacrifice and reward.

If we are to strike the right balance of income inequality, we shouldn’t glide over the immutable fact that, all else equal, some people are expected to work longer and harder, and do it on a grander scale, than others.

Further, we have to acknowledge choice: Many people will choose not to sacrifice their lives (and maybe their happiness) in pursuit of their vocations, while others will. The size of their wallets, for better or worse, will often reflect that choice.

The monumental challenge is doing what’s necessary to ensure that as many people as possible have the opportunity to make that choice for themselves. That, for my money, is the American dream.

Wherever you fall in this discussion, please join it. And best of luck in 2012.