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Much of the corporate value creation today comes from machines, robots, and computers. Alphabet, the parent company of Google, has a market value of 553 billion U.S. dollars, and employs 70,000 people. Boeing, an older and more traditional firm, is valued at 101 billion U.S. dollars, a fifth of Alphabet’s market value, and employs 161,000 workers, more than twice as many as Alphabet. The New Yorker perhaps best summarizes this state of affairs by saying that “new wealth can be created without creating new jobs.”
Jobs are changing and becoming less repetitive. The Economist points out that “The share of American workforce employed in routine office jobs declined from 25.5% to 21% between 1996 and 2015.” Work today increasingly mobilizes unique tasks not easily replaced by technologies. Other tasks are outsourced, not to China but to the computer down the hallway.
The tech revolution, those technological upheavals that impose large-scale changes onto our world, has implications for CEO pay. The tech revolution introduces complex machinery and robots into firms, which need to be coordinated, managed, planned. Firms require CEOs whose talents allow them to deal with the complexities of tech, and there are only so many individuals with those talents out there. Firms use CEO pay to compete for talent and screen the pool of candidates for the best and brightest, which drives up CEO pay, as argued in an article by Nobel Prize winner Jean Tirole and co-author Roland Bénabou.
Firms, then, pay big bucks for gifted CEOs, while no longer employing individuals who used to do traditional, routine work.
We are at a crossroads where widespread technological upheavals intersect with generous pay levels for the few and employment challenges for the many.
Where do we go from here?
- Challenges for firms
Firms rely on incentive structures to hire the cream of the crop; this strategy comes at the cost of a bonus culture where the ends – making that stratospheric bonus – justifies the means, while ethical considerations fly out of the window. A case in point is a 2015 report by the securities law firm Labaton Sucharow which surveyed financial service professionals in the US and UK. Asked whether they would likely engage in insider trading to make $10 million if there was no chance of getting arrested, 25% the respondents answered in the affirmative.
What is the solution to this disregard for ethics? Should firms give up their quest for talent, and the accompanying high-powered compensation? No, say Jean Tirole and Roland Bénabou in the above article; they argue that a cap on bonus pay can take the wind out of ethical misconduct, as long as firms do not come up with means other than stratospheric incentive pay to screen employees.
Perhaps another solution comes from changes in the corporate environment, specifically the rising tide of shareholder influence. During the last decade, the relation between shareholders and boards has shifted: shareholders have become more active and gotten involved in work that used to be under the board’s discretion. Shareholders now vote on executive pay, a practice called “Say on Pay” that I discuss here. Say on Pay, according to a PriceWaterhouseCoopers survey, has changed the way boards look at executive compensation, and prompted heightened dialogue between boards and shareholders. Shareholders also increasingly have a say in who sits on the board (and gets to be involved in putting together executive pay). Whether bonus culture shifts and disappears in a shareholder-driven environment depends on how shareholders view executive pay, and on how much they can influence boards.
- Challenges for individuals
Technology is good: many benefit from the sharing economy it has spawned. Airbnb makes is cheaper to go rent a place for a few days, Uber makes it cheaper get to a place, concierge services have put at everyone’s fingertips items that once required large investments (e.g., lawnmowers). We now share that which used to idly sit someplace, and thus reduce waste.
But what about the downside of all this? What about those left behind by the tech revolution, whose jobs have been outsourced to a robot? A study by Carl Benedict Frey and Michael Osbourne from Oxford University shows that 47% of all US workers are at a high risk of seeing their job outsourced to a robot. Sectors with the highest risk of robot outsourcing include office and administrative support, sales, and services.
When their job goes to a robot, individuals face unemployment, or have to take on work that is a poor match for their skills and interests. Education systems in most countries are not adapted to helping them acquire new skills. Instead, education systems are still geared to the disappearing industrial model where individuals entered a job after finishing education, and stayed there for the rest of their lives. Employers, in that traditional approach, often paid for their workers to refresh their skills during their career. But no substantial skill changes were required.
The tech revolution challenges this traditional approach. People need to be able to change gears and learn new skills throughout their lives. This allows them to switch jobs and occupations, and to get work adapted to their skills and interests. The Economist argues that “lifelong learning is becoming an economic imperative”. Education systems have to catch up to this new learn-throughout-life world and make adult learning widely accessible.
Mentalities, too, need to adapt; in a world with technological disruptions, we need to feel comfortable with no longer holding onto one occupation for a lifetime. A shift in mentalities is already happening, especially in the millennial generation, where many have become “slashers” and are working at more than one job (e.g., blogger-slash-photographer).
- Challenges for society
As wealth concentrates at the top of the income distribution, inequalities are rising. Individuals who feel left behind manifest their dissatisfaction, for example in the voting booth. 2016 has seen Donald Trump elected to presidency in the U.S., and the Brexit voted for in the UK. Nancy Fraser in her article argues that events like these reflect voters’ rejection of systems that have “eroded their living conditions”. New political parties catering to voters’ dissatisfaction are arising in many countries: Podemos in Spain, Syriza in Greece, Alternative fuer Deutschland in Germany.
In the meantime, those at the top of the income distribution seek to protect their privileges. A New Yorker article chronicles how tech entrepreneurs seek hideaways (e.g., a second home in New Zealand) that protect them from civil unrest.
The welfare systems in Western societies have been built for employment from before the tech revolution, at a time when individuals worked for one employer and one occupation during their lives. Healthcare, retirement, and unemployment benefits nowadays are not yet fully portable from one occupation to another; they need to be re-thought for individuals who are self-employed, change jobs and careers throughout their lives.
Photo adapted from Carsten Frenzl