Is McKinsey to Blame for Skyrocketing CEO Pay?

In 2011, I posed the question “Is McKinsey & Co. the Root of All Evil ?” This was not a tongue-in-cheek query, but rather, a look at how so many recent disasters traced their origins back to McKinsey & Co.

Which brings us to the latest issue negatively affecting the United States, skyrocketing CEO pay and income inequality. The parade of bad societal effects that are related to that has been well established — especially with income mobility.(Surprisingly, Wikipedia has a good overview).

Duff McDonald has a new book coming out this Fall titled The Firm: The Story of McKinsey and Its Secret Influence on American Business. He points to you-know-who as the early mover in a number of societal ills. It should come as no surprise that CEO pay is one of them.  In terms of income & wages, Duff traces McKinsey’s influence back to 1935, when “managers sought advice about how to deal with the rising power of unions, they turned to outside advisers such as McKinsey & Company.”

That then morphed into something different entirely in 1952. That was when the CEO of Pan American World Airways got interested in a McKinsey study of stock options.

The entire We can trace the rise of CEO compensation to that date:

“Anyone who has worked in the corporate milieu knows that the arrival of McKinsey on the scene tends to not be a sign of good news for the rank and file. What is less known is McKinsey’s role in the creation of the CEO-to-worker gap itself. In 1951, General Motors hired McKinsey consultant Arch Patton to conduct a multi-industry study of executive compensation. The results appeared in Harvard Business Review, with the specific finding that from 1939 to 1950, the pay of hourly employees had more than doubled, while that of “policy level” management had risen only 35 percent. If you adjusted that for inflation, top management’s spendable income had actually dropped 59 percent during the period, whereas hourly employees had improved their purchasing power.

The “academic” imprimatur of Harvard Business School’s house organ gave the work a certain credibility and the study was suddenly an annual affair, appearing in HBR for more than a decade thereafter, at which point it moved into McKinsey Quarterly. From 1948 to 1951, HBR had one article a year on executive compensation. A few years later, the review was running five times that amount. This was actually a perfect moment for the new “field of study,” because in the post-World War II years, there was a shortage of executive talent and corporate leaders had begun poaching executives not just from the competition but also from entirely different sectors. And they had to know how much to offer, did they not? Moreover, in the post-Depression years, no one had wanted to talk out loud about compensation. But after the war, they were ready to raise the volume.”

Crony capitalism and the transfer of wealth from shareholders to insiders goes back much further than you may have guessed.

Good ideas gradually die of their own accord, replaced with better ones. Bad ideas have a death grip on society, often with wealthy sponsors benefiting from them. That’s why they seem to hang around forever…


The Godfather of CEO Megapay: McKinsey Consultant Arch Patton Didn’t Invent Wealth Inequality — He elevated it to an art form
Duff McDonald
NY Observer 8/13/13

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