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Donkin on Work - Pay and Benefits

April 2006 – Affluence and happiness

I doubt if I can count the number of times I have discussed escalating levels of pay among top executives. Suffice to say that there seems no end to a phenomenon that in 2000 had stretched the annual pay and share packages of US chief executives to multiples of average workers’ pay in excess of 500.

This compares with a multiple of 42 in 1980 according to statistics assembled by The American Federation of Labour and Congress of Industrial Organizations. While the pay gap has broadened in the US, in large Japanese companies, chief executive reward packages have remained at about 10 times those of salaried workers in the same period.

Such statistics used to have shock value, inspiring condemnation of “fat cats”. Not any more. The figures now earned by some of the world’s wealthiest executives have almost lost their meaning, even for those involved.

The US financier and art collector, the late Joseph Hirshhorn, once said: “The money doesn’t matter - not after the first million. How could it? You can’t wear more than two shirts in a day, or eat more than three meals.”

Not that making money has shifted attitudes much beyond those expressed by Julian Robertson, the former hedge-fund manager, who, when working in Wall Street during the 1990s, admitted: “Everybody here is overpaid, knows they are overpaid and is determined to continue to be overpaid.”
Rather than question or condemn such sentiments perhaps it is time to examine the persistence of high rewards, their associated affluence and their influence on well being. Is affluence a worthwhile aspiration or should those with the ambition to reach the top of their professions be seeking something far more fundamental?

Pay and the wealth it delivers is relative to individual circumstances. I have just spent time with two friends, both well off businessmen with big houses and smart cars who were describing themselves as “skint”. That was the word they used.

I know that neither of these men is down to anything approaching his last million but their businesses have not been performing so well recently. One has had to take out a mortgage on his property. They don’t feel as well off as they did a couple of a years earlier. Nor do they seem any happier than they were, possibly less so. Why is this?

Over their careers, their perceived needs have changed to match an improving financial status. This creation of desire and need for fulfilment, that too often is interpreted instead as a need for more things, creates a staircase of aspiration, spiralling forever upwards. The higher sections of this staircase are no more comforting than the lowest steps. In fact a new book suggests they may be less comforting since every further step upwards is accompanied by a growing fear of the consequences of failure.

These consequences are real, says Avner Offer, a professor of economic history at Oxford University. In a new book, The Challenge of Affluence*, he argues that increasing levels of affluence can lead to a reduced sense of well being.

“In standard economic theory, what counts primarily is the absolute level of income. From the point of view of status, however, what counts is not how much you have, but how much more it is than the other person,” he writes.

He quotes the findings of a study by Richard Easterlin, economics professor at the University of Southern California, who discovered that people adjust to an increase in their income by raising their aspirations to match, finding themselves on what he calls a “hedonic treadmill”.

One of the biggest shocks anyone can experience is to fall from this treadmill, particularly where it involves job loss. Prof Offer quotes research by the academics, Andrew Clark and Andrew Oswald, who have both studied the economics of happiness. One of their studies found that the sense of loss and the experience of recovery from losing a job could be worse than that resulting from divorce or widowhood.

“Low rank induces misery,” writes Prof Offer. He notes there is a physiological response to unemployment in reduced levels of serotonin – a brain chemical associated with happiness. Physical symptoms are feelings of “being boxed in a corner, and faced with intractable dilemmas or choices with no obvious escape.”

“Numerous studies in both animals and human,” he writes, “show a consistent set of responses: depressed mood, loss of interest, loss of appetite, insomnia, slow thoughts, loss of energy, feelings of worthlessness and guilt, diminished ability to think, and poor concentration.”

Underpinning these emotions in middle class society is the fear that unemployment might wreck an otherwise stable lifestyle bolstered by the suburban house and other material possessions. Beyond this stability, writes Prof Offer, are the “social ghettos” of poor housing, schools, broken families and racial unrest that characterise the poorest neighbourhoods, particularly in the US that lacks the safety net of a robust welfare state.

These are not new observations. Adam Smith once noted that “We suffer more….when we fall from a better to a worse situation, than we ever enjoy when we rise from a worse to a better.” Prof Offer describes this as an “asymmetric” phenomenon. “A loaf of bread is worth more to a homeless person than a millionaire,” he writes. In the same way “dollars lost are experienced more acutely than dollars gained.”

But is this the case for everyone? Or are some people more resilient to loss than others? Rudyard Kipling tried to define an individualistic – possibly an entrepreneurial - human ideal in his poem If.

If you can make one heap of all your winnings
And risk it in one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breath a word about your loss;

Many people have an aversion to gambling in an unconscious understanding of the asymmetric emotions associated with winning and losing. But are there people who can enjoy winning, lose their shirts, then start again “at their beginnings” with a sense of equanimity? I believe that many entrepreneurs share this quality that is either born of experience or something innate in their character. And I don’t believe that for many of these people the overriding motivation is personal enrichment.

I suspect that Prof Offer is right, however, in his assumption that most people, including many highly paid and powerful people, are not emotionally hard-wired to deal with loss as well as they deal with success. In the UK this may have something to do with a culture that promotes diffidence as a virtue.

Whatever the reason, a headlong pursuit of affluence does not appear to have delivered equal measures of well being to accompany all the trappings of wealth. If affluence isn’t the answer to happiness, then what is?

Prof Offer argues that: “Well-being is more than having more. It is a balance between our own needs, and those of others, on whose goodwill and approbation our own well-being depends.”

He writes: “Instead of the frenzied self-seeking of politics and management, a little ‘noblesse oblige’, a genuine culture of service to others, a sense of humility and proportion is worth restoring as an ideal to strive for, to delegitimize the destructive (and ultimately self-defeating) purpose of self-interest, power, dominance, status.”

Does this mean pay cuts all round? Somehow, I doubt it. But any attempt to explore the relationships between reward, affluence and well being against an increasingly divided world, has to be applauded.

*The Challenge of Affluence, Self-Control and Well-Being in the United States and Britain since 1950, by Avner Offer, is published by Oxford University Press, price £30.

   
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