Myth: The rich get rich because of their merit.
Fact: Researchers have uncovered dozens of social factors that contribute to becoming rich.
The vast majority of academic studies on who becomes rich
have found that intelligence and merit are only a part of the
reason -- social factors play a huge role as well. Studies of
Fortune 500 companies have found that American executives are
seeing exploding pay, but there is no correlation between their
pay and a company's profitability. In fact, companies with the
greatest inequality of pay suffer worse product quality. And many
studies have found that societies with the greatest equality generally
enjoy the fastest rates of economic growth.
Many conservatives and libertarians defend the current levels
of income inequality on the basis of merit. They claim the rich got rich
because they worked harder, longer or smarter than the rest.
However, researchers have conducted a vast number of empirical
studies on what factors contribute to success, and in what proportion.
A classic example of one of these studies is the 1972 book Inequality,
by Christopher Jencks. (1) And these studies
show that the meritocrat's position is not just arguably wrong,
but clearly wrong.
For adults, countless factors other than personal merit contribute
to success. A partial list includes:
Studies from many professions have consistently found that taller
and more attractive people make more money than shorter and plainer
folks. Just one of countless examples is a study of lawyers conducted
by Jeff Biddle of Michigan State University and Daniel Hameresh
from the University of Texas. They found that the more attractive
the lawyer, the more rapid the promotions within the firm. By
the end of 15 years' time, the more attractive ones were earning
13 percent more than the less attractive ones. (2)
- Access to first-rate education
- Training opportunities
- Personality type
- Physical attractiveness
- Athletic ability
- Prejudice (and not just against race or gender)
- Social and business connections
- Knowing someone who is successful
- Lobbying Congress
- Business cycle trends
- Insider trading
- Unfair market practices
- And, last but not least, dumb luck -- being at the right place
at the right time. John D. Rockefeller once described becoming
rich as a 3-step process: "1. Go to work early. 2. Stay late.
3. Find oil."
One major factor in determining who becomes successful is inheritance.
In 1989, one third of all Americans who earned more than $1 million
began with an inherited fortune. (3) But even more widespread
is the practice of "living inheritances" -- the advantages
passed on from parents to their children while still alive. Examples
include wealthy families sending their kids off to college, providing
venture capital for their start-up businesses, and otherwise granting
them every advantage in a competitive world.
This points up the importance of childhood factors in determining
later success as well. The above chart reflects mostly adult factors,
but sociologists have identified many childhood factors as well.
A partial list includes:
Even conservatives who believe in meritocracy inadvertently acknowledge
the importance of childhood social factors. One of the hottest
topics today among the richest 1 percent is finding top-quality
private schools for their children. But if they truly believed
that merit is everything, and that social factors do not explain
or promote individual success, then they should be satisfied with
sending their kids to public or even inner-city schools. Of course,
the very idea would horrify them -- which provides eloquent testimony
as to the importance of the environment even as appraised by wealthy
- Parental wealth and receipt of welfare income
- Number of siblings and birth order
- Parental expectations and aspirations for their children's schooling
- Grandparents' schooling
- Religious denomination and church attendance
- Age of the mother at birth
- The income and racial composition of the community of origin
- The amount of time mothers spend in the labor market
- Family structure -- two parents versus a single parent, and whether
parents are separated or divorced
- Peer influences in the form of perceived peer education plans
- Measures of the quality of stimulation found in the home environment,
including emotional and verbal responsivity of the mother, provision
of appropriate play materials, time and quality of maternal involvement
with the child
parental instigation of and participation
in intellectual activities, parental affection, rejection, and
- Language spoken at home
- Discussions about college plans with teachers and other school
- Parental emphasis on self-direction versus conformity
- Ethnicity and immigrant status
- Parental involvement in school activities (4)
How large a role do the various factors play? One well-known conservative
estimate can be found in The Bell Curve, by Richard Herrnstein
and Charles Murray. They studied data from a long-term survey
of 12,000 young adults, and concluded that intelligence was a
far better predictor of future success than childhood socioeconomic
status (or SES). For example, a white child raised in the bottom
5 percent of SES is eight times more likely to become poor than
a child from the top 5 percent. But a white child whose IQ is
in the bottom 5 percent is fifteen times more likely to
become poor than a child whose IQ is in the top 5 percent. (5)
However, Herrnstein and Murray's analysis has been roundly criticized,
because they defined SES as only three things: parental income,
occupation, and education. To get a truer picture, many sociologists
have assembled a more complete SES index and reanalyzed the very
survey data that Herrnstein and Murray used. A team of Berkeley
sociologists led by Claude Fischer has conducted perhaps the best
known effort, for the book Inequality by Design. They added
family size, the presence of two parents in the home, geographical
residence and other social factors to the list, and then recalculated
the survey data. They found that social factors predicted future
success far better than IQ did. In fact, based on their results,
the authors conclude: "If we could magically give everyone
identical IQs, we would still see 90 to 95 percent of the inequality
we see today." (6)
The social aspect of wealth accumulation can be seen in the following
statistic: between 1975 and 1992, the amount of national household
wealth owned by the richest 1 percent rose from 22 to 42 percent.
(7) Does this mean the richest 1 percent suddenly became twice
as smart or productive? Does this mean that someone in the top
1 percent is 71 times smarter or more personally productive than
anyone in the bottom 99 percent? Of course not. Social factors
must be responsible for such tremendous differences, even
if these are simply the dynamics of the market. What this means
is that conservative talk of "merit" is misguided, and
not a little ironic.
Exploding executive pay: justified by merit?
In the last 20 years, total pay and compensation of America's
top executives have been exploding. Graef Crystal is undoubtedly
the United States' most renowned expert on this phenomenon, and
his book, In Search of Excess: The Overcompensation of American
Executives, commonly serves as the starting point for all
The statistics Crystal reports are not in dispute. Among the 500
biggest firms in the U.S., average CEO compensation in 1975 was
41 times what an average worker earned. By 1995, that ratio had
soared to 197 times. (Again, are CEOs five times smarter and harder
working than they were 20 years ago? Of course not. Many are the
same people.) From 1994 to 1995 alone, CEO compensation rose 16
percent, compared to 2.8 percent for workers, which did not even
keep pace with inflation. Their stagnating wages cannot be blamed
on corporate profits, which rose a healthy 14.8 percent for that
In 1996, Business Week published the findings of an income
survey of the top two executives at 362 of the nation's largest
companies. This is what they found:
CEO pay and other trends (original figures have been converted
into constant 96 dollars) (10)
1990 1995 Percent change
Average CEO pay $2.34 million $3.86 million +65%
Average worker pay $27,615 $27,448 -0.6%
Corporate profits $212 billion $317 billion +50%
Worker layoffs 316,047 persons 439,882 persons +39%
The fact that CEOs are helping themselves to record paychecks
at a time when they are laying off tens of thousands of workers
and freezing everyone else's wages begs a defense. And it's not
just liberals who demand an answer; blue collar conservatives
are just as outraged. A 1996 telephone survey of 800 voters, accompanied
by six focus groups, revealed that Americans of all ages, all
incomes, all races, and both political parties are seething over
the way large corporations have been treating their workers in
recent years. Large layoffs during times of profitability were
regarded as a "serious problem" by 81%; huge CEO salaries
were a "serious problem" for 79%, and stagnant wages
were a "serious problem" for 76%. (11) In fact, no less
a far-right candidate than Patrick Buchanan used this economic
populism to score a stunning upset victory over Bob Dole in the
1996 New Hampshire Republican Primary.
Wealthy conservatives offer a few defenses. One is that executive
pay is tied to the profitability of the company, in a widespread
system called "pay-for-performance." This payment method
involves paying executives through stock options and incentive
bonuses -- hence, an executive merely gets what he deserves. Sometimes
they even offer anecdotal evidence: in 1994, Disney CEO Michael
Eisner cashed in on $203 million in stock options, after successfully
restoring the once moribund Disney to the nation's leading entertainment
Few, if any, would disagree that merit should be rewarded proportionately.
However, anecdotal evidence often gives a false picture of what
is happening; to get a truer picture, we need to look at generalizations.
The fact is that nearly all CEOs are seeing exploding pay, whether
their companies are performing well or not. Some of them inevitably
do. But despite their company's performance, almost all executives
are raking it in as fast as they can, reducing the name "pay-for-performance"
to little more than a public relations gimmick.
Crystal has conducted studies measuring the correlation between
profits and executive compensation in Fortune 500 companies. "It's
a table of random numbers," he told the New York Times,
"like throwing darts against the wall." Specifically,
he found there is "no relationship between pay-package sensitivity
and longer-term shareholder return." He also found that "there
is no relationship whatsoever between the size of stock option
grants and future performance [of the company]." (12) Crystal
adds: "There is no reason why they need to be paid this sort
of money. They could use that money to lower the cost of products,
give workers raises, or give shareholders more profits."
He sums up his findings this way:
"Some used to think that the corporation was something of
a family and the CEO is the father at the head of it. If there
isn't enough food to go around, the father feeds his children
first. He doesn't sit at a table with great haunches of beef and
throw the bones to the kids. Yet that's what is happening at many
companies today." (13)
Even so, some have defended stratospheric CEO pay on the grounds
that it attracts top talent and provides incentive to achieve,
if only to remain a CEO. But Crystal argues: "It's insane
to think that these 'incentives' worth millions of dollars are
buying anything extra." (14) He explains that it is difficult
to provide further incentive to U.S. executives for three reasons.
First, they are already working as hard as possible. Second, they
are already old enough to be set in their management approach.
Third, they are already making the nation's largest fortunes anyway.
However, greater inequality has become a clear disincentive
to workers, who are working harder, producing more, yet seeing
stagnating wages and greater prospects of being laid off. The
following sentiment, from a United Technologies middle manager
who has seen his company downsize by some 30,000 employees in
the past six years, is typical: "I used to go to work enthusiastically.
Now, I just go in to do what I have to do. I feel overloaded to
the point of burnout. Most of my colleagues are actively looking
for other jobs or are just resigned to do the minimum." (16)
Studies confirm that business performance deteriorates when pay
differentials become excessive. In a study of over 100 businesses
(producing everything from kitchen appliances to truck axles),
researchers found that the greater the wage gap between managers
and workers, the lower their product's quality. (17) Businesses
with the greatest inequality were plagued with a high employee
turnover rate. Study author David Levine said: "These organizations
weren't able to sustain a workplace of people with shared goals."
In fact, the negative effects of income inequality can be seen
on a national level as well. Economists Torsten Persson and Guido
Tabellini conducted a thorough statistical analysis of historical
inequality and growth, and found that nations with more equal
incomes generally experience faster productive growth. (19) Numerous
other studies have also confirmed their findings. (20) Two historical
examples immediately stand out; the first is the U.S. after World
War II. Between 1947 and 1973, income inequality never rose above
.376 on the Gini Index (and fell as low as .347). But after 1973,
it began rising substantially, to .426 in 1994. And how did the
growth rates of these two periods compare? In the more equal 1947-1973
period, the economy grew at 3.4 percent a year. But since then,
growth has slowed down to 2.5 percent a year. (21)
The second example is international comparisons. The United States
has by far the worst income inequality of all rich nations. No
other country even comes close. And here are the growth rates
for several of these nations:
Annual percent growth in GDP per capita (22)
Country 1979 1989
Japan 6.5 3.4
Italy 4.1 2.2
France 3.7 1.7
Canada 3.5 2.0
West Germany 3.2 1.6
Sweden 2.8 1.8
United Kingdom 2.3 2.0
United States 2.2 1.7
We should note that the causes of different rates of growth are
still controversial even among top economists. However, these
statistics tend to refute the conservative claim that faster economic
growth occurs when we allow market dynamics to disproportionately
reward the rich.
Return to Overview
1. Christopher Jencks et al., Inequality: A Reassessment
of the Effect of Family and Schooling in America (New York:
Basic Books, 1972).
2. Maryann Struman, "For successful lawyers, it's all in
the looks, new study indicates," The Detroit News,
September 29, 1995.
3. Calculation by Michael Hout from biographies of "Forbes
400" in Forbes, October 23, 1994. Cited in Claude Fischer
et al., Inequality by Design, (Princeton: Princeton University
Press, 1996) p. 94.
4. Linda Datcher Loury, letter to the editor, Commentary,
August 1995, vol. 100, no. 2.
5. Richard Herrnstein and Charles Murray, The Bell Curve
(New York: Simon & Schuster, 1994), p. 127.
6. Fischer et al., pp. 70-101, 14.
7. Edward Wolff "How the pie is sliced: America's Growing
Concentration of Wealth," The American Prospect 22,
Summer 1995, pp. 58-64.
8. Graef Crystal, In Search of Excess: The Overcompensation
of American Executives (New York: W.W. Norton, 1991).
9. Study by Graef Crystal for U.S. News & World Report,
reported in "The State of Greed" by Harrison Rainie,
Margaret Loftus and Mark Madden, U.S. News & World Report.
10. John Byrne, "How high can CEO pay go?" Business
Week, April 22, 1996. Dollar amounts have been converted into
constant 96 dollars by Steve Kangas. The original figures, in
current dollars, were reported thus:
CEO pay and other trends:
CEO PAY WORKER PAY
1990 = $1.95 million 1990 = $22,976
1995 = $3.75 million 1995 = $26,652
CORPORATE PROFITS WORKER LAYOFFS
1990 = $176 billion 1990 = 316,047
1995 = $308 billion 1995 = 439,882
11. Three focus groups were conducted with Caucasian, non-college-educated,
working class men and women in Hartford, Conn., San Jose, Calif.,
and Oak Brook, Ill.; two with Caucasian, middle class, college-educated
men and women in Iselin, N.J. and in San Jose, Cal.; and one among
African-American working class men and women of mixed education
levels in Oak Brook, Ill. A "focus group" is a conversation
between trained listeners and the members of the group, who respond
to questions posed by the listener. The conversation is videotaped
and then analyzed and evaluated. The results have been published
as: EDK Associates, CORPORATE IRRESPONSIBILITY: THERE OUGHT TO
BE SOME LAWS (New York: EDK Associates [235 West 48th St., NY,
NY 10036; phone: (212) 582-4504; fax: (212) 265-9348.], July
29, 1996). Copies are available from: The Preamble Center for
Public Policy, 1737 21st Street, N.W., Washington,
DC 20009; telephone (202) 265-3263; fax: (202) 265-3647. Free,
but if possible a $5.00 donation to cover costs would be appreciated.
12. Crystal, Graef, "CEOs and Incentives: The Myth of Pay-for
Performance," Los Angeles Times, January 8, 1995.
13. Quoted in Byrne.
14. Quoted in Rainie.
15. Graef Crystal, "CEOs and Incentives: The Myth of Pay-for-Performance,"
Los Angeles Times, January 8, 1995.
16. Quoted in Byrne.
17. Douglas Cowherd and David Levine, "Product Quality and
Pay Equity," Administrative Science Quarterly 37 (June
1992), pp. 302-30.
18. Quoted in Byrne.
19. Torsten Persson and Guido Tabellini, "Is Inequality Harmful
for Growth?" American Economic Review 84, June 1994,
20. Roberto Chang, "Income Inequality and Economic Growth,"
Economic Review (Federal Reserve Bank of Atlanta) 79, July/August
1994, pp. 1-10; George Clarke, "More evidence on Income Distribution
and Growth," Journal of Developmental Economics 47, 1995,
pp. 403-27; Peter Lindert, "The Rise of Social Spending,"
Explorations in Economic History 31, 1994, pp. 1-37; Lars
Osberg, Economic Inequality in the United States (Armonk,
N.Y.: M.E. Sharpe, 1984); Edward Wolff, p. 64.
21. Gini Index: U.S. Bureau of the Census, Current Population
Reports, Series P60. GDP growth: Bureau of Economic Analysis,
National Income and Product Accounts.
22. Gary Burtless, "Public Spending on the Poor: Historical
Trends and Economic Limits," p. 81 in Sheldon Danziger, Gary
Sandefur and Daniel Weinberg (eds.), Confronting Poverty: Prescriptions
for Change (New York: Harvard University Press, 1994), citing
Howard Oxley and John Martin, "Controlling Government Spending
and Deficits: Trends in the 1980s and Prospects for the 1990s,"
OECD Economic Studies 17 (Autumn, 1991), and unpublished
data from the U.S. Department of Labor and Bureau of Labor Statistics.