The Cost of Overpaying: How High CEO Salaries and Income Disparity Affect Our Wealth, Health and Happiness

Hidden beneath the visible price tag of the many accepted ways of life are hidden costs that most do not consider. Sometimes they are societal costs that are harder to calculate. But without accounting for these hidden costs, policymakers and societies frequently accept the status quo. What if we did calculate the true price of everything? That is the work of journalist and author Eduardo Porter. In his new book, the Price of Everything: Solving the Mystery of Why We Pay What We Do, Porter examines the costs of overpaying CEOs and professional athletes as well as the price of happiness, work, revulsion and the future.

Maria Armoudian: What is the true cost of superstars, professional athletes and CEO's salaries? Their salaries have grown exponentially. How much have they grown and how does this affect the rest of us?

Eduardo Porter: The share of income that has gone to the most highly paid in this country has grown exponentially. In 1980 the top 1 percent of Americans, the richest 1 percent of Americans, reaped about 10 percent of the nation's income and by 2008, which is the last figure that I've seen, they were reaping about 21 percent. So their share of the nation's income has more than doubled. This means much less income for anybody else, so it clearly has an impact on all of us, not only because of the large share, but also what this does to the incentives for everybody else.

MA: Let's talk about the incentives. You wrote that capitalism relies on inequality, but when it becomes so grossly disparate, people start to drop out. Talk about that phenomenon.

EP: That's right. Experiments have shown that when the rewards are tilted so heavily to pay the very few, others will assume that there's no chance that they can be up there with the most highly paid and will therefore stop trying. The idea that inequality generates incentives is fairly sound [because when] we want to earn more, we try harder when we know that there is a higher wage at the end of our efforts. But when we think that the higher wages are all captured by the very few, this turns this engine down.

MA: You wrote about two experiments that are important to mention. Describe the one at the University of California about pay and job satisfaction, and the one showing that "winner-take-all" games produced more cheating and less effort.

EP: Yes, people tend to react badly to inequality within their own jobs and labor experience. If you know that the person next to you earns much more than you do for roughly the same sort of work, this will detract from your morale and it clearly has an effect on how people work. The second experiment was a surprising discovery showing that when games are extremely tilted to favor only the very best, it will lead people to cheat. But it sort of makes sense if people feel that they have no chance except if they cheat. But if you tilted the rewards from perfect equality -- in which everybody gets the same no matter how well they do -- to slightly incentivize better performance, in which people get a little bit more if they perform a little bit better, it works fine as an incentive. But once you've tilted this so immensely such that only the very best got most of the rewards, then it totally broke down.

MA: So it seems there's a long-term cost to gross disparity in people's incomes, which is more cheating in societies and I can see potentially more bubbles as a means to beat the systems too.