They may be rich, but are Britain’s top executives happy? The recent news that the members of this elite club have awarded themselves average pay increases of 29 per cent over the past two years probably left many people hoping the answer was no.
So, with impeccable timing, a study from Professor Richard Easterlin of the University of Southern California appears, demonstrating that rising incomes do not make people happier.
This is confusing news for the magic roundabout of pay review bodies whose members deliberate on each other’s remuneration packages (and keep them the highest in Europe). For, if Easterlin is right, maybe they are not doing each other any favours. According to his theory, the UK chief executive on the average CEO salary of £509,000 a year is no more delighted with his (or her – there are a few) lot than he was when he was earning, say, £300,000 a few years ago. Maybe, then, it would be a kindness to reduce CEO salaries.
Not so fast. As Easterlin acknowledges, income does have a very great bearing on happiness: studies over several decades and in different countries have consistently concluded that income is strongly related to well-being. The more educated you are, the more money you are likely to earn and the happier you are likely to be or – almost the same – believe yourself to be.
But that is only half the picture. If the relationship were simple, it would mean that we continue to get happier throughout our lives (and become positively delirious with joy by the time we reach retirement age), given that most of us become richer as we get older. But this is not so, according to Easterlin. Instead, he found that happiness was remarkably constant throughout people’s lives. Despite a predictable rise in the fortunes of any particular peer group – the result of promotions and pay increases – the average sense of well-being does not change. A particular individual’s emotional state and perception of their own happiness will show dramatic ups and downs according to life events such as marriage, divorce, health, the Big Brother vote, and so on. None the less, the happiness level of a group of such individuals remains constant.
To put it another way, if your next-door neighbours were richer and happier than you ten years ago, the chances are they are still happier than you now. The point, according to Easterlin, is that our wants increase according to our means: if we get paid more, we aspire to more. We quickly decide we want – even need – the new trainers and the week in Ibiza or, higher up the income chain, the Gucci shoes and Caribbean holiday. In other words, we are on a “hedonic treadmill”, always wanting the next thing, our incomes never quite catching up with the wherewithal for the next object of desire.
So, our sense of well-being, instead of following the upward trajectory that we imagine results from increasing fortune, stutters along horizontally until the next income increase arrives, just in time to meet the next unmet desire. As Ralph Waldo Emerson expressed it in 1860: “Want is a growing giant whom the coat of Have was never big enough to cover.”
Needless to say, none of this dashes our constant expectation that future happiness is almost within our grasp. It would be tragic if we were not so comical in our continuing faith in the power of material goods to change our lives.
Slightly nearer tragedy, though, is how early in life our “for life” happiness levels are determined. According to Easterlin (interpreting United States data), the pattern is set in senior high school. Because young people increasingly share the same youth culture – music, television programmes, films – their material aspirations are remarkably similar whatever their income prospects. Easterlin found that those expecting to go to college, as well as those not intending to, scored more or less identically on a list of “big-ticket” goods (a house, cars, music equipment, designer clothes) that they considered it would be “important to own”. Their aspirations are the same but the gap between their likely incomes throughout their lives is enormous. The non-college group will start their working lives with a lower happiness level and finish with one.
Like most such economic theories, Easterlin’s is painted with a very broad brush. It is more than possible that you are utterly content with your new Gaggia espresso machine – this week at least. Or that – against the trend – you might have become happier and happier in your life with each annual pay rise. But Easterlin is surely right to identify the vast majority of us as restless hedonists seeking out the next “hit”. He acknowledges the universality of his thesis by prefacing his work with a quotation from Samuel Johnson in 1776: “Life is a progress from want to want, not from enjoyment to enjoyment.” Still, it is useful to have a few equations and graphs to back up our time-worn beliefs.
And the detail of his work does raise wider questions. If the astronomical increases that big bosses are awarding themselves are not even making them any happier, what are they for? Not for efficiency, service to the public or even increasing profits, if recent cases are anything to go by. Isn’t it time to try something different in the management of our companies, particularly with regard to the pay gap between top management and shop floor? The global salary survey revealing that British top executives received the highest salaries in Europe also showed that our average manufacturing wage is the lowest at just £20,475 (that’s approximately 4 per cent of £509,000).
Surely a bit of redistribution would be a happy outcome for everyone.
“Income and Happiness: towards a unified theory” by Richard Easterlin is published in the current issue of the Economic Journal
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