No. Turns out it was Clinton-era Labor Secretary Robert Reich – a man whose uneven virtues I have previously sung – speaking in favor of letting markets and shareholders determine CEO compensation packages (link behind a WSJ subscription wall):
There’s an economic case for the stratospheric level of CEO pay which suggests shareholders — even if they had full say — would not reduce it. In fact, they’re likely to let CEO pay continue to soar. That’s because of a fundamental shift in the structure of the economy over the last four decades, from oligopolistic capitalism to super-competitive capitalism. CEO pay has risen astronomically over the interval, but so have investor returns.
The proof is in the numbers. Between 1980 and 2003, the average CEO in America’s 500 largest companies rose sixfold, adjusted for inflation. Outrageous? Not to investors. The average value of those 500 companies also rose by a factor of six, adjusted for inflation. In 2005, for example, Exxon Mobil reported $36 billion in profits. Its former chairman, Lee R. Raymond, retired that year with a compensation package totaling almost $400 million, including stock, stock options and long-term compensation. Too much? Not to Exxon’s investors, who enjoyed a 223% return over the interval, compared to the average 205% return received by shareholders of other oil companies, a premium of about $16 billion. Raymond took home just 4% of that $16 billion.
Of course, being an old class warrior, Mr. Reich can’t quite satisfy himself with the economic justification for a few CEO superstars to bring home the big bacon – he has to get all moralistic on us (proving while doing so that the left isn’t against the idea of morality as a basis for social policy per se, they just don’t like yours):
This economic explanation for sky-high CEO pay does not justify it socially or morally. It only means that investors think CEOs are worth it… If America wants to rein in executive pay, the answer isn’t more shareholder rights. Just as with the compensation of Hollywood celebrities or private-equity and hedge fund managers, the answer — for anyone truly concerned — is a higher marginal tax rate on the super pay of those in super demand.
Let us put aside for now the fact that the top 1% of wage earners (by adjusted gross income) paid almost 37% of the US federal tax burden in 2006 (and that the top 10% paid over 68% of the total). If shareholders and markets choose to reward brilliant innovators, risk takers and strategists with stratospheric remuneration packages, what kind of market deforming signal will the government send by standing there by the pay window smiling placidly and pointing a pistol?
And if successful entrepreneurs are to be punished by confiscatory tax rates, what other incentives can we provide to our most brilliant executives – people who actually contribute to the general economic well-being, creating tax generating jobs and taxable economic activity along the way (as opposed to cabinet secretaries and academics, who tend to deal in burdensome regulations and airy abstractions, or both) – sufficient to ensure that the innovation and agility remain the drivers of our own comparative advantage? Because the alternative would be competing on price with Bangalore-based call centers in a services economy.
Which, *shudder* .
And they wonder why people off-shore.
Update: You know, it occurs to me that this is really fundamental to one of the characteristic left/right divisions in this country, and it comes down to what you believe makes America great (if in fact, you’re not one of the goons running around setting retirement home flags on fire).
I think people like Mr. Reich instinctively believe in the power of government and people in government to make the country better. So long, you know, as the right sort of people are at the helm. Making the correct choices. For you.
Other people, your correspondent not least, believes the genius of our federal system is that at its best it tries its hardest to stay out of the way of the people who actually make things happen while still laying out a safety net for the less able.
This may be why people like Steve Jobs and Bill Gates create markets and rise to the top of their milieu by servicing them and everyone says, well, yeah, I understand that – it makes sense. And why on the other hand, every four (or eight years) we go through one of these dreary political primary processes trying to whip up enthusiasm for one or another gray suit in a line up of otherwise unprepossessing mediocrities.
Hmm.
“If America wants to rein in executive pay…”
I have yet to see a cogent argument as to why America would want any such thing.
And yet Steve, I suspect that one or two of the regulars will show up in this space to tell you that we ought to. Arguing from their own specific to a theoretical general, this will be called what the American people want. Or if not, then what is best for us.
I will say that my Apple stock is going through the roof. I bought a bunch at $19/share a number of years and splits ago. Pay Steve Jobs whatever he darn well wants. Lavish him with gifts and first born children. I’m happy.
What I wouldn’t like is if I were a shareholder of, say, Home Depot when Robert Nardelli was CEO, or Pfizer, when Hank McKinnell ran the place, who were paid millions to pretty much go away.
Sure, my option as a shareholder is I can sell my stock and maybe have a vote, but a payout of millions for stagnant and/or tanking stock prices? Jeez. I want to be a CEO, where do I sign up?
The whole issue of CEO compensation seems to be fundamentally an emotional one. Its easy to say that a CEO is overpaid, compared to what an average worker makes. The average person wonders: “Geez, what do THEY do all day that justifies that amount of money?”
Well, what ‘they’ do is create opportunity for capital growth in new markets and manage risk in existing ones. Those two things. Job creation is a welcome side effect of this effort, but it is a side effect. An assembly line welder could rightly say that the CEO could not likely do his or her job. Most CEOs couldn’t–but a surprising number would have the aptitude to learn and succeed at that job–or any job put in front of them. Put the shoe on the other foot and ask the welder if they personally could create market opportunity out of thin air, or make a multi-million dollar payroll every week. Not so much. So vastly different arenas of skill sets and scales of operation are involved here. Sadly, CEOS have a lot in common with field marshals, of whom Napoleon said, it took 5,000 dead to train one.
The competition between corporations for attracting and retaining highly successful CEOs is very fierce. CEOs want a bigger challenge, to make a greater impact. That is their primary motivation. Like a lot of politicians, they think a lot about their legacy. And like some politicians, some CEOs fall victim to the nemesis that stalks their particular hubris. Corporate boards know that the challenge their organization offers is an unknown quantity. The exceedingly high compensation they offer in exchange for someone [hopefully] capable of taking on that challenge is like the earnest money deposit in real estate. It shows that you’re organization is serious. Because if you aren’t there are other organizations out there that are, and all are competing for the same limited talent pool.
An organization capable of paying very high CEO compensation by definition also has the resources to make the market impact that CEOs are seeking for their legacy.
Jpr is correct. Pfizer’s McKinnell took an $83 million lump-sum pension in addition to his $16 million annual compensation – all the while his stock declined 42% while he was in charge! That is not “free market”; that is theft.
There are two distinct issues here: 1. Excessive CEO compensation, non-reflective of performance, and; 2. Tax issues.
As for number 1. – Notwithstanding Reich’s unusual straw man to support his tax philosophy – most all agree, including most CEO’s and institutional investors that CEO compensation has gotten well out of hand.
Warren Buffet’s partner and the antithesis of a Marxist, Charlie Munger tells us: “About half of American industry has grossly unfair compensation systems where the top executives are paid too much.”
Florida governor Jeb Bush – a pro-market conservative – is even more blunt. Out-of-control compensation, he believes, is “a threat to capitalism.”
While there is widespread and across the board agreement on out-of-control CEO compensation, tax issues are much more complex and divisive. One of the reasons CEO’s as a group want to rein in the excesses of some of their compensation is to avoid the very tax law changes that Reich and many propose to limit the excesses.
Currently, unlike the normal wage earner, executive compensation is shielded from most tax through shrewd accounting, deferrals, and the lesser capital gain rates. The system is broken.
So where’s Henry George when we need him?
A small quibble, it always grates when Bill Gates is touted as some sort of visionary, or economic benefactor. He is more properly a robber baron of the classic style. He was smart enough to steal another’s work, and sell it as MSDOS when IBM was in a fever to find an OTS operating system to resell. He was also smart enough to be willing to accept from IBM the brand recognition they were giving away. He then embarked on two decades of using first mover advantage, market position, and a very large checkbook in a predatory fashion to stifle competition, and sell inferior products into the marketplace. Where else may one knowingly vend a defective product than the world of software?
Is he worth it? To his shareholders, yes.
Back in the wayback, the company The Hubby and I work for was merged with another equal sized company. The end result of this merger of equals was the laying off of nearly 5,000 workers in one city. At the same time, the CEO of the newly merged company posted an executive compensation package of over $50 million. In the coming years, that CEO would make many employees – including The Hubby and I – rich on stock options and other benefits related to company performance. Yet most employees, if asked, would say nearly a decade later despite the wealth he spread around, that the CEO was an asshole of the first order.
It’s a conundrum; make laws and place limits and you destroy capitalism, which is what makes this country so great. Work hard, be in the right place with the right idea at the right time -and become a millionaire.
I don’t think anyone is worth $400 million, (Let’s see a little 3rd grade math, works out to $15,655/day for an individual who lives to be 70 years old, “Yeah that outa be enough to squeak by”) however, given the choice of the ridiculously over compensated CEO & the likes of Robert Reich, give me the ROCCEO everytime. Reichivian policy, assuming he would be part of HRH administration, would be a detriment, no make that a catastrophe to the US economy.
Shipmates,
I’d like to take a tangent off of CaptJ’s comments regarding welders Vs. CEO’s, etc.
I’m getting more than a little tired of hearing all the advertising, both commercial and governmental, about how kids absolutley HAVE to go to college, how having a degree is paramount to success, yadda yadda yadda.
The problems with this approach are three:
1.) It steers money into (mostly) private, commercial, for-profit ventures called Universities. These institutions exist to make money by providing an (alledged) “higher education”. What they do mostly, however, is take an impressionable 18-19 year old, and, four years and copious amounts of PC indoctrination later, send them off to the real world saddled with what for many will be a crushing debt burden.
2.) That crushing (or, at least, significant) debt burden is born by both the child AND the parent, and in many cases will force the child into a for-rent/lease existence for far too many years, thus depressing the housing/ownership market and keeping a great many forever out of the full American dream.
3.) It takes good, industrious folks out of the tech and trade schools, and leaves us dependent upon a dwindling supply of people able to provide those skills which any succesful society requires. Plumbers. Electricians. Finish Carpenters. Etc. Witness the sky-high pay that those who chose to persue these skill sets command.
My plumber starts at $60.00 an hour and is at least 6 weeks booked. He charges (and gets) $90-$120.00 an hour for weekends, overtime, etc. He dribes a Lexus. My doctor has a 7-year old Taurus. Go figure. She also has a huge debt load from medical school, college, residency, and crushing insurance premiums, etc.
No, we need to start steering kids to trade schools vice college in order to return us to a more self-sufficient and more productive nation. We need to return some sanity to the college level schooling as well, because far too many are being cheated of future wages to pay for some shmuck with a PHD who doesn’t contribute anything to society except mental masturbation. For outrageous returns. Think Ward Churchill times 10,000.
Respects,
It’s interesting that there has been so much concern about *CEO* compensation…but little about the very high incomes of entertainers, musicians, athletes, etc.
Any theories as to why?
“And yet Steve, I suspect that one or two of the regulars will show up in this space to tell you that we ought to”
Roles and missions-I have mine!
For every Steve Jobs or Bill gates there is a Glenn Tilton-the man who reneged on his company’s obligations to his employees screwing every employee out of pension benefits they had earned while he himself keeps a 5 million dollar a year pension package for himself.
Moral suasion means nothing to these guys so the only way to get them and the income flow back on the track is to make it not worth their while to profit at the expense of their employees.
Government does have a role to play in that process.
Furthermore-while in macro numbers the economy is growing, slower than it used to this year thanks to the housing crunch, the gap between sectors of society is getting wider. ( Kiplinger is the source for that statement). Again, government has a role to play in incentivizing the correct behavior and making the all boats float higher-not just those of the privledged few.
There is nothing wrong with advocating that-especially in a world that is increasingly becoming divided between the haves and the have nots.
#10 – David, that is indeed a good question. Here is my theory:
Entertainers and performers incomes are more tied to a self-regulating free market than CEO’s. Their income is normally directly tied to their performance. Those at the very top of their profession can command large crowds willing to pay top dollar for their performances. Extraordinary and very rare performance = extraordinary income. Likewise, those of far less ability and performance are relegated to a Council Bluffs lounge acts or the Huntsville Stars AA baseball team, and the relative and proportionate, much lower income.
CEO’s compensation on the other hand, is far too often unrelated to their performance or value.
Rather than the customer determining their value and paying as it is with entertainers, it is a small Board of Directors that determines the level of CEO compensation, and it’s the stockholders that pay. Too often, these Boards are lax (as are shareholders) in regulating this excessive executive compensation. Worse, Boards of Directors are often filled with cronies, and companies frequently have interlocking Boards that scratch each other’s backs, compensation-wise.
Like extraordinary entertainers, there is nothing really wrong with extraordinary compensation for CEO’s whose performance is extraordinary. But in recent years, there has been a growing disconnect between CEO pay and performance. It is not right when a farm-club or lounge-act CEO whose company’s stock severely underperforms is nevertheless lavished with multiple millions and a golden parachute for life. Not even movie stars or pro-athletes get those kinds of deals.
Exceptional CEO compensation despite their poor performance is a theft of stockholders equity, and a theft of their employee’s productivity.
What AW1 Tim said.
The next ‘extraordinary’ CEO could be the welder-who-went-to-trade-school -and -tinkered-at-nights-in-the-hangar-after-work-and-9-years-later-wins–the-X-prize-and-makes-millions-in-the-IPO.
Whereas 9 years in academia to often means mind-numbing committee work and nasty tenure in-fighting, only to end up [to paraphrase Fliterman] a farm-club or lounge-act scholar lavished with multiple millions in [your tax dollars] grant money and a golden parachute for life.
Cpt J, does the name John Moses Browning ring any bells to you? Because you just described his story. The same is true of a number of American inventors.
There are a number of people who are over-compensated. Markets being what they are, they generally find themselves either paid less or out of work soon enough.
– Max