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So now the academics... [Feb. 20th, 2007|10:58 am]
a.d.h.d ramblings and obsessions
Corporate Chiefs May Come to Rue Fat Paydays: Albert R. Hunt

By Albert R. Hunt

Feb. 19 (Bloomberg) -- There is hand-wringing in America over growing income inequality and excessive executive compensation.

The complaints aren't emanating from left-wing populists or ivory-tower academics. Federal Reserve Chairman Ben S. Bernanke devoted an entire speech this month to income inequality, worrying that it threatened ``the dynamism'' of capitalism. A critic of greedy executives: George W. Bush.

These conservatives have realized that, for all the strength of the American economy, many people feel it's chiefly the rich who are getting richer while the middle and working class struggle to stay even. This is going to be a big issue in the 2008 presidential election.

The gap between the wealthy and the less affluent has gradually widened for decades, accelerating during the Bush presidency. Meanwhile, American chief executive officers and chief financial officers now make 400-fold more than average workers; that's 20 times what the gap was in 1965.

Inflated CEO pay -- such as the $357 million retirement package given Exxon Mobil Corp.'s Lee Raymond or the $210 million that Home Depot Inc.'s Robert Nardelli walked away with after being fired -- is fueling the populist backlash far more than the salaries of baseball players and other celebrities that Bernanke cited.

`Important Symbol'
To be sure, excessive corporate compensation is only a small part of income inequality in America. Most experts agree the larger problem requires significant and smart investments in education and job training for skills required in tomorrow's economy.

Politically, however, the CEO pay issue resonates. ``It is more symbolic than substantive,'' says Robert Reischauer, head of the Urban Institute think tank and former director of the Congressional Budget Office. ``But it is an important symbol; in other countries, CEOs are not making a thousand times more than factory workers.''

Remarkably, many corporate boards have little sense of this. ``The biggest shock with executive compensation is how unembarrassable these people are,'' says Nell Minow of the Corporate Library, a corporate-governance research group.

(One exception: Aflac Inc., the big insurance company, which said last week it will let shareholders cast a non-binding vote on executive pay.)

One person who wants to do something about it is the new chairman of the House Financial Services Committee, Barney Frank of Massachusetts. Democrat Frank is confident that the House this year will approve his legislation to give shareholders the chance to vote on compensation and golden-parachute packages for top executives at publicly traded companies.

Status Quo Champions
This is benign stuff; it is not the government setting executive pay, it's merely directing the Securities and Exchange Commission to give shareholders the option to vote on lucrative compensation packages.

Yet many corporate interests, and even the usually reasonable Treasury secretary, Henry Paulson, insist such an exercise in capitalistic democracy is a bad idea, a harbinger of other intrusions.

These champions of the status quo contend that lucrative compensation is necessary to attract the best talent; that the demands and scope of a CEO are far greater than in earlier eras; and that these executives earn their largesse because of what they return to shareholders.

Frank and Minow reply that academic studies show very little correlation between higher compensation and better performance. If the same rules apply to all publicly traded companies -- as they would under the Frank legislation -- it's difficult to see any comparative disadvantage.

Not Bill Gates
Moreover, in the competitive global economy, it's the American executive remuneration that looks out of kilter. A study by the consulting firm Towers Perrin of top executive pay in 26 major countries found that American executives make an average of twice as much as their French, German and British counterparts and four times as much as the Japanese and Koreans.

The most specious argument is that legislation is unnecessary because the CEOs add so much value to the company. Shareholders that are reaping big returns surely won't complain about pay packages.

``The same green eyeshade should be applied here as any other asset allocation,'' Minow says. ``You don't hear complaints about Bill Gates.''

There are other shareholders that would and should complain about indefensible compensation packages, says Warren Buffett, America's foremost investment guru. ``Too often, executive pay in the U.S. is ridiculously out of line with performance,'' he wrote in his annual report.

Succeeding as They Fail
Golden parachutes for non-performing CEOs especially rankle the Sage of Omaha: ``Getting fired can produce a particularly bountiful payday for a CEO,'' he wrote. ``Indeed, he can earn more in that single day while cleaning out his desk than an American worker earns in a lifetime of cleaning toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure.''

Examples abound, starting with Home Depot's Nardelli. Pfizer Inc.'s Henry McKinnell, dumped by his board last year, walked away with a $180 million package. Hewlett-Packard Co. shareholders got off comparatively easy; Carly Fiorina's severance package -- after she was ousted -- was valued at about $42 million.

Thoughtful or Stupid?
Frank notes, with more than a little irony, that some corporate defenders of executive compensation are the same people who worry that excessive regulation -- the Sarbanes-Oxley corporate-governance law and litigation -- imperils America's financial standing. The U.S. needs to be more like London, or New York soon will be replaced as the world's leading financial center, they say.

They are less likely to note that in Britain shareholders get to vote on executive compensation in public companies. That vote is not binding but is rarely ignored. ``Apparently, that's one thing about England they don't like,'' Frank says.

Similarly, he notes these are many of the same people who wax eloquently about the virtues of the free market and investors as the arbiters of rational choice: ``It turns out that these shareholders, who are wonderfully thoughtful and collectively incisive, become quite stupid when it comes to paying the boss, the guy who works for them.''

(Albert R. Hunt is the executive editor for Washington at Bloomberg News.)

To contact the writer of this column: Albert R. Hunt in Washington at ahunt1@bloomberg.net.

The economists are some of the most influential players in the american political sphere as we give so much legitimacy to economic models and the country is based on a free market way of life. If the academic optomists get worried then it really is likely to start to trickle down into real policy.

[User Picture]From: whildbill
2007-02-20 06:17 pm (UTC)
I've always rather liked that one company (though I can't remember its name at the moment, sadly) that has, as one of its company policies, the rule that no one in the company can earn more than 11 times what the lowest paid employee makes. I think that's a very good way to keep everyone on a more even footing, as well as (likely) fostering a better sense of community & loyalty within the workforce.

A study by the consulting firm Towers Perrin of top executive pay in 26 major countries found that American executives make an average of twice as much as their French, German and British counterparts and four times as much as the Japanese and Koreans. (bolding is mine)

And how much do you suppose that has to do with the trouble American car companies are in right now? I'm not saying it's the only problem; it's not.
But... If you looked around the Big Three, picked out all the top exectutives, cut their pay by 75%, and added all the savings together, how much more money would that give the companies to spend on areas they need to improve in, such as R & D?
Obviously, the Japaneses and Korean carmakers are doing something that works right now, and Detroit isn't. Perhaps this is part of it.
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[User Picture]From: psych0squirrel
2007-02-22 01:37 am (UTC)
I've thought of that actually. It seems they like the idea of cutting other employees salaries more then their own.

There also doesn't seem to be much differentiation between products sold and salary. Perhaps a consulting firm can afford to pay their CEO's more then a car company as they can charge more and have lower costs. A big problem seems to be that they vote on their collegues salaries, and they ussually vote high as the new CEO will most likely sit on their board later. (And they stick together too much, the CEO's who lose money should get fired and not with millions of dollars in severence). And maybe if they concentrated on the long term strategy of a company they would have less volitility.
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From: wildmachine
2007-04-19 11:17 pm (UTC)
You have interesting perspectives for a psychosquirrel.
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[User Picture]From: psych0squirrel
2007-05-01 06:18 am (UTC)
Oh well I don't generally find it useful to repeat the same old stuff everyone else does. I try and take the most interesting aspects of different arguments, from different sources and come up with the normative consensus. Most people are reasonable unless they are crazy and the precentage of crazy people is so minute. While I have met people who are deeply idealogical a lot more are just cranky and not approached well by people who also hold idealogies perhaps of a different stripe. If people get excited because they meet people who disagree with them, who am I to find that a sign of increased intelligence? Also the arguments of "OMG I found a stupid person" strike me as contrived because in a normal distribution you should expect at least half the people to be of below average intelligence so its not exactly interesting to note the obvious. (And 1/6th should be of a statistically significant point below average... omg who cares?)

Mostly I've found that if you mix the arguments around lots more people will talk to you, its the trick of being social, and somewhat of a survival skill as I live just outside Washington DC. The political and socio-economic undercurrents can be interesting here despite most people just coming for the jobs. As kids growing up here we just rehabilitated the kids who had strange views, most of them were pretty normal otherwise.

Anything in particular you found interesting? Questions on the blog?
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From: wildmachine
2007-05-02 07:24 am (UTC)
So with informmation overload we rulez. :)

I will check the blog with more time if you wish, Im pretty busy right now preparing the next exhibition.

But what about you? what do you do there?

Im an artist studying theology and with stress.
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