Credit Crisis Sharpens Anger Over CEO Pay

Expect a lot more of this in the coming year as more and more ordinary Americans are "left behind". And the heads we win, tails we still win approach continues at the top of corporate America. Again, let me throw out the harebrained idea of if, like Germany we limit executive compensation to say 50x the median worker (they limit it to 7x). "Free market" capitalists will say, then the "best and brightest" will leave. I ask - to where? The only exclusions would be people who founded their own company and thus can enjoy the fruits of their labor as they take their company public - the shares they get at IPO should more than make for enough wealth for 50-100 people. Then if they are unhappy with the 50 to 1 ratio for CEO pay they can leave and start a new company - which would be good for US innovation. Most of the rest of the CEOs are highly paid babysitters. Is Coke really going to go out of business if some guy in middle management ran it? I know it won't change - and after a year or two of anger things will continue on their old path, but just asking the questions - i.e. how can German companies stay in business if they are led by such incompetents who somehow only made 7x the average wage? And... do you think the median wage in America would go up if the CEO's own wage was tied to the median in their company? I think that answer is very easy to figure out....

Let the shareholders decide? We've tried that system for a long while and it hasn't done a thing. Other than Carl Icahn and a few others who actually try to buck the system, it's broken. Most shareholders with scale are institutions who don't want to get involved in this, their job is to make money - not be corporate activists. From the CNBC.com article (emphasis mine; my comments in italics):

• Arizona design teacher Marsha Minniss believes the culture of paying sky-high salaries to U.S. executives is "insane." Public health director Paul Pisinski from Massachusetts thinks multi-million dollar payouts for CEOs are "unfair" and "unwarranted" as a global financial crisis deepens. Minniss, who was out shopping in upscale Scottsdale, Arizona, agreed. "The whole thing's insane and I think the average American feels that way." (Note to Ms Minniss - the average American however does not pay for the political parties or lobbyists.)
• Texan market stall holder Alan Smythe just wishes someone would pay him a million dollars to run a Wall Street financial firm into the ground. "They gave the guy from (American International Group) $40 million. Give me a million and I'll run it into the ground faster than that, I'll run it into the ground in six months," he said.
• The United States places a high value on the pursuit of wealth and many speak of the American Dream in which anyone can achieve riches and success through hard work—and resentment toward the rich is comparatively rare. But as U.S. lawmakers consider a $700 billion bailout for Wall Street using public money, many on Main Street are turning against the culture of lavish executive pay, analysts say.
• Last year CEOs of companies in the Standard & Poor's 500 index on average took in $10.5 million in pay, 344 times that of the typical U.S. worker, according to the Institute for Policy Studies and United for a Fair Economy
• "It's an issue that people are outraged about across the political spectrum," said Sarah Anderson, an IPS analyst specializing in executive pay. "The public feel outraged, but they feel disempowered. They don't know what they can do about it," she said.
• Up until now, the justification for golden CEO payouts has been that they recognize performance in a competitive international market. But as firms buckle under in the present crisis, and taxpayers are being asked to pick up the tab for some of their worst errors, many Americans are questioning that long-held belief.
• "I do not think it holds up," Pisinski told Reuters. "I don't think it's fair, I don't think it's warranted for anybody to be paid the bonuses and benefits that they have received, especially in light of the fact that they seem to be rewarded for failure."
• "I don't see that leaving it to shareholders has led us anywhere. Shareholders, all they care about are their profits," she said.
• "People that work hard and start their own companies, if they make a lot of money, great. But if they're not doing a good job, then no," she said, although she drew the line at laws to curb executive pay. I just wish (executives would) have a conscience and take care of the people who work for them."

Fifty to 1... if they are unhappy with that go start a new business with those "one in a million type of abilities" or go to another country to be CEO where a CEO will get far less than 50 to 1. The United States was somehow competitive in the '70s and '80s when it was below 50 to 1... I'm sure we'll find a way to compete under this new "socialistic" rule. ;)

Comments

[Tricky:]

I won't try to predict any of the specific outcomes - social, regulatory, geopolitics - that result from this crisis. But I will predict that there will be many significant ones.

2008 Oct 04 04:17 PM

[dealfinder500:]

While I am hesitant about a law limiting pay because it's a step towards socialism, I really think that it should be limited for executives. You would have thought that shareholders would have limited it a long time ago - as 1 million that they don't pay the executive is 1 million more in profit for the company. I don't think that any executive should make more than $1 million a year in salary (unless of course they started the business).

2008 Oct 04 05:37 PM

[dixie:]

If 50 times the median workers pay is still insufficient, let those "captians of industry" refine either their basketball or acting skills.

2008 Oct 04 07:19 PM

[olesalt:]

How we got here is thru 1) executive stock options and 2) packing the BOD compensation commitees with buddies to reciprocate and 3) giving away the proxy for our 401 shares so the BOD have a lock on votes

2008 Oct 04 08:04 PM

[Egg:]

Not that it's comparable, but CEO pay doesn't resonate so badly when you think about some professional sports players (especially basbeball) who now make 10M+ per season that are not that special of players.

My analogy would be when the CEO of (let's say) GE is paid 12M which is less per year than a good (not great) starting major league pitcher then CEO pay is not out of control.

2008 Oct 04 08:44 PM

[1worldcurrency:]

The author's comment about a shareholder's solution being impractical is telling. If all the failing companies were allowed to go bankrupt, then shareholders would behave more rationally in the future. But Congress already decided that is not practical, so everyone must get a haircut, even ceo's. The old definitions of socialism versus free enterprise must be adapted, even the fool Bush sees the free market has caused a crisis. Let's give "productivity", "efficiency", and "growth" more tangible meaning than the limited measuring stick of the Dow Jones.

More evidence that the model is broken is the wild popularity of ETF,s which allow investors to diversify but result in even more passive ownership of public corporations. When owners don't mind the store, managers steal the profits.

2008 Oct 04 09:08 PM

[roger maxims:]

Egg: No, it is not right to compare CEO pay to MLB players. The whole baseball team is made up of a dozen or so players, each of them is capable of changing the outcome of the game. And they alone bring in all that sponsor revenues.

And no again, US CEOs can easily go to Japan (Carlos Ghosn for Nissan) or Dubai or London etc to get exactly the same pay, parachutes and pancakes from Mackey Dees. This is because you cannot learn management skills of a multinational with 100k workforce by running a small factory in the countryside or getting an MBA from Harvard.

2008 Oct 04 11:39 PM

[Gary Williams:]

7X is the key to happiness and safety for corporations and CEO's. Any more than that is to invite serious criticism the Boards of Directors, whose pay should also be cut dramatically. Make no mistake about it, Americans hate the excesses of greed and abuses of capitalism. Corporate pay is visible to everybody. Overpaying at the top is driving up so many things in our society: tuition costs, housing materials, stocks, and is creating poor and rich, with nobody in the middle.

2008 Oct 05 12:19 AM

[LCACM:]

The current sky high CEO salaries is one of the main contributory factors to the current crisis. To justify their huge salaries, the CEOs have outsourced most US companies to foreign countris, leading to severe job losses in the US. Needless to say a person without a job is unable to meet mortgage payments. Limiting the CEO salary to 7x the average company salary (as in Germany) would ensure that the US workers get better salaries, and in turn they would be in a much better position to pay their mortgages/bank loans. There would be no need for the Government to bailout banks, as is currently happening.

2008 Oct 05 04:09 AM

[investor88:]

The capitalist system is the best economic system but COMMON SENSE must prevail. CEO pay is ridiculous around the world particularly in the USA, there should be a regulated limit of median or average company pay level else the dissatisfied CEO become an entrepreneur/sharehold... with truly rich rewards for job well done/luck but by the same token face the risk of being wiped out in an adverse turn of events. The capitalist system has evolved into a heads I win tails I also win, the country which embraces such a system without any common sense of proportions must pay the price and lead to long term adverse outcomes.

There must be common sense, a must be a balance in everything in nature. No system must be carried to extremes when it will breakdown. To use the umbrella of the capitalist system to embed in a system of extremes of "heads I win tails I win" is not capitalist at all. Capitalism rewards entrepreneurship or even luck but certainly does not preach "heads I win tails I also win" carried to the utmost extremes.

2008 Oct 05 04:18 AM

[AmericanInE...:]

Why the hell is CEO pay relevant at all? If a company wants to pay amount X to its CEO, who cares? This is just populist crap that resonates with simpletons that don't understand anything.

2008 Oct 05 08:50 AM

[Jimbo:]

I understand the CEO of Merrill-Lynch walked with a 150 million dollar settlement when they went broke. I also understand that something like 9,600 employees of Merrill were out of a job. Perhaps that great champion of the downtrodden, Senator John Edwards, will file a pro bono class action law suit against Mr. McNeil in behalf of all those former Merrill employees. Sadly, the whole damn culture is rancid. But don't worry, Archbishop Rowan Williams will bring us Sharia and we shall have justice at last!

2008 Oct 05 01:05 PM

[TinyTim:]

agreed that top execs are way overpaid. the baseball comparison is appropriate since both have short longevity. which brings up competence. many top execs got there by luck and timing and organizational intelligence, rather than management skill and expertise. Once they hit that level, it's self perpetuating since head hunters only look at experience.
more power to them if they can go overseas. I think this demonstrates greed over allegiance.

the interesting question for me is how or why it happened. the chart shows a steady, but large increase from 75 to 90. After 1990, compensation went throught he roof. what changed? was it looser regulations, merger mania, what?
interestingly, the same thing happened in pro sports.

2008 Oct 05 06:21 PM

[OnW:]

A more progressive income tax, with brackets as high as 90% would go a long way to reducing outrageous compensation. Our experiences of the 1950's, when this was a case, didnot reduce ambition or incentive. Being the boss, or one of the bosses, is in itself compensation.

2008 Oct 05 09:38 PM

[Old Rick:]

This is nothing more than a "class warfare" piece with a whole batch of "class warfare" responses (with a couple exceptions). If a CEO has added a billion dollars in value (revenues and profits, not stock price) to a company, shouldn't he be entitled to a share of the bootey?? The only person(s) who are rationally entitled to be outraged at excessive CEO pay (whatever that is and however it is measured) are the shareholders in a company, most of whom don't vote anyway. the rest of you don't have a dog in the hunt.

As far as a 90% tax bracket, go read JFKs statements on those kinds of brackets and why they were impediment to growth.

2008 Oct 05 11:29 PM

[ResourceWise:]

I like the argument that you have presented though I don’t agree with the remedies. Capping salaries and benefits, and/or deploying punitive taxes will not only destroy innovation and enterprise, but will also stoke corruption – misuse of corporate resources. However the current system is rotten to the core, where insiders pick the pockets of the public and call it capitalism! It needs some serious decontamination.

A fresh regulatory framework that creates transparency for all players in the markets is an absolute necessity. Congress needs to invest some quality time in building a new integrated framework as well as creating an independent regulator that has authority over all market participants. They also need to coordinate regulatory efforts with rest of the world to minimize arbitrage.

Meanwhile as the system deleverages, we’ll just have to grit our teeth and keep our fingers crossed.

2008 Oct 06 04:58 AM