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Elliott Morss has spent most of his career teaching and working as an economic consultant to developing countries on issues of trade, finance, and environmental preservation. Dr. Morss received a B.A. from Williams College in 1960 and a Ph.D. in political economy from The Johns Hopkins... More
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  • Paying People Too Much 0 comments
    Jan 21, 2010 1:24 PM
    In 1991, Neva Goodwin, the co-director of the Global Development and Environment Institute at Tufts University, wanted to write a book on “Dumb Things We Could Stop Doing”. I thought it was a great idea, and drafted an article on “Paying People Too Much.” The book was never written and the article never published. But I recently read over the article, and the issue is as relevant today as it was back then.
     
    Below, I have updated the article with current data.
     
    Paying People Too Much
     
    by Elliott R. Morss, Ph.D.
     
    Introduction
     
    In 1990, Donald Pels, the chief executive officer of LIN Broadcasting, made $186.2 million by cashing in stock options when LIN was bought by another firm. Steven Ross, the head of Warner Communications, walked away with a $74.9 million cash "bonus" when his firm merged with Time Magazine. Stephen Wolf of United Airlines was at the top of the "regular" compensation list when he took home $18.3 million (1990 was a year in which UAL profits fell by 71%). 
     
    Business Week reported that chief executive officers of large U.S. firms were paid an average of $1.9 million in 1991 ("The Flap Over Business Pay", Business Week. This grew to $10.9 million in 2008 (http://www.aflcio.org/corporatewatch/paywatch/pay/) Another study estimated the average chief executive officer of a major U.S. firm makes 160 times what the average American makes (Graef S. Crystal, In Search of Excess: The Overcompensation of American Executives, New York: W.W. Norton & Company, 1991), May 6, 1991)
     
    Let’s look in more detail at 2008. Table 1 provides compensation data for the executives who made more than $20 million that year. It is a long list. A number of names have been in the news recently as a result of the US banking collapse and the TARP bailout – Blankfein (Goldman) took home $43 million, Pandit (Citigroup) collected $38 million, Dimon (JP Morgan) got almost $36 million and Fuld of failed Lehman got $22 million. They were paid these amounts for one year of work.
     
    Table 1. – 2008 Executive Compensation
    Company
    CEO Name
    Compensation ($)
    Lazard Ltd
    Bruce Wasserstein
    133,708,650
    Nabors Industries Ltd.
    Eugene M. Isenberg
    116,652,816
    Chesapeake Energy Corporation
    Aubrey K. McClendon
    112,464,517
    Oracle Corporation
    Lawrence J. Ellison
    84,598,700
    Freeport-McMoRan Copper & Gold Inc.
    Richard C. Adkerson
    77,085,387
    XTO Energy Inc.
    Bob R. Simpson
    53,482,631
    Walt Disney Company
    Robert A. Iger
    51,229,341
    Axis Capital Holdings Limited
    John R. Charman
    46,770,492
    GAMCO Investors, Inc.
    Mario J. Gabelli
    45,927,900
    Federal-Mogul Corporation
    Jose Maria Alapont Ph.D.
    43,878,871
    American Express Company
    Kenneth I. Chenault
    43,393,172
    Philip Morris International Inc.
    Louis C. Camilleri
    43,229,587
    Goldman Sachs Group, Inc.
    Lloyd C. Blankfein
    42,946,801
    Activision Blizzard, Inc.
    Robert A. Kotick
    41,243,860
    Citigroup Inc.
    Vikram S. Pandit
    38,237,437
    Massey Energy Company
    Don L. Blankenship
    37,201,341
    Eagle Bulk Shipping Inc.
    Sophocles Zoullas
    35,788,323
    JPMorgan Chase & Co.
    James Dimon
    35,764,557
    Calpine Corporation
    Robert P. May
    35,143,178
    Hewlett-Packard Company
    Mark V. Hurd
    34,031,021
    McKesson Corporation
    John H. Hammergren
    33,554,015
    Roper Industries, Inc.
    Brian D. Jellison
    33,318,262
    Iconix Brand Group, Inc.
    Neil Cole
    32,453,264
    Exxon Mobil Corporation
    Rex W. Tillerson
    32,211,079
    Harman International Industries, Incorporated
    Dinesh C. Paliwal
    31,914,693
    Honeywell International Inc.
    David M. Cote
    30,829,513
    Occidental Petroleum Corporation
    Ray R. Irani
    30,401,622
    News Corporation
    Keith Rupert Murdoch
    30,053,157
    Coca-Cola Company (The)
    E. Neville Isdell
    29,713,057
    Johnson & Johnson
    William C. Weldon
    29,127,432
    Seagate Technology
    William D. Watkins
    28,329,065
    Abbott Laboratories
    Miles D. White
    28,253,387
    Viacom Inc.
    Philippe P. Dauman
    27,994,832
    Yum! Brands, Inc.
    David C. Novak
    27,949,368
    Herbalife Ltd.
    Michael O. Johnson
    27,659,552
    VMware, Inc.
    Diane B. Greene
    26,839,850
    BMC Software, Inc.
    Robert E. Beauchamp
    26,467,125
    Hess Corporation
    John B. Hess
    26,334,067
    Comcast Corporation
    Brian L. Roberts
    26,240,363
    Wyeth
    Bernard Poussot
    25,845,593
    Procter & Gamble Company (The)
    Robert A. McDonald
    25,568,212
    Lockheed Martin Corporation
    Robert J. Stevens
    25,551,586
    Merck & Co., Inc.
    Richard T. Clark
    25,073,555
    IBM
    Samuel J. Palmisano
    24,965,547
    Marsh & McLennan Companies, Inc.
    Brian Duperreault
    24,962,204
    State Street Corporation
    Ronald E. Logue
    24,517,276
    Integra LifeSciences Holdings Corporation
    Stuart M. Essig
    24,504,288
    ConocoPhillips
    James J. Mulva
    24,402,520
    Motorola, Inc.
    Sanjay Jha
    24,236,930
    Omnicare, Inc.
    Joel F. Gemunder
    23,847,016
    Anadarko Petroleum Corporation
    James T. Hackett
    23,835,714
    United Technologies Corporation
    Louis R. Chenevert
    23,575,769
    WellCare Health Plans, Inc.
    Heath Schiesser
    23,467,591
    Abercrombie & Fitch Co.
    Michael S. Jeffries
    23,198,271
    ProLogis
    Jeffrey H. Schwartz
    23,176,089
    Bristol-Myers Squibb Company
    James M. Cornelius
    23,150,236
    eBay Inc.
    John J. Donahoe
    22,462,893
    MetLife, Inc.
    C. Robert Henrikson
    22,456,244
    Liberty Media Corporation
    Gregory B. Maffei
    22,286,303
    CVS Caremark Corporation
    Thomas M. Ryan
    22,116,260
    Lehman Brothers Holdings Inc.
    Richard S. Fuld
    22,052,273
    Polo Ralph Lauren Corporation
    Ralph Lauren
    22,039,181
    Deere & Company
    Robert W. Lane
    21,830,483
    TD Ameritrade Holding Corporation
    Joseph H. Moglia
    21,745,211
    General Dynamics Corporation
    Jay L. Johnson
    21,724,967
    Northrop Grumman Corporation
    Ronald D. Sugar
    21,658,718
    Avon Products, Inc.
    Andrea Jung
    21,622,451
    Time Warner Inc.
    Jeffrey L. Bewkes
    21,617,867
    Prudential Financial, Inc.
    John R. Strangfeld
    21,584,843
    ACE Limited
    Evan G. Greenberg
    21,482,013
    CBS Corporation
    Leslie Moonves
    21,167,470
    H. J. Heinz Company (The)
    William R. Johnson
    21,080,265
    Weatherford International Ltd.
    Bernard J. Duroc-Danner
    20,930,309
    Knight Capital Group, Inc.
    Thomas M. Joyce
    20,862,388
    BlackRock, Inc.
    Laurence D. Fink
    20,641,331
    Foster Wheeler AG
    Raymond J. Milchovich
    20,576,993
    Raytheon Company
    William H. Swanson
    20,567,134
    Verizon Communications Inc.
    Ivan G. Seidenberg
    20,333,127
    Valeant Pharmaceuticals International
    J. Michael Pearson
    20,172,115
     
    Executives make a lot, but so do entertainers. Today, the average major league baseball player makes $3.3 million a year, while the average NBA player makes $5.6 million. Tiger Woods has been making $100 million per year, Oprah Winfrey takes home about $225 million annually, while the leading movie stars regularly get $20 million for each movie.
     
    Is it not dumb for us to tolerate a system that allows people to make these amounts when:
     
    ·        engineers average less than $95,000 annually;
    ·        secondary school teachers earn $51,000;
    ·        General Norman Schwarzkopf's annual salary for managing 250,000 military; personnel in Desert Storm was $103,927.60, and
    ·        In 2009, General Peteus made $180,000.
      
    Capitalism or Socialism?
     
    In a capitalist society, people are paid in accordance with their contribution. In a socialist society, people are paid in accordance with their needs. As an economic system, capitalism works while socialism does not. History has shown that whether it is a kibbutz in Israel, or collective farming in China, people don’t work as hard when they are just paid what they need.
     
    But the numbers cited above do raise questions. Should we be concerned enough to take action? Many thoughtful people are disturbed by the size of these payments. Professor Edward E. Lawler of the University of Southern California's Graduate School of Business says: "It seems to get more absurd each year. What is outrageous is that one year becomes the standard for the next. And no one is in a position to say no." Graef Crystal, an Adjunct Professor of Business at the University of California, Berkeley and a longtime business consultant, calls the executive pay system "rotten to the core".
     
    The standard Chamber of Commerce reply is that we should not "mess with the market" because whatever its weaknesses, it is a better overall allocator of resources than any other system ever devised by man.
     
    Certainly, the issue warrants further investigation. Two criteria come immediately to mind that can be used to determine whether people are overpaid:
     
    ·        The market test: is there competition, and if so, is the person earning his or her marginal value product? In less technical terms, is a person getting compensated in a manner that reflects his or her contribution to the profits of an enterprise? If the person provides services to a non-profit organization or a government, the question is how much higher are the additional social benefits provided by the entity as a result of the person's services;
    ·        Social: There is a point at which a large segment of society views the amount paid to an individual for services rendered so large as to be obscene, outrageous and simply not to be tolerated. This feeling might be caught in a quote such as the following: "I don't care if the market is working; from a societal standpoint, those payments are obscene; there is something wrong with the market mechanism if it allows somebody to make that sort of money when a school teacher only makes $32,000". 
     
    Such payments can cause anger and envy that can generate further social costs.In the following sections, we will apply these criteria to two groups, senior executives and media performers, and investigate their consequences.
     
    Senior Executives
     
    i. The Market Test
               
    Mark Farmer has reviewed the literature on executive compensation and finds a very weak positive relationship between executive pay and company performance. This is troubling inasmuch as if the market is working as it should in a capitalist society, there should be a strong positive correlation between pay and performance, It is clear that by the market test, a large number of senior executives are overpaid.
     
    But on this subject, consider also Table 2. While admittedly a small sample, it does offer some troubling evidence. It lists bank executives earning more than $1 million in 2008 who took TARP money. Certainly these executives did not “earn” their money in 2008: in many cases, their banks would have collapsed without TARP bailout money.
     
    Table 2. – 2008 Executive Compensation of TARP Recipients
     
     
     
    TARP
    Company
    Recipient
    Compensation
    Payment
    American Express Company
    Kenneth I. Chenault
    43,393,172
    3,388,890,000
    Goldman Sachs Group, Inc.
    Lloyd C. Blankfein
    42,946,801
    10,000,000,000
    Citigroup Inc.
    Vikram S. Pandit
    38,237,437
    50,000,000,000
    JPMorgan Chase & Co.
    James Dimon
    35,764,557
    25,000,000,000
    State Street Corporation
    Ronald E. Logue
    24,517,276
    2,000,000,000
    American International Group, Inc.
    Martin J. Sullivan
    17,073,478
    98,935,000,000
    Bank of New York Mellon Corporation
    Robert P. Kelly
    14,183,633
    3,000,000,000
    South Financial Group, Inc.
    Mack I. Whittle
    12,406,428
    347,000,000
    PNC Financial Services Group, Inc.
    James E. Rohr
    11,958,853
    7,579,200,000
    Bank of America Corporation
    Kenneth D. Lewis
    9,857,723
    45,000,000,000
    Lincoln National Corporation
    Dennis R. Glass
    9,059,351
    950,000,000
    Wells Fargo & Company
    John Stumpf
    8,768,935
    25,000,000,000
    Northern Trust Corporation
    Frederick H. Waddell
    8,379,651
    1,576,000,000
    SunTrust Banks, Inc.
    James M. Wells III
    8,091,887
    4,850,000,000
    Hartford Financial Services Group, Inc.
    Ramani Ayer
    7,283,943
    3,400,000,000
    U.S. Bancorp
    Richard K. Davis
    6,987,092
    6,599,000,000
    Regions Financial Corporation
    C. Dowd Ritter
    6,807,662
    3,500,000,000
    KeyCorp
    Henry L. Meyer III
    6,727,671
    2,500,000,000
    BB&T Corporation
    John A. Allison
    6,478,689
    3,133,640,000
    Comerica Incorporated
    Ralph W. Babb Jr.
    5,947,475
    2,250,000,000
    CIT Group Inc.
    Jeffrey M. Peek
    5,383,517
    2,330,000,000
    TCF Financial Corporation
    Lynn A. Nagorske
    5,165,471
    361,172,000
    Central Pacific Financial Corp.
    Clint Arnoldus
    5,042,745
    135,000,000
    FirstMerit Corporation
    Paul G. Greig
    4,875,261
    41,500,000
    City National Corporation
    Russell Goldsmith
    4,150,608
    400,000,000
    East West Bancorp, Inc.
    Dominic Ng
    4,063,319
    306,546,000
    UCBH Holdings, Inc.
    Thomas S. Wu
    3,619,608
    298,737,000
    Marshall & Ilsley Corporation
    Mark F. Furlong
    3,449,755
    1,715,000,000
    Wilmington Trust Corporation
    Ted T. Cecala
    3,348,030
    330,000,000
    First Horizon National Corporation
    Gerald L. Baker
    3,323,284
    866,540,000
    Sterling Bancorp
    Louis J. Cappelli
    3,294,011
    42,000,000
    Signature Bank
    Joseph J. DePaolo
    3,169,037
    120,000,000
    Synovus Financial Corporation
    Richard E. Anthony
    3,057,187
    967,870,000
    Webster Financial Corporation
    James C. Smith
    3,000,939
    400,000,000
    Fifth Third Bancorp
    Kevin T. Kabat
    2,980,259
    3,408,000,000
    Royal Bancshares of Pennsylvania, Inc.
    Joseph P. Campbell
    2,892,005
    30,407,000
    Associated Banc-Corp
    Paul S. Beideman
    2,776,841
    525,000,000
    Cathay General Bancorp
    Dunson K. Cheng
    2,771,032
    258,000,000
    Boston Private Financial Holdings, Inc.
    Timothy L. Vaill
    2,722,076
    154,000,000
    Umpqua Holdings Corporation
    Raymond P. Davis
    2,615,010
    214,181,000
    Flagstar Bancorp, Inc.
    Mark T. Hammond
    2,506,900
    266,657,000
    Discover Financial Services
    David W. Nelms
    2,431,100
    1,224,558,000
    Trustmark Corporation
    Richard G. Hickson
    2,230,868
    215,000,000
    Valley National Bancorp
    Gerald H. Lipkin
    2,085,773
    225,000,000
    Whitney Holding Corporation
    William C. Marks
    2,084,389
    300,000,000
    First BanCorp Holding Company
    Luis M. Beauchamp
    2,057,905
    400,000,000
    Sun Bancorp, Inc.
    Thomas X. Geisel
    2,033,417
    89,310,000
    International Bancshares Corporation
    Dennis E. Nixon
    1,906,875
    216,000,000
    Huntington Bancshares Incorporated
    Stephen D. Steinour
    1,884,117
    1,398,071,000
    First Niagara Financial Group, Inc.
    John R. Koelmel
    1,738,847
    184,011,000
    SCBT Financial Corporation
    Robert R. Hill Jr.
    1,610,736
    64,779,000
    First Midwest Bancorp, Inc.
    Michael L. Scudder
    1,600,487
    193,000,000
    F.N.B. Corporation
    Robert V. New
    1,520,354
    100,000,000
    Zions Bancorporation
    Harris H. Simmons
    1,499,926
    1,400,000,000
    Pinnacle Financial Partners, Inc.
    M. Terry Turner
    1,493,862
    95,000,000
    MB Financial, Inc.
    Mitchell Feiger
    1,474,217
    196,000,000
    PrivateBancorp, Inc.
    Larry D. Richman
    1,461,666
    243,815,000
    National Penn Bancshares Inc.
    Glenn E. Moyer
    1,445,647
    150,000,000
    First Financial Bancorp.
    Claude E. Davis
    1,412,088
    80,000,000
    Old National Bancorp
    Robert G. Jones
    1,408,464
    100,000,000
    Popular, Inc.
    Richard L. Carrion
    1,395,622
    935,000,000
    OceanFirst Financial Corp., Inc.
    John R. Garbarino
    1,360,415
    38,263,000
    Susquehanna Bancshares, Inc.
    William J. Reuter
    1,352,659
    300,000,000
    Flushing Financial Corporation
    John R. Buran
    1,316,171
    70,000,000
    Midwest Banc Holdings, Inc.
    Jerome J. Fritz
    1,306,880
    84,784,000
    Morgan Stanley
    John J. Mack
    1,235,097
    10,000,000,000
    Citizens Republic Bancorp, Inc.
    William R. Hartman
    1,212,611
    300,000,000
    Westamerica Bancorporation
    David L. Payne
    1,209,466
    83,726,000
    CVB Financial Corp.
    Christopher D. Myers
    1,187,958
    130,000,000
    First Bancorp
    Jerry L. Ocheltree
    1,155,422
    65,000,000
    SVB Financial Group
    Kenneth P. Wilcox
    1,121,251
    235,000,000
    Lakeland Bancorp, Inc.
    Thomas J. Shara
    1,105,240
    59,000,000
    Independent Bank Corp.
    Christopher Oddleifson
    1,086,855
    78,158,000
    Berkshire Hills Bancorp, Inc.
    Michael P. Daly
    1,076,348
    40,000,000
    1st Source Corporation
    Christopher J. Murphy III
    1,066,327
    111,000,000
    Columbia Banking System, Inc.
    Melanie J. Dressel
    1,053,087
    76,898,000
    Intervest Bancshares Corporation
    Lowell S. Dansker
    1,020,169
    25,000,000
    CoBiz Financial Inc.
    Steven Bangert
    1,012,037
    64,450,000
    Pacific Capital Bancorp
    George S. Leis
    1,002,428
    180,634,000
     
    There is one more table relevant here. It provides exit pay (golden handshakes) for a certain executives. Look at the companies – they all failed shortly after these executives got paid off! And look at the amounts these people received! A late Palm Beach friend of mine once said the churches are always full on Sundays with repentant sinners!
     
    Table 3. – Exit Pay for Executives
    Company
    Individual
    Date
    Total
    Merrill Lynch
    Stanley O'Neal
    Oct. 28, 2007
    $161,000,000
    Citigroup
    Charles Prince
    Nov. 4, 2007
    $105,000,000
    Washington Mutual
    Kerry Killinger
    Sept. 8, 2008
    $44,000,000
    Wachovia
    Ken Thompson
    June 1, 2008
    $42,000,000
    Lehman Bros.
    Richard Fuld
    Sept. 17, 2008
    $24,000,000
    Washington Mutual
    Alan Fishman
    Sept. 25, 2008
    $19,000,000
    Freddie Mac
    Richard Syron
    Sept. 8, 2008
    $16,000,000
    Bear Stearns
    James Cayne
    Jan. 8, 2008
    $13,000,000
    Merrill Lynch
    John Thain
    Sept. 14, 2008
    $9,000,000
    Fannie Mae
    Daniel Mudd
    Sept. 8, 2008
    $8,000,000
    Source: James F. Reda & Associates                                           
     
    Why has the market broken down? There are many reasons for market imperfections. Here, we will focus on two. First, there are certain "assets" one must have to be considered for the senior executive "club" by large corporations and the "headhunter" firms that work for them. Social and professional networks are two of the more important assets given consideration. By limiting searches to persons turned up by the head hunting consulting firms. And the “compensation tables” developed by these firms are very difficult to challenge. Unfortunately for stockholders, the executives selected and what they get paid is part of a very imperfect market.
     
    Second, collusion between the senior executive and the firm's board of directors occurs. Board members remain loyal to the CEO because they make good money by being a Board member. Back in 1990, Business Week reported that in a survey by Korn/Ferry International of 352 companies, the average director of these companies collected retainer and meeting fees of $32,352. Back then, paid much more: Pepsico, Philip Morris, and Coca-Cola paid $78,000, $54,675, and $53,400, respectively. In 2006, the New York Times reported on a survey indicating that directors now get paid between $52, 000 and $165,000.
     
     In theory, these directors represent the interests of shareholders. In fact, these directors are normally selected by the Chief Executive and are likely to support his or her recommendations on most matters. And even if the Chief Executive does not make a recommendation on what his or her compensation should be, it is reasonable to think that under current arrangements, directors will make quite generous offers.
     
    ii. Social
     
    But even if the market were working properly in awarding senior executives "what they were worth", are there not some longer-term social costs that should be considered? In 1990, the heads of the "big three" American auto companies took home between $8 and $12 million, and there were numerous others operating out of the executive suites of these companies that took home considerably more than $1 million. It is hard to believe that such compensation does not have a damaging effect on company morale. Consider two cases: a senior engineer and a production worker:
     
    • A senior engineer is critical to the success of an automobile company because s/he is responsible for the mechanical design of the company's vehicles, and s/he knows it; s/he might make as much as $300,000; how must he or she feel about having to report to a group in the executive suite making ten times more? A production worker with seniority knows a lot about the automobile industry. Can s/he be expected to believe there is someone in the executive suite who is more than 100 times as productive as s/he? 
     
    Is it reasonable to expect that the senior executives, technicians, and production workers in a firm with such differentials will be disposed to work together as a tightly knit team?
    Another important social question warrants attention: Should anyone get paid these amounts? Do we want anyone in our society to receive so much more than they will ever be able to use in a reasonable manner? We are concerned about destroying incentives to work and make risky investments. Perhaps $10 million is okay; but how about the $186.2 million payment to Donald Pels or $78.2 million to Steven Ross?
     
    Media Performers
     
    i. The Market Test
               
    On first blush, sports and other media people seem to get paid "what they are worth" by the market. After all, the public pays fairly directly to enjoy their performances. But is the market really working properly? How about the argument that the media makes stars out of not-too-exceptional people. If that is the case, stars are overpaid in the sense that their intrinsic qualities do not exceed those of others who cannot charge as much for their services. This would not be possible if the market was working. Why? Because through the competitive process, all performers would be judged and paid in accordance with their talents. But is the media competitive? 
     
    We know the broadcast media cannot be completely competitive because the number of airwaves is limited and because of the high costs of getting into the business. However, it is still possible that the best get to the top if the process of sorting that takes place before media involvement is competitive. Let us consider a concrete example drawn from heavyweight boxing: most of the money made from big-time boxing events comes through pay-TV. Mechanisms have been developed for cable-TV by which the audience can be charged on a per event basis, but only a few cable-TV stations are set up to employ them. The Time-Warner conglomerate owns one of the biggest. They have an audience of 20 million sets hooked up. To give some sense of the numbers, when Holifield fought Foreman (Holifield was the heavyweight champ while Foreman was a popular contender), they had an audience of 7% that got charged $35 to watch the fight, generating a gross of $49 million. The rule of thumb is that the boxers get 50% of the gross with the remainder going to the promoters, out of which they have to pay all costs. For a Holifield-Tyson match, estimates are they would get a 20% audience, generating a $140 million gross.
     
    Time-Warner has effectively "bought" Holifield in that it gets to show any of his fights on their pay-TV system. Time-Warner tried to "buy" King and all of his fighters, including Tyson, but King chose to set up his own pay-TV network. While everything is at some level negotiable, the tradition is that the Champion's promoter gets to produce the fight. Consequently, with Holifield the champion, the fight will go out over the Time-Warner system; if Tyson beats him, the next fight will be shown on the King system.
     
    What does all this mean? In a nutshell, the promoter is earning an excessive profit because s/he has access to the airwaves that are in limited supply. If competition was introduced among promoters, their payments would come down dramatically, and some of that would probably go to the performers in even higher payments.
     
    The Unique Performer: Myth and/or Reality?
     
    The question now becomes whether we have two performers who are intrinsically so unique that the public is willing to pay a huge amount to see them perform. Incidentally, this question can be generalized across all performers. Consider two possibilities:
     
    • there is a small group of performers that are simply better at what they do than any others in their field; the public knows this and is willing to pay a substantial premium to see the very best perform; the electronic media allows them to register this demand by paying for these performers to come into their living rooms;
     
    • the media operates as an oligopoly and limits competition: it chooses individuals that are not uniquely endowed and convinces the public that they are simply better at what they do than any others in their field; in short, it creates these people: Krugman is made a superstar in economics (because the New York Times regularly quotes his opinions) just as perhaps Holifield, Tyson, Pavarotti, Roger Clements, Frank Sinatra, Madonna, and Tom Brokaw are media creations.
     
    Knowing which possibility fits the facts is important: if the first is correct, the market is functioning properly and our dislike of what media performers they are getting paid has to be registered on social grounds; if the second is possibility is the correct one, their high pay results from a market imperfection.
               
    My conclusion is that there is an element of each (uniqueness and fabrication) associated with most highly-paid performers. Regarding the former, there are more and less competitive review processes that performers must go through before the media is interested in promoting them into something "bigger-than-life". In sports, the processes are quite competitive: Tyson must be a good boxer, Tiger Woods has to be a good golfer, and Clements must have been a good baseball player to get to where they are today. At the other extreme, there are people who are almost completely media creations: Hollywood does create mystical superstars out of some pretty ordinary people.
               
    Solutions
     
    Let's start by considering suggestions to deal with the breakdown in accountability between the senior executives and their shareholders which permits the former to pay themselves excessively and get away with it.
     
    Here are the suggestions I made nearly 20 years ago:
     
    • strengthen stockholder representation in compensation decisions. There are several actions needed here: first, get the Securities and Exchange Commission (SEC) to allow stockholders to have a say in senior executive compensation decisions: under present regulations, the SEC does not permit stockholders to determine executive remuneration on grounds that it constitutes "ordinary business";
    • there is need for stronger public interest stockholder associations; recently, the United Shareholders Association put out a study that identifies "black-hat" CEOs who collect too much pay for too little performance; perhaps a regular publication is needed having the same format as Consumer Reports to report on matters of interest to stockholders (Stockholder Reports;
    • third, major investors, such as government retirement funds, should be pressed to play a stronger role in corporate decisions; already, the California Public Employees Retirement System is questioning executive pay;
    • fourth, corporations should be pressed to consider establishing ratios between their highest and lowest paid employees; Plato suggested a 5 to 1 ratio; Peter Drucker proposed 20 to 1; in Germany, the average rate is 21 to 1; in Japan the average is 17 to 1 whereas in the United States, the average is a mind-boggling 85 to 1!
    • get shareholders to determine directors' pay, rather than having directors themselves or senior executives making these decisions;
     
    The above suggestions were hardly original. Many people were making them. They have not worked.
     
    The Ultimate Solution
     
    Let us get beyond these executive compensation outrages to a broader point: should there be an upper limit on what any individual should earn in any one year? And I ask this believing in capitalism and concerned about destroying work incentives.
     
    Back in 1991, I suggested we consider an annual compensation limit of $7.5 million adjusted annually for increases in living costs. Correcting for cost of living adjustments since then, this would be $11.8 million today. Can anyone claim that this does not provide adequate incentives for executives to work and performers to perform? And even if, as an athlete or other type of performer, your professional life is extremely short, you can live reasonably well on the annual interest and dividends provided by one year's work at an $11.8 million rate.
     
    If society could agree on an upper limit, it would be reasonably easy to implement. The personal income tax was instituted because it was seen as the best measure of taxpayer's ability to pay. To implement my suggestion would involve imposing a 100% marginal rate on any annual earnings that exceeded society's upper limit. Introducing this rate would mean:
     
    • either the government would collect all of a person's annual payments in excess of that amount in taxes, or
    • the individual would put his or her excess income in a charitable organization.
     
    Is this so unreasonable? Think about it.
     


    Disclosure: No Positions
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