I can understand superior athlete compensation. They get millions annually because they generate that much more for their employer from the market. And they are few.
But there must me hundreds of thousands of MBAs and plenty of people who could run a corporation.
And the pressure on top executive salaries has increased enormously since 1980.
How is it these guys can command such high remuneration from their employer? What is the “right stuff” they have compared to other unemployed MBAs? What makes them so special ?
They have to have demonstrated some success somewhere in their careers and they’re good at selling themselves. The boards of directors must let themselves be bullied out of fear that someone that will work for a reasonable salary won’t perform as well and they’ll be sued for lack of due diligence.
1st: The government decided to cap the deduction on executive salary at $1 million. This had three consequences:
A) Companies ramped up the salary to $1 million.
B) More was put into bonus programs.
C) More was put into stock option programs.
Stock Option programs grew at a great rate, especially as companies came to realize that they were the easiest way to link executive pay to shareholder gain. In addition, there was no “cost” to options other than dilution, so you could pay out execs and others with no discernable impact in the 10k or 10Q. Add in a fantastic stock market, and exec “pay” - predominantly due to stock optiosn - skyrocketed.
The executive pay disclosure rules for the Def-14A (proxy) were changed. You went from a paragraph of random text and hidden numbers to a simple table showing 3 years of all types of compensation for the top 5 officers. This made executive pay levels completely transparent. Suddenly, each exec knew EXACTLY what their peers were making, and could start to argue for pay opportunity equity. Since some firms always like to pay at median or better, this resulted in higher and higher pay levels as well. The disclosure rules were written to try to make it easier for shareholders to control things, but it had some of the opposite effects IMHO.
They are mostly all friends with each other, all members of the same small in-crowd. Bob gives Dave a cushy job and big bonuses, because someday Dave may be in a position to do the same for Bob. That other MBA, who is as competent or better ? Well, he just didn’t go to the same schools or hang out at the same golf clubs; he’s just not One Of Them.
So say they make 40X what the average worker does. How is this worse than if they make 20X? Why is 40X bad but 39X or 10X or whatever random number “good”?
“Oh crap, they make a lot of money!” While interesting, doesn’t really mean much.
If the poor are living pretty cozy, secure lives, who really cares what the income span is? If the highest incomes are set by market forces, why are they bad even though all other market set incomes are alright?
Are the poor living “pretty cozy, secure lives”, though, just because most of them have color TV’s and microwaves? Electronic gadgets are not the indicators of luxury lifestyle that they used to be. There are plenty of color TV’s in households in crime-ridden neighborhoods, where the heat or food supply is unreliable, or medical care or education is seriously substandard. Having a few bucks for a TV no longer means that your overall lifestyle is “cozy” or “secure”.
Are the highest incomes set by market forces, though? From what Algher was saying about the “costless” stock options and the shared information about salary levels, it sounds as though the CEO pay system is very far from an ideal competitive market in a number of ways.
Making information public makes the market better able to adjust to a proper value. That the number went up suddenly when the information to be able to trade rationally became available could mean that CEOs were underpaid, or it could mean that CEOs put in the first bids and got lucky, but the number will start to go down as the market finds it can’t support those values.
If the market can support those values and feels them worth paying for, how are they wrong?
Well do you think that you personally are making an unfairly high income? The average income in the US is around 40k per year. Seeing as you’re someone who can type proper English, it’s a decent bet that you went to college and are currently making more than that. But are you working harder than the people making less than 40k per year? Can you attribute your ability to have gone to college and to have thence been able to get a good job making more than $40k to the products of your own labour, which you started at the age of 2? I rather doubt it.
But it seems that you’re just assuming that CEO salaries are set in accordance with market forces, rather than actually showing that they are. CEOs do seem to have a lot of influence over levels of CEO compensation, which is not in accordance with the idea of a perfectly competitive labor market reacting to impersonal forces of supply and demand. (This 2002 article, Managerial Power and Rent Extraction in the Design of Executive Compensation, lays out some of the arguments for this claim.)
Why should I believe that changes in CEO pay are really the result of rational competitive market behavior, rather than market distortions? If they are, then it should be possible to find cites supporting that assertion. And if they’re not, then all your hypothesizing about “the market adjusting” or “the market finding it can’t support” certain pay levels is just wishful thinking.
Sage Rat, I think that the majority of the population is underpaid. The people high in the hierarchy are overpaid, often drastically; the people lower down are underpaid, often drastically.
Athletic pay is not tied to skill, it’s tied to the entertainment draw. The high wages are also hidden in bundled cable packages. If cable companies are forced to sell channels individually it will affect athletic wages down the road.
I can’t speak to the level of CEO but getting to the level of VP represents a multiple level of achievement that starts with an MBA. The degree itself is meaningless at this point. The draw for an executive becomes a combination of industry specific knowledge, managerial skills, and financial skills. They are the sum of many subordinate disciplines.
Well you and I and everyone have the option to voluntarily take a lower income. I’d be pretty certain that your boss wouldn’t refuse cutting your pay by 10%.
I’ve heard it argued that increases in executive pay are self-reinforcing, but not in quite the way you describe. CEO pay is set by a company’s board of directors, and they usually justify it in their particular case by citing comparable pay to CEOs in general. But those board members are likely to be CEOs of other companies. By increasing the market, they can make a case for their own higher pay to keep up with the increasing market. It’s cronyism of a sort, but nothing to do with all rubbing elbows at the same yacht club.
You’ll notice how often it’s referred to as “executive compensation”, not “pay”. Clever word, that; “compensation” suggests that skills and effort they bring to their job are truly worth the huge rewards, and that they’re just being compensated for what they have already given.
First, the current number is 400X not 40x. People are harking back to 40x as that being the good old days. The key issue now is that the upper salaries have risen so high at the expense of middle and lower level salaries (the vast majority of people’s salaries) not even keeping pace with inflation. This means that most people can not maintain their lifestyle without depending on credit, which has finally run out, and so they are not spending as much. The upper levels don’t spend as much of their incomes as do the middle and lower levels, so **many, many dollars were sucked out of the active economy because of the increased executive salary levels.
**
Second, all those luxuries you are begrudging poor people are just red herrings one and all. This sounds like an appeal to the principle of lesser eligibility, saying that to qualify as being poor, you have to be worse off in every way than someone whom we don’t consider poor. I am not currently poor, but I don’t have a garbage disposal, so anyone who has one isn’t poor? HA!
Everyone of those items (save possibly the disposal which is often part of a furnished apartment) could be the result of gifts, inheritance, prizes, residuals from better times, or castoffs from those better off. I know a family which was homeless last year which has two large screen TVs because they were being replaced at a bar and the owner let them have them if they would just haul them away. I have a half dozen computers at my house which were obtained on similar terms. I once bought a washing machine for $10 at an auction. It served me for years. I was able to do that because my grandmother could arrange for it to be delivered to my apartment. I had no means to move it myself.
When I was poor, I had a ruby ring. It was an heirloom. Selling it would not have raised my standard of living for long, and I would be out the heirloom. I once saved months to buy a wooden clothes rack to hang up laundry. It was not worth it to me to ditch my great-great-great grandmother’s ring so I could buy it, and even if I had wanted to, there is no reason to think I had the means to find out what was a good price or even if it was enough to cover the laundry rack–it was pretty worn.
My mother bought me a microwave for my wedding, did that make me not poor? How do you expect people who are poor to live? Are you saying that should they come into the possession of any luxury item, like a five year old color tv, they should sell it to make what money they can from it rather than get some enjoyment out of what is otherwise trash, otherwise they are not really poor?