Inspired by this story, and a resultant Fark thread.
(For those who don’t/can’t read that thread, Delphi is having financial problems. So they’re cutting employee’s wages by 50%, and increasing upper management’s salaries.)
Now, before we get started, I’m not actually proposing we do this. This is more in the way of a thought experiment.
Okay, we’ve all seen stories of the massively overpaid (in my opinion) CEOs of big corporations, where Joe Schlub working down on the line is getting near minimum wage. Any sort of pay cut is potentially lethal to Joe, but even a fifty percent cut of the CEO’s salary means that the CEO… uh… okay, it would mean nothing to the CEO.
So how 'bout we link the two salaries, then? For example, say that nobody at a company can make more than 100x the salary of the lowest-paid employee at said company. If a CEO wants a raise, he’s got to increase wages across the board- which, theoretically, helps everyone. If, say, minimum wage at Company X is $40,000, then the CEO of Company X has a salary cap of $4mil.
Now, I can see a few problems:
Everyone’s got more money. This’d lead to inflation. However, it’s not like there’s more money in existence, but rather that the existing money is more spread out among the populace, so is it still a bad thing?
What’s to keep CEOs from jumping ship, and moving to other countries? Well, things would still be fairly competitive here, and, besides… would it really be that bad if a few CEOs found that they could make more money elsewhere? And, when you get right down to it, is a CEO that makes 50mil REALLY ten times better than the CEO who gets 5mil?
This would encourage CEOs who feel they’re underpaid to, uh, find extra money. At the company’s expense. Well, we’ve already got that, don’t we?
Anything else? Something I’m overlooking?
Again, I’m not suggesting we actually do this. Hell, there’s no way to do it- the first person who seriously suggested this in Washington would be ridden out of town on a rail.
Wouldn’t this just lead to them simply contracting everything out, or setting up a large number of companies with special relationships, so the lowest paid worker in the CEO’s company isn’t actually the lowest paid worker hired?
I think I have seen surveys indicating that CEOs in Europe get much more reasonable multiples of exec salaries than CEOs in the US. It’s such an obvious shill that’s being run here in the US, but the biz types lap it up, because every last one of them believes that someday it will be THEM running the shill.
No, but the CEO’s not being paid simply by virtue of how much he or she personally adds to the company’s value.
To make it into upper management of a medium or large corporation, one has to be a complete workaholic. Can you name any VPs who put in just a 40 hour week, and maybe occasionally slip out early on a Friday? Any that aren’t directly related to the company’s owner, that is?
CEO salaries aren’t paid like regular salaries in terms of what they directly add. They’re paid like sports stars: as an incentive to a person to completely devote their life to a single subject in the hopes that one day they might grab that brass ring. If you slash a CEO’s salary to 10% of what it was, it doesn’t just affect the morale of the CEO- it affects the morale of every member of the company who believes that they have a shot at being the CEO eventually. While that may not be many of the people down at the ground floor, the farther you move up, the more likely your competent and driven members of your staff are going to jump ship to work at a company that has better payment.
If a CEO’s salary is based off of the salary of the lowest paid worker, the incentive is to raise only the lowest paid workers. So now unskilled labor gets paid as much as skilled labor… that doesn’t make being skilled worth much, now does it?
Finally, if such a law is passed, what’s to stop CEOs from receiving unpaid benefits instead? If the company has to buy the CEO a mansion as a recruitment tool, provide chauffered service as an efficiency improvement, etc…
How 'bout we cap CEO salaries? Um…how would you propose to do that for private companies exactly? If you figure that out put me down for a resounding ‘NO FUCKING WAY!’ please.
IYO…that kind of says it all. And you are making an assumption here that a 50% pay cut to a CEO will mean nothing to him. Your assumption is not reality based…at least, not in the reality I live in. It works something like this…whatever salary you make your life style will basically fill the void (i.e. your life style will rise to meet your salary). If you work at 7-11 as the check out boy making $12k a year then your lifestyle will be a basic apartment with perhaps an old beater for a vehicle. If you are a blue collar worker making $50k a year your 4 bedroom home and car will rise to meet that salary. If you are a network engineer making $100k a year then your 5 bedroom home, 2 cars and a boat will fill the void. If you are a CEO making $10 million a year then your 2 house and a summer home, etc etc will fill that void. Trust me…I actually know folks who make 7 figure salaries and if they suddenly had a pay cut of 50% they would be fucked.
Now, you might say ‘well, they don’t NEED all those things’ and perhaps you’d be right…but frankly who are you to say what someone else needs or doesn’t need. Its not up to you…its up to them. As for their salaries, thats not up to you or the government either…its basically up to their boards of directors, and ultimately up to the customers who purchase their product or service. If the company is doing well, if their stock is rising and they are making a profit, I’m inclined to think it has more to do with the CEO than it does to Joe Sixpack working the line or sweeping the floors…or even with XT the engineer or even Bob the scientist. XT and Bob are going to be compensated more than Joe is because they have more impact on profits…and Bill the CEO is going to be compensated more than XT and Bob because HE has more impact on profits than they do (and also more responsibility if things go tits up).
Not going to get into the rest of your OP just yet…going to see what comes of this first.
Is that really worse for the company than affecting the morale of non-management workers to the extent of cutting their wages in half, as in the OP’s Delphi example? Is there a rational reason why the financial motivations of the upper echelons have to be preserved with so much tender respect while the negative effects of salary cuts on lower-level workers are simply accepted with a shrug?
I don’t think anybody’s seriously denying that it’s nice to be able to make a lot of money and that, all other things being equal, we wouldn’t want to discourage management by imposing salary caps on them.
The question is, since all other things aren’t equal, could this be a helpful strategy? A company in financial difficulties simply doesn’t have an unlimited amount of money to throw around. Savings have to come from somewhere. Is it really good for the company to get its cost-cutting and its management-level pay raises out of pay cuts for ordinary workers? Or could there be advantages to a salary-linking strategy that shares the burdens a little more evenly?
But thats the thing…its up to the individual COMPANIES to decide what they think is best. If they choose wrong then they go out of business. It seems to me that folks are suggesting imposing what THEY think is best for the company to do. How would you, Kimstu, know whats best for company ABC? Is it better to cut some jobs at the bottom, cut salaries at the bottom, cut middle management jobs or salaries or do an across the board pay cut top to bottom? What would you be basing that on? And if you take a one size fits all approach, imposing salary caps or across the board pay cuts reguardless of the actual situation, then you are essentially saying that your generic approach is best in all situation…and that you know best how others should run their business and whats good for them. Right?
I kinda figured this would be a hot button subject. Look, I’m trying to present this as a thought experiment only- can we leave the emotional responses out of it?
And, if you’d read my OP, you’d see that I’m NOT proposing we institute this for private companies. I’m not proposing we do it at all. I’m just asking “what-if”?
Of course it’s in my opinion- just like what you said is in YOUR opinion.
I’m currently making pretty good money. A 50% cut in my wages would be pretty painful for me. But I know it would be downright deadly to someone making eleven bucks an hour. To someone who brings in 4mil a year, a 50% paycut would mean they’d have to tighten their belts- but they’ve got a LOT more belts than the rest of us.
Besides, that’s not really the point of this thread. You and I both know they’d adapt- just like those Delphi workers will have to adapt to making half of what they’re used to.
And I’m not saying who does or doesn’t need what. I’m not even addressing that question in this thread.
Do you really think that a CEO who makes 50mil a year is going to have ten times the impact on the company’s revenue than a CEO who makes 5mil/year? CEO salaries keep going up and up- but baseline income is staying roughly the same. Does that seem fair to you?
You think VPs slip out? Engineers? Designers? Even middle managers? The fact is that most salaried employees work a lot longer than 40 hours. Give them a lap top they’ll work more.
I don’t think capping salaries at even $2 million will hurt hours much.
Do you work in a big company? Most CEO salaries are set by a compensation board, made up of directors, most of whom are selected by the CEO. The CEO might well be on the committee that sets their salaries. As the example in the OP shows, CEOs are in no way paid based on performance.
In 25 years in big companies, I have never met anyone who would be demotivated by the CEO having his salary cut. The company I work for now has a good CEO, who actually cut his own salary, drastically, when things weren’t going well. (Don’t cry for him - he has old options.) I think it helped morale.
Cutting the CEO salary will put more money in the business, and maybe make more available for salaries. If you think anyone below senior VP level would jump ship because of low CEO salaries, you’re nuts.
It would clearly increase salaries all the way up the line. Do you think HR departments are stupid? What would really happen is a reduction on CEO salaries, not an increase in everyone else’s. As for perks - does the name Tyco ring a bell? Ever hear of Carly’s private jet? CEOs get the perks already.
Well, I’m a human being with a reasonable, layman’s grasp of the economic concept known as “diminishing marginal utility”. As someone gets more and more money, the perceived value to them of every additional dollar decreases. That’s a basic economic law.
While I would never presume to dictate to anybody the specifics of what particular luxury items they “need or don’t need”, I’m perfectly capable of recognizing that according to the law of diminishing marginal utility, any particular amount of money becomes less and less important to them as they acquire more and more of it. So I think it’s perfectly reasonable to talk about wealthy people “not needing” certain comparatively small amounts of wealth.
The question is, though, are upper-management salaries set by boards of directors really the product of free-market operations, or are they simply a form of rent extraction? Are these salaries being set totally by perfectly competitive market forces, or are they significantly affected by anti-market influences like cronyism, monopoly and oligopoly, high entry barriers, and so forth?
What you’re “inclined to think”, though, doesn’t really count when it comes to factually answering the question about whether CEO salaries are genuinely determined by market forces. If somebody’s simply asserting that CEOs legitimately earn even the hugest of salaries because that’s what the invisible hand of the free market has freely determined to pay them, I’m going to ask for a cite.
Sure. We as a society do that all the time. It’s called “regulation”.
We tell companies that WE think it’s best that they don’t dump untreated waste into waterways, so they’re not allowed to do it. We tell companies that WE think it’s best that they don’t pay any of their workers less than a certain minimum wage level, so they’re not allowed to do it. We tell companies that WE think it’s best that they don’t subject their workers to more than a certain level of health hazards or safety risk, so they’re not allowed to do it.
We arrived at all those regulatory practices after a long period of laissez-faire policies, when we decided that what the companies thought best to do in these respects tended to be extremely unfair to the workers, to the rest of society, and to the long-term health of the company itself.
Now the question is whether this matter of huge salary inequality has turned into another standard corporate practice that’s sufficiently unfair and counterproductive that it requires regulation. We certainly shouldn’t jump to the conclusion it does, but neither should we be scared away from the whole issue by the mere fact that it involves telling the company what WE think is best for them to do. We do it all the time.
Hm…fair. Well, I don’t really know or care if its ‘fair’ or not. I’m not interested in ‘fair’ if I’m the one making the decision, and if my decision is based on how well or poorly my company is going to do…I’m interested in profits and being competetive, of holding or increasing market share.
I DO believe that a CEO has a much larger impact on a companies profitablilty than a line worker, and I believe that one pays for talent. Its sort of like, is it ‘fair’ to pay someone like Michael Jordan $100 million dollars (not a real ammount here, just for illustartion) when I could pay player Bob $1 million? Player Bob needs the money much more than Michael Jordan does after all, so wouldn’t it be ‘fair’ to give Bob his shot? Well, I suppose…if I didn’t want to win games. But see, if I pay Jordan that $100 million I have a much greater shot at winning games and championships than if I got Bob…even though Bob costs me $99 million less. Doesn’t do me much good though saving that kind of money if we lose all the time.
It seems to me that, under this scheme, a highly-paid CEO will have truly earned his better-than-average income, by virtue of having improved company profits so much that everyone on down the line has gotten a raise.
In other words, instead of paying someone a huge salary because they might increase company profitability, pay someone a huge salary because they did increase company profitability.
Beliefs are good things and help bring meaning to our lives. However, what we’re talking about here are specific quantitative comparisons between CEO salaries and line workers’ wages.
If we’re going to try to justify a certain level of income disparity by an economic or financial argument, we need to see specific quantitative evidence backing up that conclusion, not just a vague qualitative statement of belief.
Why do some companies do well and others do poorly or fail? Why do some companies do VERY well for years and then wither and die? Is it because of the line worker or perhaps because of the upper management and the CEO?
Do things like cronyism happen (I’ll leave out monopolies as they aren’t really relevant anymore, at least not in this country)? Certainly. And if a company allows such things to happen to their detriment then they have themselves to blame for their eventual failure. Obviously (to me) you can’t just put any monkey in charge and have the company just keep cranking out the profits…were this the case then big fortune 500 companies would never have problems, never lose market share, never go tits up. But they do.
And there is a much more dynamic mechanism out there than government regulation of CEO salaries or preventing cronyism by govenrment fiat…its called the market. I think it works a lot better than piling on more and more regulations. YMMV of course.
Myself, I’d think it was self evident. Its obvious that some companies do very well and others fail. Why? Is it because of their workers or because of the leadership? As for a cite…well, I’m not even certain how to find that information out in a format that would be acceptable. I suppose there is data out there somewhere on the relationship between the CEO and a companies profitability but I haven’t any idea right now how to get that information in a form that would be acceptable to you…or convincing to you. As I said, to me its self evident…the sky is blue, water is wet, companies profit for many reasons, but the biggest one is how they are managed.
In other words, xtisme, all your assertions are completely unsubstantiated, and you don’t even have any idea how to attempt to substantiate any of them.
You can certainly go on believing them anyway as far as I’m concerned; it’s no skin off my nose. But if you can’t back them up with evidence, then you’re not debating; all you’re doing is witnessing.
You’re assuming that companies are setting salaries based on performance. Not true thanks to the inbred Board of Directors System…
Here is an article from 2001 from that Commie rag Business Week, showing how CEO salaries increased much faster than general salaries even as the bubble burst. That article optimistically said things might get better. USA Today in 2003 showed no such hope.
Frome here we see that in 1980 CEOs were on average making 42 X worker’s salaries, in 2000 there were making 531 X times workers salaries. Do you really think they performed all that much better? (And if you say it was because of the good economy in 1999, notice the situation got worse as the economy headed south.)
I think you’re assuming free enterprise is at work here. What actually is happening is a cartel of top execs.
For the OP: Instead of just capping salaries, how about making very high salaries not deductible, which would hit the bottom line still more. It is done now, to some extent, but there are giant loopholes.
Options are another big piece. Now I love options, but perhaps they should be set so they only are useful if the company goes up more than the market as a whole. I’d also be in favor of rules improving the handling of them if they are spread relatively evenly across the employee base. When I worked for AT&T I got options exactly once, while the top execs got a lot. The Silicon Valley companies I’ve worked for are a lot more equitable, and I think it increases the stake in the company of most workers.
As for the OP’s concern that CEOs would move abroad - they’d take a big pay cut if they did. A number of studies have shown that CEOs move company headquarters close to where they happen to be living. So not likely to be a problem. Now if you ask me whether we should outsource the jobs of some of these clowns, though …
The thing is, companies that waste lots of money on unprofitable compensation for executives will be, well, less profitable. Companies that spend money on executive salaries wisely will be more profitable.
I’m of the opinion that a lot of success or failure in business is just a matter of luck. Companies produce products and have very little idea of which ones will be successful, it’s just that the companies with a slightly better than average skill at picking good products and employees and avoiding costly mistakes tend to make money, those with slightly worse skill tend to fail. There is a good analogy with biological evolution here…some animals just happen to be in the right place at the right time and prosper, others–even superbly adapted ones–get hit by a meteor and go extinct. But over the long run better adapted companies and organisms survive and reproduce.
So, companies that can’t control executive salaries will fail at a higher rate than companies that can. Will that eliminate the problem? Probably not, there will always be parasitic organisms that are able to exploit the loopholes. But companies that can control the parasites will do better than companies that can’t, and a company with too large a parasite load will eventually die.
Thats generally how it works, yes. Since no one has a magic time machine though, you pays your money and takes your chances. You pay a CEO a lot of money in the hopes that you will get a return on your investment, that your companies profits and market share will go up…which will benifit everyone in the company. Sometimes it doesn’t work out that way though and even though you are paying a lot for a CEO s/he just isn’t producing. So, if you are a smart company you fire him/her and get someone else in there that will do better. It happens all the time.
I had a bet with myself that this would be your response to my insertion of ‘belief’ into that post.
Why do WE need to see ‘specific quantitative evidence’ to back up anything? Its not up to us…its up to the individual companies. Besides, it would be on a case by case basis, different for each company out there. I doubt anyone here would be willing to say that paying ungodly sums for someone like a Bill Gates wouldn’t be worth it…one has but to look at Microsofts bottom line, follow the companies history of profits. If THEY feel the need to pay a certain salary to a floor sweeper or to a CEO then its their decision…not yours, not the governments. If they make a poor choice in setting that salary then they will pay for it themselves.
That may very well all be true Kimstu. Of course, the converse is also true…i.e. YOU haven’t exactly provided anything substantial in this ‘debate’ either. All you’d done so far is pick apart my posts because of words like ‘belief’ are used while really providing no more substance than I have to back your own case. So, while it may be true that all I’m doing is ‘witnessing’, how do you figure you’ve provided any substance on your own side?
I actually do have more than mere ‘belief’ behind me…I have my own experiences in both working for Fortune 500 companies and owning my own company as well as a basic understanding of how business works from my college years. I, however, don’t have the time or energy to get into a cite war with you on this…not while I’m at work (well, I’m at lunch atm but you get the idea). Even if I had unlimited time I’m not sure exactly how to cite a definitive answer to this question as I’m not aware of studies that cross multiple corporate lines to show quantatatively how CEO salary meshes with corporate performance.
Because I don’t know the answer though doesn’t mean that my whole arguement is bullshit…it just means I’m not the right guy to answer it.
