Overpaying CEOs
by Linda Beale
crossposted with Ataxingmatter
The Wall Street Journal reports today on a study by three academics on CEO pay. They are Streedhari Desai (Harvard), Jennifer George (Rice) and Arthur Brief (Utah), and their study is “When Executives Rake in Millions: Meanness in Organizations” (available on SSRN). Here’s the abstract:
The topic of executive compensation has received tremendous attention over the years from both the research community and popular media. In this paper, we examine a heretofore ignored consequence of rising executive compensation. Specifically, we claim that higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers. We present findings from two studies – an archival study and a laboratory experiment – that show that increasing executive compensation results in executives behaving meanly toward those lower down the hierarchy. We discuss the implications of our findings for organizations and offer some solutions to the problem.
Trends in this country are ominous.
1. Wages for the middle class have stagnated, especially with the waning power of labor unions to demand an adequate share of corporate revenues (a result of the decades-long effort of neocons and multinational corporations to kill labor unions and make new unionization efforts in previously nonunionized industries very difficult through generous provisions for employer control and significant hurdles for union approval).
2. The middle class has therefore depended more on debt than it should, a dependency that has been encouraged by the financialization of the economy and the hunger of the financial institutions and shadow banking system for “product” from which it can reap multiple layers of fees and excess profits. That easy flow of credit led directly to the financial crisis that caused the Great Recession.
3. Meanwhile, those at the top have done well and those at the very top–the ultra rich in the top tier of corporate status and in the finance (and shadow finance) industry and its related hangers-on–have done exceedingly well by being able to keep a much larger share of the business profits for themselves.
4. That inequality then has created a feedback cycle of disrespect for ordinary workers and greed for more profits and status and power that also led directly to the financial crisis that caused the Great Recession.
5. And now we learn the capping blow (which common sense tells us anyway, given what we know about human nature and its frequent inability to handle the struggle between self-interest and altruism in ways that benefit all) those at the top who have been paying themselves exceedingly well (and their buddies when they serve on their boards of directors) are likely to treat their employees exceedingly poorly. Greed at the top goes along with meanness towards those considered “beneath” them.
From my perspective this is just one more reason (i) to ensure that ALL compensation income is subject to payroll taxes (removing the Social Security cap) and (ii) to increase the tax rates on the income of the top by adding more rate brackets. We should go back to the type of system we had before Reagan, when there were many more “rate brackets” under the income tax. It’s really not reasonable in a progressive tax system to fail to distinguish between incomes of a quarter million and incomes of $10 million–they should not be taxed at the same marginal rate. And the hedge or equity fund or real estate partnership manager who makes more than a million a day as his compensation for managing (paid, of course, part as fee and part as “carried interest”) should be taxed at a rate considerably higher than the CEO who makes “only” 10 million a year. The wacky system we have right now lets that equity fund manager pay the preferential capital gains rate under a realization system–meaning with deferral as well as lower rates!
So why is it that Congress–even in a period of high deficits and lots of talk about having to change the benefits under Social Security because of the GOP and blue-dog Dems’ worries about the deficits (even though Social Security has actually been running a surplus) –couldn’t bring itself to pass a bill that would treat carried interest as the ordinary compensation income that it is, so that fund managers would pay tax the same way that their firm’s janitor does? Talk about meanness.
The carried interest thing was beaten back by the two “Crown Princesses” in the Senate. HR 4213 died a very ugly and protracted death. Kerry said it was the worst legislative failure he’s ever seen IIRC.
Chances are I’m going to flip Republican soon. If you can’t beat ’em, join ’em.
No need for Room 101 for me.
More nonfalsifiable bull from the religious left…
“an adequate share of corporate revenues” – an objective mathematical formula would be nice.
Broad sweeping generalization. I know plenty of middle-class that have lived within their means and didn’t buy a $500k home with 90% leverage and a mortgage they can not afford…
“middle class has therefore depended more on debt than it should”
I thought democracy was a good thing. Go out and vote for your favorite board of directors and quit whining.
“those at the top who have been paying themselves exceedingly well”
I assume in the name of fairness you are refering to the cap on beneifts as well when you say…
” to ensure that ALL compensation income is subject to payroll taxes (removing the Social Security cap)”
What it boils down to is a bunch of greedy people pushing for a tax system that will benefit them more.
Jay, tell me you are not implying there is class and wealth envy??!!!!!????
No, we don’t see it every day in the artciles and commentary. Nope, not on on the intertubes.
I understand that the many who espouse these opinions have failed to take advantage of the opportunities those others have taken. Go ahed, try it! You might even like the challenges and rewards.
OOps, sorry. I know you would like the rewards. You’re forever trying to take them from the others.
Considering my age, I seem to be confused by the few comments here. Not sure if it’s sarcasm, envy, or??? The oppisition to raising the cap on SS withholding, is a no brainer. But, it seems that “O”‘s special group of old people who are not in need by any stretch of the imagination of the safty net that is provided, want to do away with SS entirely. Perhaps some one can inform this old guy as to why there should be a SS cap on wages, why the tax rate should not be graduated upwards to keep pace with all the expenditures the Government spends, regardless of what it’s for? As for the old B.S. that is brandied about today concerning entitlments, what would you call the obscene compensation that is being paid to the top cats, isn’t that entitlments also? Please explain, if anyone cares too.
Jay….”Go out and vote for your favorite board of directors and quit whining. “
You don’t know much about proxy votes if you think proxy and democracy in the same sentence.
The basic problem with over paying CEOs is that money that goes to them does not go to the stockholders and it does not go to expand the business. It also rewards them for taking excessive risk. In simple terms we are paying CEOs to blow up their companies. CEOs do not own their companies and therefore should not get the lion’s share of the profit. The stockholders are the ones who are risking their capital and therefore should get the lion’s share. CEOs control their compensation and use that power to steal their company’s wealth.
The right complains that Americans on unemployment are lazy and unwilling to work for whatever minimum wage job happens to appear in the Sunday paper, while they accept the notion that many CEO’s can’t be expected to show up and do their damn job for anything under $5m/year.
“CEOs control their compensation”
Nope. The board of directors controls the CEO’s compensation.
What could be more anticompetitive than proxy voting? I don’t know. Maybe campaign finance laws and every other election law in this country that protects the Demothug monopoly in this country.
Have you tried launching a 3rd party campaign lately? You have better odds of beating the proxy vote.
The CEO of Walmart makes decisions that affect $400,000,000,000 in revenue annually. The cashier at the local Walmart makes decisions that affect how much revenue annually? (hint: knock off several 0’s)
If you think CEOs are overpaid and aren’t satisfied with the way the Board is representing your interests as a shareholder, sell your shares. If you think CEOs of particular companies are excessively overpaid to the point that it’s impairing the performance of the company, short the shares of those companies.
Vulturous private equity managers who fail to fit the “CEOs are overpaid” narrative of complacent boards and passive shareholders, have only the financial returns of their investments with which to be concerned – and yet they pay their CEOs commensurate with CEOs of publicly-traded firms.
Unless you have a financial interest in a company, complaints regarding how much the CEO of a Fortune 500 company makes is no more relevant than commentary on how much the owner of the independent book store down the street makes.
BOD composed of other CEOs.
I actually fully agree with this. I have zero problem with what CEOs can get for their services.
The problem is just the declining split that labor is getting.
The pie is getting bigger, or it was at least, but labor’s piece is getting pretty anemic.
Let me clarify…proxy voting is not democratic, and is heavily stacked against shareholder input that counts.
So by extending that logic does it follow that any one person has no interest in the criminal acts of another if such acts are not perpetrated against that one person? As I noted elsewhere on this site, the best way to address the issue of excessive individual compensation is to have Eisenhower era tax rates on the highest margins of income. Let corporate boards approve what they will. Let the taxation process correct any inequities of pay for performance.
Well, shareholders, even the big pension funds, are at a big disadvantage given how boards currently operate. Was it always that way??? No. Things can change in an orderly fashion to more fully resemble what the right seems to declare as true, shareholder ownership and the rights of ownership that are more balanced. Shareholder voice. How is “go stuff it” and sell your shares a rational answer to accomodate ownership claims?
Just about everytime on of these vaunted CEO’s openis his mouth(withness ceo’s of GE and Tenneco) they pretty much prove they are overpaid. Also recent study(I think by Harvard Business Review) tends to show that the people at the top are better liars than the rest of us.
“but labor’s piece is getting pretty anemic.”
Reference?
“proxy voting is not democratic,”
1 share, 1 vote. You don’t have to check the box that says “I agree with my corporate masters think is best for me”.
See that is the difference between markets and government. In markets if you think you can improve the business, buy a controlling stake. Also, you can exit when you want (sell your shares). With government you have no choice but to bend over and take it in the @$$ until you can muster up a coalition majority to stick it to some other minority.
No one is better at lying than politicians. Obama had all you fooled on Gitmo, Iraq, etc. Send in more troops. Torture more A-rabs. Heck, the feds are still busting pot dispensaries.
There is a word for people who lie more often then they tell the truth. Sociopath.
Absolute stupidity never gets old…
http://www.youtube.com/watch?v=jORdN7v0ej0
Stupidity is eternal, yes, and a very fluid sort of thing.
Criminal activities are those that almost always involve one party not consenting to what the other party is doing (drugs, prostitution and gambling, notable exclusions). As a condo owner, I may not consent to the way the homeowners’ association is run – but I have a financial interest in that and can choose to sell my unit if the association is not run to my satisfaction. Some may argue I also have a financial interest in the way the association next door is run, as it affects my property value – but then again, that’s no different than two single-family neighbors living next to each other.
As for shareholders, rdan – what is the disadvantage. Is there evidence that boards are “cozier” now than they have been historically? I’d wager that independent director percentage is significantly higher than 10, 20, 30, 40 years ago. I’m also quite certain that CEO tenure is down significantly from years ago.
What is this disadvantage of which you speak? Share ownership is certainly significantly more dispersed than it was years ago.
“Go stuff it” is the same rational answer to not providing business to firms with whose policies you disagree. In one case you’re choosing not to provide revenues, in the shareholder case, it’s capital. If enough people shun the provision of capital to these so-called “value-destructing” firms, they become cheap enough for “value-creating” firms to acquire and reconcile the value-destruction mechanism.
Go buy the shares of companies whose policies you support, bank on their valuations rising, and acquiring these nefarious companies. Even better, put your money where your mouth is on both sides and short these nefarious companies. As for me, I see 3 or 4 letter symbols on a computer screen and want those that are going to produce the highest returns.
But the increase in what is going to the few at the top did not level off, even with all that. As of 2007, income inequality in the United States was at an all-time high for the past 95 years, with the top 0.01% — that’s one-hundredth of one percent — receiving 6% of all U.S. wages, which is double what it was for that tiny slice in 2000; the top 10% received 49.7%, the highest since 1917 (Saez, 2009).
I guess there are people who would rather not simply throw up there hands in disgust and frustration and walk away. That’s what selling your interest in a corporation or condo would mean. Corporate boards seem not always to have the best interests of the other share holders at heart. There are those who would rather address the issues raised in Linda’s post. Those over compensated CEOs would surely be pleased to see the dissatisfied throw in their marbles and go else where. That leaves them in the better position to continue to pillage the employer which they have come to control.
Very simple way to fix pay across the board, and does not require any caps. No employee can make more than 100 times the lowest paid employee (this would include all compensation, and no employee would be exempt – that include facilities, security, the works). Want to make 5 million a year? Your lowest paid employee must be making 50k.
Very simple way to fix pay across the board, and does not require any caps. No employee can make more than 100 times the lowest paid employee (this would include all compensation, and no employee would be exempt – that includes facilities, security, the works). Want to make 5 million a year? Your lowest paid employee must be making 50k.
m. jed, “I see 3 or 4 letter symbols on a computer screen and want those that are going to produce the highest returns.”
Strange that you don’t see the disconnect between your desired result and the outsized compensation of too many CEOs. Or, do you think that profitability of a company rests solely with a few executives. What do you suppose that the rest of the employees are busy doing on a daily basis. Good leadership is important, but the input of 98% of the work force is certainly equally so and probably more so. Take a look at the annual compensation package of Buffet as an example. He’s hugely wealthy not because of outsized compensation, but because he’s financially invested in his company. His wealth and that of his shareholders have grown in tandem.
Strange that you don’t see the disconnect between your desired result and the outsized compensation of too many CEOs. Or, do you think that profitability of a company rests solely with a few executives.
Profitability probably doesn’t rest with a few executives. Buffet, himself has said, given the choice between a great management and a bad industry, or a great industry and a bad management, I’ll pick the latter all day long. But give me a great management and a great industry, and I typically wouldn’t care what management gets paid.
Good leadership is probably more often the norm – but bad leadership can destroy a company – I’ve seen it both from outside and within. AIG is a great example – go see Martin Sullivan’s testimony before the House Oversight Committee. Sullivan replaced Hank Greenberg and basically fell asleep at the switch – or wasn’t up to the task of replacing Greenberg. In fact, there’s multiple examples of this that highlight how underrated management is – Immelt replacing Jack Welch at GE, Chuck Prince replacing Sandy Weill at Citigroup, John Mack replacing Phil Purcell at Morgan Stanley,
I assume that by canonizing Buffet, you’d also be willing to do the same for Steve Schwarzman at Blackstone – who’s business model is actually very similar. His compensation in GAAP financial statements shows up much higher than Buffet’s but that’s because he’s amortizing his ownership of the company and his stake in the carried interest of the funds he’s managed. On a cash basis, from the holding company, his compensation is similar to Buffet’s. And to the extent that managers get wealthy through stock or options they get granted, or based on performance metrics, isn’t that the example set by The Oracle?
Find me an academic study that links outsized executive compensation and sub-par investment returns and I’ll reconsider – but again – following the example of Private Equity or Venture Capital vultures – management matters a lot, and doubling the pay of management means not a lick to the profits generated by largish-companies (market values exceeding $1bn)
Find me an academic study that links outsized executive compensation and sub-par investment returns and I’ll reconsider – but again – following the example of Private Equity or Venture Capital vultures – management matters a lot, and doubling the pay of management means not a lick to the profits generated by largish-companies (market values exceeding $1bn)
And if you don’t want to walk away – then buy more and agitate for change such that you change the mind of your co-owners. Plenty of examples of activist investors that slash and burn expenses to get the stock price up. I’d argue it destroys long-term value of the company and would tend to not invest along side such people – but that’s what makes a market.
What’s the magic of 100x? Why not 50x? Why not 1000x? Who is the man behind the curtain that says 100 is the magic number. De La Soul says 3.
For argument’s sake – and I’m using an extreme example on purpose – let’s say that the top 0.01% earned 10MM annually in 2000 and the median earned 50k. In 2007, in real terms, the top 0.01% earned 1,000MM, but the median earned 1MM.
Given these assumptions, do you view this increasing income inequality as problematic?
Best Line of this thread.
“Or, do you think that profitability of a company rests solely with a few executives.”
The following people here would obviously have to answer that question with a resounding YES! Mike (#1 beleiver), Kharris, Rdan, Bruce, coberly, etc
Why? Becuase they all beleive that the President of the US controls US GDP growth. 1 person!
Thus you should pay your CEO’s whatever it takes becuase they determine your profitability…
Come on guys at least get some consistancy…
Islam will change
Norman,
“Perhaps some one can inform this old guy as to why there should be a SS cap on wages, why the tax rate should not be graduated upwards to keep pace with all the expenditures the Government spends, regardless of what it’s for?”
The wealthy are already footing the Tax bill. That why the class warfare on the wealthy rings hollow. Considering they follow the rules, they are only bringing home 50% of what they make anyway. If Americans do not have the opportunity to become very wealthy, then what exactly is the driving force to go above and beyond. Isn’t this the arguement of why the Soviets could not keep up with American Capitalism, even thought they could cheat in any fashion they chose?
As far as the S.S. Cap. The ROI for the wealthy is very small compared to the people who barely qualify. The arguement from many is that it is poverty insurance, at what point will it turn into welfare or wealth redistribution? For every action there will be an opposite and equal reaction in the economy…the elimination of the cap could be very painful for the little people, the pain will be passed on to them. Can there be an increase to the tax…Yes….but elimination of the Cap spells “Back-Fire.”
Eight,
What does it matter what they make. Why not focus on bringing up the bottom end instead of focusing on bringing down the top end? One of the reasons why these people require such large sums of money is because at the first sight of trouble, they take the responsiblity, and leadership changes hands quickly, so to get the best leaders you can, to take that kind of risk, you have to pay dearly for it, and that is a good thing.
We are bringing in foreign labor to do jobs, that Americans won’t do or to dumb to do, or at least that is what we are being told…and that makes sense how?
Jack,
And that is the exact logic that gets American companies home offices shipped overseas. If you tax the income then the pay will be shifted to investments. During those Eisenhower years, the tax rate may have been high, but nobody paid it, because there were loopholes in place to engineer around, and the same thing will be done if we try it again.
I found this research on pay inequities rather interesting,
http://www.physorg.com/news198239413.html
C’mon Buff. There is no comment on this site that supports your analogy. I’ll assume you are grossly exaggerating in order to make some point. Though the point escapes me. It is very clear to any reasonable person and I’ll count in all those you’ve noted, that the President has little direct influence over the country’s economic performance. The closest one might come to a link might be, if all programs with some economic component, requested by the President, are enacted by the Congress there would likely be an effect on GDP.
Will Buffpilot ever change?
“The CEO of Walmart makes decisions that affect $400,000,000,000 in revenue annually.”
SO? The president makes decisions that affect trilions of dollars in revenue, Generals make decisions which affect billions of dollars.
IF the CEO had placed hundreds of millions of his own money at stake in the venture Id have less of a problem with the compensation levels, these guys are in NO LOSE situations. Be a Carly Fiorina lose your company billions and get your hundereds of millions, atta girl Carly. There is no way to defend CEO behavior in this country.
The only good way to tax the real rich people is through capital gains tax. All the screaming to tax income tax above 50% will only hurt the productive people.
The multinational corporation will always find the lowest overseas shelter for the their taxes. Productive people will always migrate to a place where they can be rewarded for their hardwork. All these talk about taxing the rich will eventually hurt the people whom don’t have the resources to relocate.
USA must find a way to do away with foreign tax shelters. Unfortunately, this might go against progressive’s ideal of taxing the rich. The only way to do this is through legislation where your country’s ultimate tax rate and/or productivity is lower than your competitor country. (I.E. China) Yes, tax rate can be higher but the infrastructure/cost must be lower so that your country can be competitive.
I am trying to speak from a historic point of view, rather than an pure economic one. Just look at United Kingdom, a very progressive society. In the 50s/60s they nationalized healthcare, railroad, major “strategic industries.” A very progressive tax structure was introduced (90% top income tax). Followed by public housing, major government program etc. In the end, all their multinational corporation left (I.E. Registered in Cayman Islands, Bermuda). Their famous superstars=rich people such as Roger Moore, Beatles, Sean Connory all registered their residence in Spain, or in United States. In two decades, all their wealth was spent/redistributed. They have to painfully reverse course in the 1980s to become competitive again.
I am definately not against progressive ideals, but reality is people will always takes advantage of handouts and not work. A balance needs to be established.
Yeah, but the wealthy also get most of the benefits of government. They get huge, government insured incomes, subsidies for the collectives they don’t own, but milk ruthlessly, more government subsidies, more government protection and more government services. If they don’t want to pay US taxes, they should get out of US dollars and US assets and move elsewhere.
I do see your point about class warfare though. Class warfare on the wealthy does ring hollow. The only reasonable class warfare is on the middle class and poor. It’s important that they not be allowed to fight back.
Jack,
You obviously have not been around here very long. The book linked at the top is based on the premise that the President, and the President ONLY, is directly responsible for GDP growth in the US. I agree with you, the President doesn’t have that kind of control or influence. But:
“It is very clear to any reasonable person and I’ll count in all those you’ve noted, that the President has little direct influence over the country’s economic performance. “
The people I listed would disagree with you vehemently. I wasn’t exaggerating, I was stating a fact. They really beleive that.
Islam will change