Friday, October 7, 2011

Their Pay Is Too Damn High

One of my major concerns with the growing gap between rich and poor is not based on the wealth generated by capitalists, but rather with the outsized compensation paid to certain employees of companies, most significantly senior executives. Many are paid salaries and bonuses that are not rationally tied to performance or success. They are not risking their capital, yet get paid like highly successful capitalists; often whether or not their companies prosper.

There needs to be a recognition of sharing appropriately with those who make companies successful. I feel top contributors can only accomplish so much by themselves. They need contributions from many others in the organization to accomplish success for the company. At some point individual rewards should diminish going up the scale.

The opposite seems to be true today.

Superstars aren't all that great. There are many talented CEOs in waiting who could do just a good a job for a lot less than those currently running our public companies. The same is true of athletes, movie stars and other entertainers. There are limitations on what they can accomplish without the contribution of others.

As an aside, strangely enough no one in the Occupy Wall St. movement seems to complain about outsized pay to athletes and entertainers; in fact many march supporters ( i.e. Michael Moore, Sean Penn) are themselves overpaid movie stars and the like.

It is different for investors, but only to the extent they are risking their own money. The old investment banking model of investment bankers putting their own money at risk was fine. The problems arose when the investment banks went public and started risking other peoples money . No one was sufficiently looking out for the shareholders. The executives "feathered their own nests" with extremely high
compensation and non-merited based bonuses, and the shareholders let them.

Wealth needs to be shared more fairly, but not given away either. I'm not talking about redistribution of wealth, but rather an accurate assessment of the real value created. See the example of how pro golfers earn their pay versus how members of other pro sports teams get paid. The golfer has to earn his money every week.

Even in sports, top performers' contributions has its limits. One player on a team can only do so much without the help of others.

The usual left wing solution, taxation, however, is not the way to get there. It doesn't raise the compensation of the middle class to raise taxes on the rich. It may feel good to liberals, but it just gives the government more money and doesn't raise the incomes for those in the middle class on the "have not" side of the wealth gap.

Executives, especially commercial bankers, used to make very good, but not outsized, compensation. When and why did the shift occur?

The market should recognize the real value of employee contributions and the diminishing returns of any one person to the real creation of wealth.

Why doesn't it? Somehow those in control exploit their position of power to retain outsized rewards. The shareholders, the actual capitalists, should not let them get away with it.


We will always have classes of "haves" and "have nots". I've studied just a bit of history and have been struck by the fact that from the Greeks and Romans to the Soviet Union, it always seems that people eventually sort themselves out to create elites and the rest of society.

However it is dangerous to all if the gap becomes too wide. See French and Russian Revolutions. I've always maintained that the union movement actually saved capitalism in this country because it gave the working man his own "piece of the pie" and as a result he ferociously defended our system against the Communists.

Today we have a global economy which puts into play issues like cheap labor, the environment and free trade. It is hard to reconcile these currents on a national basis and there clearly is no appetite to do so on a global basis. Cheap foreign labor may in part be the reason for the loss of jobs on the lower end of the wealth spectrum, but it doesn't explain why the higher earners are getting so much more.

While I know it may be hard to put that "genie back in the bottle", and yes I know if you spread their compensation over their whole work force it may not be that much money, nonetheless it would be the right thing to do.

Eric

7 comments:

  1. Now here is where there may be common ground with the Occupy Wall St folks; though I suspect most of them want a lot more. However, if they do go much farther that is when they'll start losing most Americans.

    What most seem not to understand from the financial crisis is that the capitalists who owned the banks got crushed, even with the "bail outs". For example Citi stock before the crisis was $50 and now is effectively ( they had a 10-1 reverse split) $5, and was as low as $2 for a long time.

    It was the surviving executives ( recall many, if not most, lost their jobs and the value of their holdings) who have bounced back in compensation.

    Eric

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  2. Through size, corporations, once merely an efficient tool employed by individuals in the conduct of private business have become an institution-an institution which has brought such concentration of economic power that so-called private corporations are sometimes able to dominate the state. The typical business corporation of the last century, owned by a small group of individuals, managed by their owners, and limited in size by their private wealth, is being supplanted by huge concerns in which the lives of tens or hundreds of thousands of employees and the property of tens of hundreds of thousands of investors are subjected, through the corporate mechanism, to the control of a few men. Ownership has been separated from control; and this separation has removed many of the checks which formerly operated to curb the misuse of wealth and power. And, as ownership of the shares is becoming continually more dispersed, the power which formerly accompanied ownership is becoming increasingly concentrated in the hands of a few... [and] coincident with the growth of these giant corporations, there has occurred a marked concentration of individual wealth; and that the resulting disparity in incomes is a major cause of the existing depression.
    Louis Brandeis
    Dissent, Liggett Co. v. Lee, 288 U.S. 517 (1933), at 565-67.

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  3. The more things change the more they remain the same? Or is it even worse now?

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  4. Towards the end of this you get to what I think is happening. Those of
    us who believe in capitalism need to understand that maybe Marx was
    right after all. If you have not read Robert Reich's New York Times
    Op-Ed of a couple of weeks ago, you should (along with Charles Blow's
    column of a few days ago). Reich documented what we know, that incomes
    for middle class Americans have been stagnant for 30 years, after 30
    years of steady progress. But the most striking and scary statistics he
    cited had to do with productivity. From 1947 until 1979, productivity
    grew by 119% and hourly compensation by 100%. In fact, until the early
    70's there was very little difference between those two statistics. So
    Marx was certainly wrong when he said that capitalists would exploit
    labor until workers could no longer buy the products of capitalism - the
    seeds of capitalism's own destruction. What had happened, contrary to
    Marxist theory, was that workers enjoyed most of the benefit of the
    fruits of capital investment, with the capitalists taking only a modest
    share of the increases in productivity that their investments had
    brought about. Hence the growing prosperity of workers and the
    relatively modest but very comfortable incomes of most business people
    and their lawyers and bankers that you allude to.

    The story has changed. From 1979 until now the divergence between the
    growth of productivity and the growth of hourly compensation that had
    begun to widen in the early 70's has become dramatically wider. In the
    30 years beginning in 1979 productivity grew by 80%, but hourly
    compensation by only 8%. Now, as we recently learned, the median income
    of workers is almost exactly what it was in 1972, despite the impressive
    growth in productivity. Obviously, the capitalists have captured the
    difference for themselves, as Marx predicted (although, fortunately for
    us, they shared it with their executives, professional advisors and
    bankers). And now in an economy driven by consumer demand massive
    numbers of working people cannot afford to buy what is on the market.
    Are the job creators not creating jobs because their taxes are too high
    and they can't pollute as freely as they would like, or because there is
    not enough demand for their products? Fox news says one thing, the
    evidence says the other. If by some miracle Fox news turns out to be
    wrong, then we are likely to see the rest of Marx's prediction come true
    if we do not quickly reverse the trend of the last 30 years.
    Increasingly, workers are finding themselves with nothing to lose but
    their chains. The result will probably not be the workers' paradise
    Marx envisioned, but something closer to a hell for all of us.

    I just read that Republicans are saying that Obama's tax proposals are
    class warfare. They may be closer to the truth than they realize, but a
    proposal to raise taxes 4 pennies on the dollar on the winners has
    nothing to do with it. In fact, we have been in a class war for 30
    years, but only one side has known it. That can't last.

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  5. Ron thanks for your response. I think you have hit the nail on the head.

    I was talking to a very smart friend at dinner the other night who, I believe independently, came up with the following similar observation to your reference to Marx:

    The balance between Business, Labor and the Consumer is out of whack.

    In order for business to prosper consumers need to buy their products. If labor is not properly paid, the consumers, who are overwhelming labor, won't have sufficient resources to buy business' products. Thus the cycle spins downward.

    How do we break this cycle in a global economy? I don't recall any answers from Reich or Blow. I read them both but just don't remember solutions being put forward.

    I don't have any either.

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  6. http://www.huffingtonpost.com/jo-piazza/occupy-hollywood-why-its-time-celebrities_b_1028190.html?ir=Entertainment

    here's an article about your point about Hollywood earners.

    It calls for Occupying Hollywood and she is not kidding.

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  7. Right on, as we used to say when I was younger ( although I probably never really said that except in jest).

    This is especially true of those non talented celebs.

    How about athletes? We discussed it and there are a lot of guys getting paid for just making the team.

    The answer that Wall St execs caused the economic melt down only goes so far. There are only a few hundred Wall St CEOs and senior execs at most and the protesters are against all CEOs and high paid executives types, including companies like Proctor and Gamble, Kraft, Disney, US Steel, At&T, Kellogg, Intel, Cargill, IBM, Boeing and so on and on; those companies had absolutely nothing to do with causing the financial melt down and ensuing recession.

    You know from my posts that my view is that they are all overpaid; however they aren't any different than overpaid entertainers ( of all kinds) and atheletes.

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