No More Double Standards

by hilzoy

I've been wondering why such different standards are applied to financial executives and Detroit's auto workers. Consider:

* The financial executives helped cause the present meltdown. Auto workers did not.

* The financial executives run their firms, and are responsible for their troubles. Auto workers and their union, by contrast, just got themselves a good deal by bargaining with management. That's their prerogative. I don't see that they're any more to blame for the problems of the Big Three than people who accept unduly large cash back bonuses on their new cars would be, had the Big Three miscalculated and given away more in cash-back bonuses than they could afford.

* Financial executives have just destroyed a tremendous amount of value and ruined the global economy. Auto workers have been busy creating useful things.

* In exchange for destroying value, financial executives get paid a whole lot more than auto workers. Orders of magnitude more. They even get multi-million dollar performance bonuses when their firms lose money! And their benefits are a lot more cushy: not just good health care but private jets and chauffeurs!

* Punishing financial executives helps reduce moral hazard. Punishing auto workers does not.

Honestly: what sense does it make to stick it to a bunch of auto workers while letting the financial executives off scot-free? How can Richard Shelby get all upset about the fact that some blue-collar workers have, gasp, health care, and not about the fact that financial executives, on whom we have spent a lot more money than the Big Three ever asked for, get financial planners and chauffeurs? Just imagine the furious oratory we might have heard had the UAW succeeded in negotiating benefits like the ones people get at Goldman Sachs. (I'll bet chauffeurs would help auto workers concentrate more on their jobs...)

For the reasons given above, I think that we should stick it to the bankers and hedge fund managers, and not to the UAW. However, I'd be happy with a single standard uniformly applied. rok for dean at dKos has a good idea:

"In 1950, the average pay of an S&P 500 CEO was less than 30 times that of an average U.S. worker; by 1980, prior to the "Reagan Revolution, the average pay of the S&P 500 CEO was approximately 50 times higher than that of an average U.S worker. But by 2007, the average pay of an S&P 500 CEO had soared to more than 350 times as much as that of an average U.S. worker.

This is both immoral and unsustainable in a democracy. By way of comparison, in Europe, an average CEO only makes 22 times as much as an average worker, and in Japan, only 17 times as much.

If America wants to be competitive again, we need to reduce CEO pay to a level comparable to CEO pay in Europe and Japan. I know exactly how to accomplish this feat. The UAW should agree to immediately lower U.S. union worker pay to a level equal to the level paid by their non-union, non-American competitors. In return, auto CEO’s must agree to permanently lower their compensation to only 20 times that of an average union worker.

Once this has been accomplished, Congress must move to apply the same pay standards to AIG and all of the financial institutions that took one penny of taxpayer money from the TARP fund."

Amen. Only one addition: this has to include not just salary but benefits, and benefits should be equal to (not greater than) those enjoyed by the average American worker. Until the average worker's employer pays for his or her home security system or chauffeur, those multimillionaires on Wall Street can pay for those things out of their salaries.

Comments

[now_what]

Thanks for the concise and accurate post.

[Warren Terra]

Last week (Thursday iirc) the New York Times had a front-page story about Merrill-Lynch's bonuses, and right there in the first paragraph or so it said that Merrill-Lynch reported profits of around 6 billion for one recent year - and promptly handed 5/6 of its profits over to its executives as bonuses.

It later emerged that some of those profits were illusory, and the rest would soon be more than counterbalanced by massive losses in a later year. But frankly, even had the profits been real and sustainable, I'd have thought that the shareholders would have been within their rights to sue for that money. 5/6 of the profits, and a massive amount at that, going to executives as their reward, and not to the company's owners as theirs?

One of the problems I've seen developing in recent years is that companies are treated as something the executives should parasitize, not something they should build. Executives are rewarded for a few years' work as if they actually owned the company, or had worked all their lives to build it to its current status. Cash is extracted from the companies for the benefit of the companies' executives, while little thought is given to the long term implications for the company or to the shareholders who rightfully own the company, and far less thought is given to the lower-status workers.

The most extreme version of this was of course the way too many members of the Bush administration managed the government: they had been handed power over (and responsibility for) vast assets belonging to the American people, and they proceeded to find ways to extract cash value from those assets for themselves and their friends as if the assets were their own personal property, and without thought for the true owners or the long-term health of the organizations they now controlled.

I'm a lefty, and I'm all for progressive approaches to solving our economic woes. But I'm also sorry that I don't hear from more rightwingers complaining that their free-market ideas of corporate officers responsible to their shareholders have been so comprehensively ignored by those corporate officers.

[KCinDC]

Sp*m cleanup on aisle 1:06!

[Warren Terra]

But it's such nice sp4m, and it's so complementary. It's not profane, it's spelled properly, and its only vulgarity is its commercialism and blatant dishonesty. Hardly sp4m at all, really.

[Micheal]

what sense does it make to stick it to a bunch of auto workers while letting the financial executives off scot-free? How can Richard Shelby get all upset about the fact that some blue-collar workers have, gasp, health care

[asterisk]

Wouldn't it be fair to say that the executives got their pay and benefits through bargaining? Like the autoworkers, that's their prerogative.

It's interesting that executive pay in the U.S. is so much higher than it is in Europe. But I get the feeling that artificially capping salaries won't address the root of the problem.

I have a feeling (but I'm not sure) that the double standard and the outlandish salaries come from the amount of political power our business leaders are allowed to have.

Any idea where rok for dean got his figures?

[hilzoy]

Sp4m gone!

[mike]

I have a feeling that the double standard and the outlandish salaries come from the amount of political power our business leaders are allowed to have.

[Nell]

Wouldn't it be fair to say that the executives got their pay and benefits through bargaining? Like the autoworkers, that's their prerogative.

Execs do not get their pay and benefits not through bargaining, unless you-scratch-my-back-and-I'll-scratch-yours is considered bargaining. A very cozy negotiating environment.

Shareholders, except for those holding decisive numbers of shares, haven't controlled corporations for a long time. John Kenneth Galbraith was vividly analyzing executives' effective control many decades ago.

And even if today's corporate executives had gotten where they were by bargaining, it wouldn't be their "prerogative" in the same sense as collective bargaining is the prerogative of the autoworkers, something their predecessors struggled and in many cases died for.

[KCinDC]

1:33 and 1:59 are sp4m as well. It's odd that 1:59 deleted the parenthetical phrase in its quote.

[Nell]

rok for dean doesn't provide a link to back up his figures, but the AFL-CIO Executive Pay Watch site has footnotes. I'm guessing rok's stats are based on the IPS/United for a Fair Economy 2007 report 'Executive Excess'.

[Nell]

The UFE report 'Executive Excess 2008: How Average Taxpayers Subsidize Runaway Pay' can be downloaded from this page.

[John Spragge]

A solution I've proposed for the past twenty years: replace all corporate taxes with a single tax on gross receipts based in a multiple of the wage disparities in the corporation, rounded to the nearest 20, and multiplied by 1%. So paying your chief executive 19.9 times your floor cleaner (say $400,000/year) you pay nothing. Pay less than 40 times, and you pay 1% of receipts. More than 40, you pay 2%.

This does three things: it allows the corporate world to choose to reward genuinely exceptional talent. If your CEO really has single-handedly bumped the profit margins by over a percentage point as a function of gross receipts, then fine, pay him a fair share of that. It also penalizes greed. If you have a mediocre CEO, then paying that person the rate which now prevails will add to your tax burden while returning you nothing. And it pushes up average corporate wages on the low end of the wage scale. Squeezing an extra few bucks out of your cleaners or stockers all of a sudden looks a lot less appealing, if the government will take all the money you would gain from doing so in taxes.

[Jay Levitt]

I seem to recall a number of progressive-thinking companies trying this in the 1990s - Ben & Jerry's was one, maybe?

The problem is that, much as we like to hate the Big Man at the Top, there's a limited supply of potential CEOs. And although their predecessors didn't struggie and die for them (is that now the standard for contractual negotiations?), they do, in fact, negotiate over their salary and benefits.

What that means is that even if your *current* management team agrees to limit its compensation, you will have a very difficult time recruiting *new* management. Why should some innovative, experienced manager join your company for $200K when he can make $1M somewhere else?

We struggle with this for public-sector jobs - anyone think teachers, policemen, etc. make enough? - but at least we can hope that the satisfaction of "working for the people" provides an intangible benefit.

Unless you consider running GM to be charity work (insert joke here), that's not gonna fly (insert other joke here).

[Sapient]

"Why should some innovative, experienced manager join your company for $200K when he can make $1M somewhere else?"

Some innovative, experienced manager? This is how you're describing the people who've run the economy into the ground? My experience with large corporations is not that their management represents innovation. See Office Space or Dilbert for a more realistic picture.

[bucky]

Jay: there's a limited supply of potential CEOs

Actually, the supply of potential CEOs is rather unlimited. We've only been led to believe it is unlimited by the smallest but most successful unofficial labor unions in history: US Executives. They've been so successful because they are both management and labor. It's a sweet deal.

Having worked in corporate America for 20+ years, I can assure you that there are many, many qualified, experienced women and men who would be more than capable and more than willing to run the company for far less than the billions we are currently paying top "talent."

The truth is, that most executives would continue to want to run companies even at a greatly reduced pay. This is because generally the people at the top are Type A personalities that thrive on power. Yes, the money is nice because it increases their power in the outside world. But within the company itself, it is the control that they enjoy. That wouldn't change if they were only making 50 times the average salary instead of 350 times.

[Andrew]

We struggle with this for public-sector jobs - anyone think teachers, policemen, etc. make enough? - but at least we can hope that the satisfaction of "working for the people" provides an intangible benefit.

Not sure about your neck of the woods, but where I live these jobs are incredibly competitive. Median income, health benefits, pension...these jobs are like winning the lotto to many people.

[Personal Failure]

"Having worked in corporate America for 20+ years, I can assure you that there are many, many qualified, experienced women and men who would be more than capable and more than willing to run the company for far less than the billions we are currently paying top "talent.""

Yeah. I'm a legal secretary and I could run the firm I work for more effectively than the managing partner, whose managing style amounts to nickle and diming us into oblivion, while simultaneously pulling out as much money as possible to buy himself fancy cars, etc.

Hey, John! I don't care how much ink costs, I still need it to print! You don't need a $200,000 car to go grocery shopping!

[RepubAnon]

During the 1950s, US Execs made proportionally far less than they do today - and US corporations thrived. Today, they make much more and their "expert, world-class" leadership has taken all these companies over a cliff.

The top income tax bracket in the 1950s was 90%. It didn't stifle innovation, there were still plenty of CEO wanna-bes, but it did stifle these outlandish salaries.

[asterisk]

"unless you-scratch-my-back-and-I'll-scratch-yours is considered bargaining"

Isn't that exactly what bargaining is? I'll give you something and you'll give me something.

"And even if today's corporate executives had gotten where they were by bargaining, it wouldn't be their "prerogative" in the same sense as collective bargaining is the prerogative of the autoworkers"

In what sense is the autoworkers' prerogative different? Any employee has the right to bargain, set terms, accept or decline employment.

[bucky]

Asterisk, the problem is that in traditional barganning you have two people with usually opposing goals meeting somewhere in the middle to reach an agreement.

In traditional labor negotiations, labor is trying to look after their interests and get the most they can and management is supposed to be working to look out for the best interests of the company.

This all changed dramatically when Reagan ushered in the "greed is good" era. The CEOs of American companies worked very hard to game the system and change the financial and oversight rules. And they succeeded.

We now have a system where when it comes to CEO pay and benefits, they are essentially barganning with themselves without any real concern for the companies they "lead." They have given themselves lovel golden parachutes and ironclad contracts that pay them handsomely regardless of their performance.

[mckinneytexas]

The UAW does not make "useful things". They make products the market doesn't particularly care for. The blame you lay on stupid, greedy bankers resonates well in this very small corner of the universe, but the fact remains that the labor burden on marginally appealing products is one of the leading reasons why the US Not-So-Big Three are on the ropes. You are comparing apples to oranges.

The issue you should be focused on is how do companies show huge profits from which executives pay themselves huge bonuses when, in fact, they turn out a year or so later to not be profits at all? Since Enron, the logical step seemed to me to require the CEO and CFO to personally sign the company's 10-K and to face prison for any material misstatements of the company's financial position (with a three year look-back period that is extended for concealments lasting more than three years) with no scienter requirement, i.e. liability would be strict and not subject to the traditional requirements of knowledge or intent.

If a CEO in fact consistently delivers huge profits to the benefit of shareholders and workers alike, then he/she deserves huge bonuses. Bill Gates comes to mind.

[joseph]

In traditional labor negotiations, labor is trying to look after their interests and get the most they can and management is supposed to be working to look out for the best interests of the company.

[Bernard Yomtov]

Isn't that exactly what bargaining is? I'll give you something and you'll give me something.

Sort of. The problem comes when:

1. What the negotiators give each other is other people's property. Then there's not much incentive to drive a hard bargain.

2. The people whose money is being paid have literally no voice in the process. Companies are not required to allow shareholder votes on executive compensation.

3. One side of the table gets lots of goodies from the other side. Board members, in principle elected by shareholders, are in fact chosen by management, Being on the board of a large corporation is a very sweet deal, and members are reluctant to risk it by offending management.

[cleek]

The UAW does not make "useful things". They make products the market doesn't particularly care for.

best-selling vehicle in the US, for 17 of the past 18 years ?

Ford F-150.

[Porcupine_Pal]

There doesn't seem to be much of a market for high dollar CEOs. Most of the demand for them seems to come from their own BOD.

[Porcupine_Pal]

Much of the exuberance in CEO compensation tracks the decline of influence in organized labor, formerly a notable constraint on executive pay.

[mattH]

The problem is that, much as we like to hate the Big Man at the Top, there's a limited supply of potential CEOs.

I don't know whether to laugh, cry, scream or just sit in dumbstruck awe.

One simple question then, where are all the women CEOs? 50%+ of the population, but certainly not even 25% representation at the CEO level.

And although their predecessors didn't struggie and die for them (is that now the standard for contractual negotiations?), they do, in fact, negotiate over their salary and benefits.

But they don't "negotiate", except in the most perverse sense of the word. The individuals who make up a Board of Directors are primarily CEOs, not stockholders, in fact stockholder ability to hold a board responsible has been gutted and limited. So you have CEOs setting the salary of other CEOs with no real outside oversight by interested parties, and each CEO's salary is based on what other CEOs make, less on what a CEO actually does (look at the bonuses of the financial companies CEOs and how failure was rewarded), so it's in the best interest of a CEO to make sure any CEO makes more money, because that will likely translate into greater wages for himself, and not because he's going to buy more of your "product".

The UAW does not make "useful things". They make products the market doesn't particularly care for. The blame you lay on stupid, greedy bankers resonates well in this very small corner of the universe, but the fact remains that the labor burden on marginally appealing products is one of the leading reasons why the US Not-So-Big Three are on the ropes. You are comparing apples to oranges.

Guess that Toyota "make[s] products the market doesn't particularly care for".

Toyota Motor, the Japanese auto giant, announced Monday that it expected the first loss in 70 years in its core vehicle-making business.

Probably not a fair thing to point out, but there have been many posts and comment threads here (ObWi) that have pointed out numerous times that the Big 2.5 have been getting better, and there is more going on than just bankruptcy for them, that we are likely going to do more harm to the economy if we let them fail now than if we can let them fail later.

[bedtimeforbonzo]

Thank you hilzoy for this post and the other.

I was in a grumpy mood already last night after watching my Eagles blow a golden opportunity to make the playoffs, then when I log on to check my fantasy stats -- boy, my new favorite player is DeAngelo Williams -- I see on the Comcast homepage all of this reporting of the latest malfeasance Wall Street is committing right under Rudolph's red nose; hence, last night's F-bomb tirade.

Wall Street fat cats and the like -- that would be you, Richard Selby -- must know people are hurting, so obviously, the don't care.

These are tough times, an understatement. People -- and I don't think the article I linked in the "No Bailout" thread was referring to strictly "poor" people -- are having to give up their pets in order to put food on the kitchen table. Unless you've never had a pet, you know how heartwrenching that must be.

I've been wanting to go to the English Setter shelter in Chesapeake City, Md., ever since I suffered the double-whammy of losing CoCo and Bowser this spring and summer, but can't begin to think about getting a dog like that when I sweat out each month's mortgage payment and wonder if an apartment is in our future (meaning no yard).

Similary, there have been a lot of downbeat stories in the news about how the Marines are getting enough donations to do their Toy for Tots thing.

Chauffer? I drive to work every day in my 1992 Ford F150 and freaked out the last Wednesday when the Check Engine light came on. Hard to focus, but we working people go on, don't we?

This may seem silly, but my wife and I were actually having a dicussion last night on if it was necessary to load up on the Christmas sweets when I drop by Bing's Bakery tomorrow. Well, sorry, Honey, but I just phoned in an order for my apple crumb pie; that's my Christmas bonus.

It's heartening the last few days to see the discussion on social issues here, issues that have been given the back-of-the-bus treatment by the Bush Administration. But I don't want to see us lose sight of the constant corruption that apparently never ends on Wall Street. Can anyone tell me what Henry Paulson has accomplished?

Has anyone else had their credit card limit lowered -- by of all entities -- Citi? Those schmucks.

Congressional hearings seem tedious, but shouldn't we drag the Wall Steet recipients of all this TARP money up to the Hill for some kind of accounting?

I wonder what Russia, China and all of these newcomers to the free market think of our brand of capitalism now.

And, I am sorry Jay Levitt -- "The problem is that, much as we like to hate the Big Man at the Top, there's a limited supply of potential CEOs" -- but I find that hard to believe.

For years, it was said trhat a rookie NFL head coach could never go to the playoffs in his first year: Well, three are going to the postseason this year and they all three seem more innovative than the tired, uninspired thinking of, say, Eagles coach Andy Reid.

Clearly, there is a similar Old Boy's Network on Wall Strett, where you will no doubt find a dearth of CEOs who are black or female or gay or perhaps simply fair-minded and progressive thinking.

This posting has already gone on too long, but after my little tirade last night, russell rightly reminded me to focus my anger where it belongs: the Congress.

And then Gary and I debated the merits in the same thread of the leadership on all of this bailout buisness by Pelosi and Reid -- I think it has been rather weak.

Perhaps others could join in here.

Thank you.

[Gary Farber]

"The UAW does not make "useful things". They make products the market doesn't particularly care for."

The UAW doesn't design cars, or market them, or pick which cars to work on; attempting to lay off responsibility for these management decisions on the union won't fly. The UAW has also agreed to massive pay and benefit cuts, etc.

I otherwise agree with your comments.

OT, but mckinneyintexas, I have those copies of hospital bills to email you if you still want to see them, but I need your email address, as I previously posted weeks ago which you undoubtedly didn't see.

[KCinDC]

10:44 is more drug sp4m, like the earlier 1:33 and 1:59. Some bot quotes a sentence or two from the post or a earlier comment and links to the sp4m site.

[bedtimeforbonzo]

Thank you hilzoy for this post and the other.

I was in a grumpy mood already last night after watching my Eagles blow a golden opportunity to make the playoffs, then when I log on to check my fantasy stats -- boy, my new favorite player is DeAngelo Williams -- I see on the Comcast homepage all of this reporting of the latest malfeasance Wall Street is committing right under Rudolph's red nose; hence, last night's F-bomb tirade.

Wall Street fat cats and the like -- that would be you, Richard Selby -- must know people are hurting, so obviously, the don't care.

These are tough times, an understatement. People -- and I don't think the article I linked in the "No Bailout" thread was referring to strictly "poor" people -- are having to give up their pets in order to put food on the kitchen table. Unless you've never had a pet, you know how heartwrenching that must be.

I've been wanting to go to the English Setter shelter in Chesapeake City, Md., ever since I suffered the double-whammy of losing CoCo and Bowser this spring and summer, but can't begin to think about getting a dog like that when I sweat out each month's mortgage payment and wonder if an apartment is in our future (meaning no yard).

Similary, there have been a lot of downbeat stories in the news about how the Marines are NOT getting enough donations to do their Toy for Tots thing.

Chauffer? I drive to work every day in my 1992 Ford F150 and freaked out the last Wednesday when the Check Engine light came on. Hard to focus, but we working people go on, don't we?

This may seem silly, but my wife and I were actually having a dicussion last night on if it was necessary to load up on the Christmas sweets when I drop by Bing's Bakery tomorrow. Well, sorry, Honey, but I just phoned in an order for my apple crumb pie; that's my Christmas bonus.

It's heartening the last few days to see the discussion on social issues here, issues that have been given the back-of-the-bus treatment by the Bush Administration. But I don't want to see us lose sight of the constant corruption that apparently never ends on Wall Street. Can anyone tell me what Henry Paulson has accomplished?

Has anyone else had their credit card limit lowered -- by of all entities -- Citi? Those schmucks.

Congressional hearings seem tedious, but shouldn't we drag the Wall Steet recipients of all this TARP money up to the Hill for some kind of accounting?

I wonder what Russia, China and all of these newcomers to the free market think of our brand of capitalism now.

And, I am sorry Jay Levitt -- "The problem is that, much as we like to hate the Big Man at the Top, there's a limited supply of potential CEOs" -- but I find that hard to believe.

For years, it was said trhat a rookie NFL head coach could never go to the playoffs in his first year: Well, three are going to the postseason this year and they all three seem more innovative than the tired, uninspired thinking of, say, Eagles coach Andy Reid.

Clearly, there is a similar Old Boy's Network on Wall Strett, where you will no doubt find a dearth of CEOs who are black or female or gay or perhaps simply fair-minded and progressive thinking.

This posting has already gone on too long, but after my little tirade last night, russell rightly reminded me to focus my anger where it belongs: the Congress.

And then Gary and I debated the merits in the same thread of the leadership on all of this bailout buisness by Pelosi and Reid -- I think it has been rather weak.

Perhaps others could join in here.

Thank you.

P.S. hilzoy made mention of it upstairs but I will throw up the next time I see a Shelby or Corker or whoever say that automakers make $73 an hour -- hasn't that myth been dispelled by now -- or do these ignorant blowhards truly want to engage in class warfare?

[Gregory]

The UAW does not make "useful things". They make products the market doesn't particularly care for.

But they don't choose what products they build -- management does.

The workers add value by assembling components into finished products -- and at truly astonishing levels of productivity into the bargain. Management decides how those finished products will be designed. So if the public doesn't like the finished product, unless the fault is directly traceable to workmanship, the fault is that of management, not labor.

[SuperUser]

btfb: it absolutely infuriates me. It would be different if the people who are mad at the UAW applied the same standards across the board, taking into account the difference between workers who do not e.g. design the cars and bank CEOs who are responsible for the direction their company takes.

But nooooooo.....

About the comment sp4m: those comments seem to me to be close enough to actual comments from someone who for whatever reason wants to link to a commercial website that I don't feel I should delete them. Hmm.

[bobbyp]

Dean Baker has a trenchant comment on executive pay at the American Prospect site.

[hilzoy]

That comment ostensibly from Moe was actually from me. Sorry about that. (I was checking out sp4m, which requires that I turn into Moe, at least as far as TypePad is concerned.)

[wonkie]

Wow. I thought Moe was back, maybe with a little glimmer of sanity. I really did.

What this makes me think of is the so-callled frog-in-hot-water syndrome. Or have Americans always worshiped the rich? It's Social Darwinism in action, in any case: the only way the wage disparities can be justified is if one concieves of the CEOs as inately superior to the rest of the workers. They don't have to do their jobs well. They don't get fired if they screw up. (They just get golden paraschutes). They aren't responsible for the consequences of their leadership. The most transparent ratinalizations work to cover for them. No, everything is the fault of the worker bees! And the thought that the worker bees might make a living wage with a decent retirement and reasonable health insurance--intolerable! At least according to the Republicans in Congress and on talk radio and, presumably, according to the people who vote for Republicans in Congress and listen to talk radio.

The whole damn country should be screaming with outrage. Instaed I find myself feeling pleasantly surprised that the corporate media is covering this and I am bracing myself for the inevitable cop out from "leading" Deomcrats in the Senate who are almost certain to collaborte with the Republicans in Congress to protect the interests of the super wealthy. Meanwhile the faux populists of rightwing radio will shriek nonsense about Obama being a socialist. It's enought to make you cynical.

[mckinneytexas]

Yes, mgt approves/creates (?) the designs that the UAW builds. Notice that I didn't have any kind words for Not-So-Big Three's mgt either. Nonetheless, the labor burden on Detroit's collective product line is a huge factor in the need for a bail-out, and is unrelated to executive compensation in the banking industry.

GF--yes, I haven't forgotten: [email protected].

[Nell]

I second bobbyp's recommendation of the Dean Baker post on executive compensation.

He reinforces several points made by btfb, Bernard Y. and others here:

If Congress actually wanted to limit executive pay, there are some simple methods to do it. For example, it could require that the pay packages for the five highest paid executives be subject to a binding vote by shareholders at regular intervals, in an election where ballots that are not returned are not counted. By changing the rules of corporate governance in a way that gives more power to shareholders, Congress can make it far more difficult for top executives to pillage the companies they work for.

[bedtimeforbonzo]

"the only way the wage disparities can be justified is if one concieves of the CEOs as inately superior to the rest of the workers. They don't have to do their jobs well. They don't get fired if they screw up."

So sad, but there definitely seems to be a lot of truth in what wonkie is saying.

[Sebastian]

This is a false opposition. Fewer bank executives AND fewer UAW workers. A large number of both of them have been wasting resources on a massive scale.

But there is also at least one other difference. There have been massive layoffs in the financial sector already. We have already seen the layoffs in the financial sector cull out many of the wastefully employed. Even before all this started we saw the mortgage company layoffs. And when those people get other jobs it will be better for the economy. And even while they are unemployed, it is better for the economy that they aren't wasting resources in an unsustainable bubble.

And to remind, I'm not totally convinced the bank bailouts were great ideas either. But for the most part they are structured bankruptcy type bailouts, with lots of layoffs. The AIG thing is weird, it seems to be an actual good bailout in the sense of fixing a temporary problem in a company that has very good short term and long term prospects. Also the AIG bridge loans come at a fantastically high interest rate, to a business which looks very likely to be able to repay them, which is in strict distinction with any proposed car company bailout. The Detroit bailouts appear to be at non high rates, and with no realistic chance of being paid back any time in the near future.

Part of the problem is that we are using the term 'bailout' to cover almost every possible government intervention, when so far as I can tell each one has been different. (Which by the way may or may not be a good thing. I can't tell. I am kind of happy that the government seems to be trying to tailor different interventions to different circumstances. On the other hand I have no confidence they are doing the right tailoring. Further the reduced predictability of the haphazard bailout thing seems dangerous in itself.)

"Financial executives have just destroyed a tremendous amount of value and ruined the global economy. Auto workers have been busy creating useful things"

It isn't clear that this is true. So far as the value destroyed, it seems like much of it wasn't of value in the first place (the runup of mortagage backed everything was illusory). Which puts them in the same situation as the Detroit auto workers. Detroit auto workers haven't been busy creating useful things either. They have been busy creating cars that aren't as resource efficient as Toyotas and Hondas. Their cars aren't as desireable as Toyotas and Hondas. Their cars on average don't hold value as well either. On average our economy would probably be better off if 50% of the employees had been working at Toyota or Honda for the past decade and if the rest had been paid unemployment while finding new jobs.

Further I'm not happy with the whole frame of the post. Laying people off isn't and shouldn't be a punitive thing. It isn't about 'punishing' the autoworkers. It is about acknowledging that they are currently getting compensated much more than their worth in the economy.

Comparatively it is very possible that bank executives are ALSO getting compensated much more than their worth in the economy. May even much much more as opposed to the much more of the Detroit autoworkers. But then we hit the problem of large numbers. There frankly aren't that many executives. so even if they are getting paid 300 times the average worker, the ratio of executives paid at that level to workers is enormously lower than a 300:1 ratio. So while both end up being an enormous waste of resources, the economic waste of overpaying 50,000 UAW workers ends up hurting the economy more than the overpaying of the executives associated with them.

Now. This isn't an argument against doing something about executive pay. I'm all for having CEOs pay for their own chauffeurs. I'm showing that doing something about executive pay isn't going to fix the problems that you seem to think it will. And it especially isn't going to fix the problems that rok for dean thinks it is going to fix.

Gary:

"The UAW does not make "useful things". They make products the market doesn't particularly care for."

The UAW doesn't design cars, or market them, or pick which cars to work on; attempting to lay off responsibility for these management decisions on the union won't fly. The UAW has also agreed to massive pay and benefit cuts, etc.

ARGH. Who designs the car doesn't change the fact that they aren't doing useful work in the context of the US economy as a whole. If I instruct you to dig a ditch and then fill it up, the fact that I told you to do it, and paid you to do it, has nothing to do with the fact that the work you just did was useless. The uselessness of the work is independent of the person who told the worker to do it.

The fact that a pretty large number of UAW workers are doing effectively useless work has nothing to do with the fact that stupid GM designers designed the useless work for them to do. The economy would be much better off if they were doing useful work.

And all that sucks. I'm not thrilled that GM has been so stupid as to misallocate the work of tens of thousands of people into effectively useless channels for decades. That isn't good. The Detroit 3 auto companies have been plowing so much money into the ground that they could have purchased Toyota and Honda outright with the money they have wasted.

But none of that changes the fact that these workers are not going to be able to work productively at GM at any time in the forseeable future. And if those workers are going to be given money by the government anyway, I'd rather not spend one more cent on the proven money losing/resource wasting company known as GM in the process.

[Gary Farber]

"The AIG thing is weird, it seems to be an actual good bailout in the sense of fixing a temporary problem in a company that has very good short term and long term prospects."

Really?

Friday, October 24, 2008; Page D01

The troubled insurance giant American International Group already has consumed three-quarters of a federal $123 billion rescue loan, a little more than a month after the government stepped in to save the company from bankruptcy.

AIG has borrowed $90.3 billion from the Federal Reserve's credit line as of yesterday, the bulk of it to pay off bad bets the company made in guaranteeing other firms' risky mortgage investments. That's up from roughly $83 billion AIG had borrowed a week ago, and the $68 billion level it reached a week before that. The news comes as the company's new chief executive warned Wednesday that the government's financial lifeline may not be enough to keep AIG afloat.

Note date.

Also:

A day after Richard S. Fuld Jr. was compelled to explain the millions of dollars he made at Lehman Brothers, two former executives of the American International Group took their turns in government witness chairs on Tuesday, answering critical questions from lawmakers about business and pay practices and outsize spending that continued even after the company received an $85 billion lifeline from the government.

One particular point of contention during the hearing before the House Oversight and Government Reform Committee was a weeklong retreat that a life insurance subsidiary, AIG General, held for its top sales agents at the St. Regis Resort in Monarch Beach, Calif., only a week after the government extended its $85 billion loan last month.

The $442,000 in expenses for the week included $150,000 for food and $23,000 in spa charges, according to documents obtained by the committee.

[...]

And many legislators berated the two men for large pay packages dispensed to top executives despite evidence that the company’s financial health had begun deteriorating in 2007. Mr. Sullivan was questioned by several lawmakers over why he had requested that accounting losses from A.I.G.’s exposure to these swaps be excluded from calculating one particular compensation plan.

[...]

Yet both Democratic and Republican lawmakers dismissed those arguments, citing testimony from a former chief accountant for the Securities and Exchange Commission.

“A.I.G. is blaming its downfall on accounting rules which require it to disclose losses to its investors,” the witness, Lynn E. Turner, said. “That’s like blaming the thermometer, folks, for a fever.”

[...]

Both PricewaterhouseCoopers, the company’s auditor, and an independent accountant complained of a lack of access to the London unit and its leader, Joseph Cassano. The accountant, Joseph St. Denis, said in a statement to the committee that he had been deliberately blocked from questioning Mr. Cassano because he might “pollute the process.” Mr. St. Denis later resigned in protest.

Mr. Cassano has continued to draw $1 million a month in consulting fees from A.I.G., a fact that aroused ire from several lawmakers. He earned $280 million over the last eight years.

Clearly, management has been excellent.

[maryo]

Your post says what I have been feeling for a long time. If companies are going to share in the bailout, then they should all be subject to the same rules. Simple.

I see that most of the comments are about how to limit executive pay or if it should be limited at all. That is a whole other issue - one that always makes me uncomfortable because it goes to the heart of capitalism. I think that most executives are paid way too much but I can't really give a good reason why. I sometimes think that it's like porn - you know it when you see it.

Anyway, just wanted to thank Hilzoy for expressing my feelings in a very clear, succinct way.

[von]

I've been wondering why such different standards are applied to financial executives and Detroit's auto workers. Consider:

I read this lead in, expecting to see a list of standards being applied to financial executives that are not being applied to Detroit's "auto workers"*. Instead, there's a list of grievances that could have been written by a UAW press agent. And fine: life isn't fair, and it's particularly unfair to UAW members at the moment.

But how are financial executives being treated all that differently from UAW workers? Several are losing their jobs. Many are universally reviled. They are calls to bring them before a Congressional Committee so that they can grovel just like the Big 3' exec team (an "honor" that was not bestowed on the UAW's leaders, of course). So what if the financial execs got golden parachutes? According to your view, they were perfectly entitled to negotiate hard -- just as the UAW was.

Also, setting a standard for auto exec compensation is a great way to make sure to ensure that you'll keep on getting mediocre auto execs. Do you have any concern that the better executives might decide to pursue other opportunities instead of Detroit, or is your proposal to set a single uniform national standard for executive compensation?

von

*By which you really mean UAW members. There are thousands of administrative, sales, dealers, designers, engineers, and other personnel who are plausibly "auto workers" but who are not considered by your post.

are not cover

[bedtimeforbonzo]

"There have been massive layoffs in the financial sector already."

And there hasn't been in the auto industry?

Visit the floor of any assembly plant -- any car dealership, for that matter -- and you see the face of America.

Visit the ivory towers of Wall Street and you see this and they sure as hell destroyed something.

And they destroyed a hell of a lot more of something, "even if they are getting paid 300 times the average worker" -- like destroying people's hopes and dreams and retirement security -- than the poor saps who are making Chevy Aveos, Cobalts, Malibus and Silverados and who need to take a shower after an eight-hour work day so they can focus, not having had the luxury of a chauffer-driven ride home.

[Sebastian]

Gary, I see the date. And their was the disturbing lowering of the interest rate of the loan a month ago (though still at very high levels).

What I haven't seen is actual need for an additional bailout, and it appears that as the swaps have been unwinding that the AIG position is getting better. Is there anything from December which suggests that they actually did use the whole loan and need more money? I haven't seen it, and I looked for some right after seeing your post.

And for the rest of point? That it doesn't matter why they are working at useless jobs so much as that they are in fact working at useless jobs? Are you going to be responding to that? It was the entire thrust of your original point.

[Sebastian]

"There have been massive layoffs in the financial sector already."

And there hasn't been in the auto industry?

I don't know what you are talking about. There have been layoffs in dealerships, but not on the production side as of yet. And if they aren't selling in the dealerships, there darn well better be some layoffs in production unless you want to waste all the production materials and let them rust.

Which is precisely the point. The cars aren't selling. The 'bridge' loan for the Detroit 3 is a bridge to nowhere.

[KCinDC]

Hilzoy, the sp4m comments aren't "actual comments". They're a couple of sentences copied from the post or an earlier comment, with no original text added. It's likely they're being created by a bot. And since they all link to similar drug sites, they're probably all created by the same sp4mmer.

[bedtimeforbonzo]

What's that old line about a recession, Sebastian? It's a recession if your neighbor loses his job -- it's a depression if you lose yours.

[bedtimeforbonzo]

More of my neighbors who must be dreaming that they've lost their jobs.

[Gary Farber]

"It's likely they're being created by a bot."

What KCinDC said. Definitely mechanical s p a m.

[John Spragge]

von, an executive in a decision-making capacity has a fiduciary responsibility, and thus, I would argue, executives do not, by definition, have the same right to bargain for their own interests that line workers and their representatives do. This holds true particularly in situations where the people on boards of directors, the people they bargain with and the supposed checks on their authority, have multiple social and financial incentives for colluding with them.

[bedtimeforbonzo]

Not so merry here, either.

[von]

von, an executive in a decision-making capacity has a fiduciary responsibility, and thus, I would argue, executives do not, by definition, have the same right to bargain for their own interests that line workers and their representatives do. This holds true particularly in situations where the people on boards of directors, the people they bargain with and the supposed checks on their authority, have multiple social and financial incentives for colluding with them.

An executive negotiating for his own compensation is in an adversarial posture, and, within certain limits,* does not owe a fiduciary responsibility to his board in connection with the negotiation.

*Limits that I'll be happy to advise you of at my hourly rate, which really is quite reasonable.

[bedtimeforbonzo]

Another lump of coal, this time for the good people in Ohio and some of our neighbors in Canada.

[bedtimeforbonzo]

And the Grinch visits Indiana, too.

[(The Original) Francis]

Well, it's Dec. 22 and I'm physically in the office, so I might as well participate in this thread.

First, there's very little evidence that executive pay is set competitively, and quite a bit of evidence that it's a ripoff from the shareholders and/or other workers. I have no problem with imposing a tax rate of, say, 60% on all income over $5 million. Nor do I have any problem with adopting SEC regulations requiring that any publicly traded company establish a truly independent compensation committee with 1/3rd representation by vote of the non-executive workers.

Work rules, not compensation, appear to be one of the great banes that unionism imposes on capital. While I don't know a d*mn thing about this issue, I'd prefer to allow corporations to request relief from a re-invigorated NLRB to renegotiate work rules in the face of declining profits than willy-nilly engage in union bashing.

After all, there's no magic number for Return on Equity that publicly-listed companies have to meet, nor is there a magic level for the S&P 500. As a society, it may well be the case that we're better off with lower stock prices, lower ROE and higher employee wages.

Feudal societies appear quite stable. Based on what I read about Brazil (or NYC in the last 5 years), frex, that looks pretty feudal, and kinda stable. Most of the money goes to a very few, who distribute some of it to household armies, and a lot of the common people are desperately poor, and disempowered.

The skeleton of our society is built of laws that are understood by a tiny few but have massive effects. As a California water lawyer, I know a lot about a tiny set of laws, and know a little about most environmental laws. Great battles are being waged over California's future right now that will affect virtually all of the 38 million people living here, and only a small number of people truly understand what's going on. Looking to the past, I see that relatively obscure sections of the Clean Air Act and Clean Water Act (among other statutes) have forced the investment of billions of dollars in infrastructure that has improved the quality of life for Americans almost immeasurably.

The point? I reject utterly the notion that the system of capitalism as currently practiced in this country is inevitable. We can, if we choose, adopt laws that will increase the bargaining power of workers as against executives and/or shareholders. We simply have to choose to do so.

[bedtimeforbonzo]

On the other hand . . .

I'm not even going to bother taking my caculator out, Seb, because I'm guessing the Goldman Sachs CEO pay of $53.4 million in this year of Bailout Nation is 300 times the entire 8-man department I work in.

What did someone upstairs say about porn?

[bedtimeforbonzo]

It's Chinatown, Francis.

[bedtimeforbonzo]

In my haste, I incorrectly linked the Goldman's CEO pay from two years ago, which I think was still 300 times my 8-man department's pay back during the good old days of car sales, and quite pornographic, and which kind of tells you How We Got Here.

I can stop hyperventilating now.

[(The Original) Francis]

btb: you have no idea. Chinatown is going to be an example of good and open government by the time this deal is done. But that's a topic for a different thread.

[Bernard Yomtov]

An executive negotiating for his own compensation is in an adversarial posture, and, within certain limits,* does not owe a fiduciary responsibility to his board in connection with the negotiation.

This is true except for the business about being in an adversarial posture. He's in a nice friendly conversation with his cronies - cromies whom he has, in effect, appointed to comfortable and well-paid positions as board members.

So all that business about the execs negotiating hard just like the unions is nonsense. As is the idea that if executive pay were lower we wouldn't get such excellent CEO's in the auto business. These are the guys who are making all that labor Sebastian is complaining about useless. Are there really not people who could do a better job for less money? I think there are.

[John Spragge]

von, I would suggest, as a slightly modest proposal, that after a small clutch of highly privileged workers got paid billions of dollars for destroying trillions in value, that maybe, just maybe, we ought to wonder if perhaps that existing safeguards had a few holes in them.

[Sebastian]

"These are the guys who are making all that labor Sebastian is complaining about useless. Are there really not people who could do a better job for less money? I think there are."

Exactly. Which is why my answer to the idea of no more double standards is not that the UAW should get off, but that corporate execs shouldn't get off either.

[Bernard Yomtov]

Which is why my answer to the idea of no more double standards is not that the UAW should get off, but that corporate execs shouldn't get off either.

Or maybe we could get execs who make better use of their labor force, so the work isn't useless, and so don't have to lay off workers.

[Jay Levitt]

@MattH: I agree with you; CEO salaries *are* based much more on what other CEOs are making than on their value to the company. But that doesn't change the problem: We still have a situation where, if you want to hire the best, you have to pay them comparably to what other companies are paying them. If we actually want to save the Big 3 - and I'm not saying we do, but apparently, we now have to - it would seem dumb to force them into a position where they can't hire good people. Segue...

@Sapient and others: Again, I agree. Their current management sucks. Do you think the best way to recruit some actual talent is to set a legislative cap on what that talent can be paid? If other companies don't have to play by the same rules, how would that work? Or do you think there's no such thing as a good executive, and therefore, it doesn't matter who they recruit to run the place?

@Multiple: It's true that negotiating with the company's money is much less "risky" than negotiating with your own - and that CEOs on boards of other companies have an incentive to boost that other company's CEO pay. I'm still not clear why that makes negotiations over a CEO's benefits any less real than negotiations over a worker's benefits. There are all sorts of financial incentives that tend to either decrease or increase how much you want to pay someone. That's why we negotiate. For that matter, aren't the union leaders in similar positions? It's in their interest to keep wages high, and they're not spending their own dollar by doing so. That's why we have unions.

@MattH again: Yes, women and minorities are horribly underrepresented in American upper management. I said there's a limited supply of potential managers. Does the lack of women somehow make the supply infinite?

@bedtimeforbonzo: same thing. I'm not saying the "supply" is "white males who hang out at country clubs". I'm saying that there's some number of people who have the skills to run a large corporation - potential executives. Do you think there are MORE potential executives than there are executive positions? And that somehow, corporations have completely overlooked this low-cost talent pool? Segue...

@bucky: If there are fewer potential executives than there are executive positions, you can't expect to fix CEO salaries by capping them at a few companies. You'd have to cap them everywhere. Sure, executives would all work for less. But if they don't *have* to, why would they? We're talking about companies that are on the brink of failure. They'll probably fail anyway, and whoever's left holding the reins will have a pretty big stain on their resume. Why on earth would anyone want that job if it paid significantly less than the competition?

[Sebastian]

"Or maybe we could get execs who make better use of their labor force, so the work isn't useless, and so don't have to lay off workers."

There is an awful lot of leeway in the 'maybe' there. I suspect, on balance, it is *likely* that we can't get executives who working with the current plants and the current UAW and the current dealerships and most importantly the current state of the brands (which is to say for the most part people who aren't buying trucks think "GM, do I look like that much of an idiot") who can make so much better use of the labor force as to save the companies.

And non-jokingly if there are such people, they most likely work for Honda and Toyota already.

And quite seriously, if the problem is bad decisions made by dead or retired executives to establish bad divisions, those divisions are going to need to close no matter what.

It is very possible that there are lots of execs who will make better use of the work force. But that doesn't mean that they can do it at GM, and that doesn't mean that many of them will do so for non-auto work.

I tend to think that government employees people to do stupid things. But *even come from that point of view*, I tend to think that if the government is paying anyway, we might as well try for some useful like infrastructure or something rather than prop up the proven 25+ year losers of the Detroit 3.

[Bernard Yomtov]

Do you think there are MORE potential executives than there are executive positions? And that somehow, corporations have completely overlooked this low-cost talent pool?

Not addressed to me, but I do in fact think so.

My own opinion is that over the past couple of decades we have greatly exaggerated the role of the CEO in the success of companies. I'm not sure how this happened - maybe some who really did make a huge difference got over-publicized, but I think this trend contributed greatly to the huge growth in compensation.

I don't claim that being a corporate CEO is simple. It's a demanding job that not anyone can do, and deserevs to be wel-paid. But I would guess that there are easily thousands of people who could run an S&P 500 corporation. I'm talking about individuals with high-level management experience, either as something like a divison head or CFO of a big company, or maybe as CEO of a somewhat smaller firm.

[CaseyL]

"We still have a situation where, if you want to hire the best, you have to pay them comparably to what other companies are paying them."

What 'best'??

I'm definitely at the jump up and down and yell stage, regarding the juxtaposition of tolerating/encouraging CEO pay and union busting.

God damn, what is 'best' about the talent than ran this economy into the ground?

I watched it happen to the company I used to work for, as the CEO and the Board were definitely in a cozy relationship and the one never turned down anything the other requested, whether it regarded executive salaries or stockholder resolutions for changes in the way the Board and senior management team kept re-organizing the company. They always watched each other's back, and I have never seen the dynamic operate differently in any other Fortune-listed company.

Unions didn't make the decisions that resulted in the credit meltdown, bank failures, and millions of job losses. Unions didn't invent CDS, or do the predatory lending, or agitate (successfully) for non-enforcement of oversight that would have prevented the collapse. Freaking top-ranked managers and CEOS did.

Unions aren't handing themselves billions of dollars in taxpayer money - again, with no oversight! - for salaries and for, dear grinning god, bonuses.

Saying "oh, I don't want those folks to get away with it either" is absurd. One, the thieves already have gotten away with it. Two, any rules changed to prevent their getting away with it again have loopholes. No, the only strings being attached to public bailout money with no loopholes applies to the unions. That's not only 'locking the barn door after the horses have escaped,' that's locking the wrong barn and penalizing the wrong horses.

The only way I've ever been able to make sense of union-hatred is by assuming a class bias. The only way I can make sense of the disparity between the onus on corporate executives and on blue-collar laborers is also by assuming class bias. It apparently really frosts some peoples' shorts that folks who don't work in offices, and aren't members of fancy professional organizations (used to) earn better-than-decent wages.

Damn damn damn but we'd be a sight better off without the Cult of the CEO.

[ThatLeftTurnInABQ]

@MattH: I agree with you; CEO salaries *are* based much more on what other CEOs are making than on their value to the company. But that doesn't change the problem: We still have a situation where, if you want to hire the best, you have to pay them comparably to what other companies are paying them.

There is a very difficult epistemological problem buried in that innocent little phrase “the best”, which gets (IMHO) to the heart of the CEO compensation problem.

How do you know who is the best? For that matter, how do you even know who is good, bad and indifferent? What semi-empirical measurement criteria is available, to sort the wheat from the chaff?

IIRC all of the measures used to justify rankings of CEO performance (and thus determine who gets to be interviewed by the writers of articles for airline in-flight magazines) are aggregate measures of the performance of their company as whole. Corporate financials, stock price, etc. How much of those aggregate results are due to the people at the top of the management pyramid, and how much are due to the contributions of others lower down, a favorable business climate, or just sheer dumb luck?

We can’t ever really know, can we? All we can do is guess - and yet executives benefit from highly selective interpretation of these guesses: when results are good, the wise, smart, and good-looking folks at the top reap the credit. When results are bad, blame the business environment, or the cost structure of the labor force (who approved that, anyway?), or anything but the poor hapless bystanders in the boardroom who are helpless in the face of forces larger than themselves (at least until the next turnaround – then suddenly they’re the Masters Of The Universe yet again).

It is a Head-I-Win, Tails-You-Lose approach to assigning blame and credit. And even if these folks manage to trash their reputations to the point of getting themselves fired, they still get to walk away with their winnings. I’d like that deal – like being able to take long-shot bets at a gambling table with somebody else’s money (i.e. the shareholders), and if I win then I get to keep part of the money, and if I lose, I just walk away without losing anything from my own stake.

That is one problem.

The other problem is that (at least here in the US), executive pay has become decoupled from the economics of the underlying enterprise in the absence of some sort of empirical measure of added value, as a result of which executive pay is distributed in a power law scale fashion rather than the more Gaussian sort of distribution you’ll find lower down in the ranks. In Nick Taleb’s terminology, executives are paid out in Extremestan terms, not based on Mediocristan values. But in almost all of the examples of Extremestan which Taleb cites (authors, entertainers, sports figures, etc.) where a highly non-Gaussian distribution in compensation levels is typical, there is a fairly direct and tangible connection between the performer and the performance, at a personal level.

So what we have is a situation where our execs are compensated using an Extremestan scale out of the profit generated by Mediocristan enterprises, with little or no tangible link between their performance and the performance of the underlying enterprise, and are able to reap the benefits when the latter is up while charging off the costs to somebody else’s tab when it is down.

You don’t need a PhD. in Game Theory to predict that this state of affairs will lead to high stakes gambling behavior and in the long run is completely unsustainable. What we are seeing right now in our economy is what happens when the casino decides that the pile of chips on their side of the table has gotten too big and somebody needs to pay out.

[bedtimeforbonzo]

Thank you, CaseyL.

[bedtimeforbonzo]

Union Busting 101.

Here, here.

[Sebastian]

"My own opinion is that over the past couple of decades we have greatly exaggerated the role of the CEO in the success of companies. I'm not sure how this happened - maybe some who really did make a huge difference got over-publicized, but I think this trend contributed greatly to the huge growth in compensation."

Interestingly enough a lot of this vein can be traced back to the cult of Lee Iacocca, so it comes back to the original horrific Chrysler bailout.

[bedtimeforbonzo]

"Interestingly enough a lot of this vein can be traced back to the cult of Lee Iacocca, so it comes back to the original horrific Chrysler bailout."

The fncking Big Three again -- what monsters!

[bedtimeforbonzo]

Let's not put all the blame on Lee Iacocca, who saved a company for a generation.

This is the type of CEO who has fckned the American economy.

[mckinneytexas]

CEO's are not fungible, and someone who does well at the CFO or Divisional Manager level may not have the drive and vision to be a successful CEO.

My first hand experience is with small, closely held companies. Generally, the owner is pretty good at what he/she does.

My suspicion is that, at the publicly traded level, the majority of CEO's are very able people. Some were probably pretty fair CFO's or ran a pretty good, small to medium sized operation but got in over their heads. An then you have have the crooks. Most of the anger here is directed against crooks. Elaborate schemes to regulate executive salaries won't work against crooks--they'll just game the system some other way--and as a few have noted, there is nothing wrong with paying major bucks to someone who takes a good company and makes it even better.

[Bernard Yomtov]

Didn't the govt actually make money on the Chrysler bailout? Maybe things would be better if the company had failed back then, but I need a lot of convincing.

[Jesurgislac]

mckinneytexas; Elaborate schemes to regulate executive salaries won't work against crooks--they'll just game the system some other way-

Odd how ready conservatives are to argue that there should be no penalty for doing something crooked, providing the crime brings in really big money.

Steal 20 bucks, conservatives say you should go to jail; steal 20 million bucks, conservatives are more likely to say you should run for President.

[bedtimeforbonzo]

Bernard: From my local paper.

[Bernard Yomtov]

CEO's are not fungible, and someone who does well at the CFO or Divisional Manager level may not have the drive and vision to be a successful CEO.

Sure. Some will, some won't. As to heads of smaller companies, remember that there are a lot of companies in the, say, $100 million to $1 billion revenue range that aren't easy to run.

An then you have have the crooks. Most of the anger here is directed against crooks.

By "crooks" I take it you mean not outright criminals, but those who manage to help themselves to unjustified levels of compensation. If so I agree, with the qualification that I think there are a lot of those.

[ThatLeftTurnInABQ]

CEO's are not fungible

This is simply not true. If it were true then it would not be such a common practice for executive search committees to recommend industry outsiders who have little or no prior experience in the specific industry which is the core business of the corporation in question.

Any CEO whose primary qualification is simply prior experience running an organization of equivalent size and complexity in a different industry is ipso facto fungible. This happens so frequently (and is reported as such in the relevant trade press) that nobody notices it anymore, whereas if similar HR practices occurred at a staff level it would not go without comment.

Most of the anger here is directed against crooks. Elaborate schemes to regulate executive salaries won't work against crooks--they'll just game the system some other way

Does your principle of “why bother, they’ll find a way no matter what you do” apply to other more blue-collar forms of crime, or just the kind that happens in a well appointed boardroom? Because we could probably save a lot of the money we spend on police depts., the prison system, etc., if this is a more general principle. I’m thinking that the War on Some Drugs would be a good place to start economizing.

[Gary Farber]

Pepsi, Apple Computers, it's all the same thing.

[bedtimeforbonzo]

Before we lose perspective here and make every CEO in the world seem criminal and clownish, I believe hilzoy's post questioned the double standard being applied to auto workers and Wall Street CEOs who leveraged our economy on its way to becoming Bailout Nation.

Anyhow, the whole thing is obviously more complex than lashing out at the pornographic fact that Wall Street CEOs make 300 times or so more than the average worker.

Not sure how exactly how I found it -- well, it is so slow at work three days before Christmas that I have almost finished reading the whole internet -- but this is a terrific (albeit long) read, providing a rich behind-the-scenes account of the fall of Lehman and its controversial CEO, Richard Fuld.

An excerpt that doesn't really do the New York magazine piece, in its entirety, justice:

"Leverage was the way to supercharge revenues. At one point, it was said that Lehman had borrowed $32 for every $1 in its coffers. (Compare that to home buying. Usually a buyer must put down 20 percent of the total price. Lehman, in effect, made a down payment of about 3 percent.) By comparison, at Merrill Lynch and Goldman Sachs, the ratio was roughly 25 to one. For all of the firms, a small dip in the value of collateral could prove calamitous.

"Lehman quickly put its capital to work in real estate and soon was a dominant force in the subprime-mortgage market, which catered to borrowers with shaky financial backgrounds. An even more significant engine of profit for the firm was commercial real estate. “Mark Walsh [head of commercial real estate] financed a lot of the firm for a number of years,” says one person who was above him. Later, Walsh was criticized for doing deals past the market’s top. The Archstone-Smith deal was usually named. But in October 2007, when he led the group that snagged Archstone, a high-end apartment owner, for $22 billion, it was the year’s trophy deal. 'A pretty good deal for the buyer,' says one analyst. It was also the largest real-estate deal Lehman had ever done, and approved by the executive committee.

"By the end of 2006, some at Lehman had begun to think that real estate was nearing the end of its run. Mike Gelband, who was responsible for commercial and residential real estate, had by then turned decidedly bearish.

"'The world is changing,' Gelband told Fuld during his 2006 bonus review, according to a person familiar with Gelband’s thinking. 'We have to rethink our business model.'

"But given the importance of real estate to Lehman’s bottom line, that wasn’t what Fuld wanted to hear. Fuld had seen his share of cyclical downturns. 'We’ve been through this before and always come out stronger,' was his attitude. 'You’re too conservative,' Fuld told Gelband."

[mckinneytexas]

J--read my first post and tell me I'm pro-criminal. My point is that complicated salary caps targeted against a single set of subjects--business executives, is counterproductive as to the talented execs, meaningless as to those who simply fail for lack of talent and doubly meaningless for crooks. I think crooks belong in jail, period. Quit being such an ideological pedant.

TLTA--fungible has a precise meaning. Not every bright person can run a company. Particularly a big company. I run a small business--less than 20 employees. I know my limits. I don't try to impose them on others. As for crooks, read my first post and get past your certitude. I suspect those that are the most outraged on this thread have never made a payroll, at least not on a business that started small and grew.

Being at the top, no matter how small the hill, carries the responsibility of making sure that there is a market today, tomorrow and in the future for whatever product you sell. The easiest job in the world is that other SOB's, but try stepping into those shoes and making a go of it. Not quite that easy.

Sorry if this sounds a bit rough. After the cocktail hour here in Houston.

[liberal japonicus]

mckinney,
I'm not sure what you mean by your 'first post', but the point is not that you are pro-criminal, it is that you are pro-upper class. I tempted to write an apologist for the upper class, but that sounds way too harsh. Still, you seem to be willing to tolerate misconduct by those making a lot of money a lot more than you can for those who aren't. Traditionally, the notion is that the upper class requires fewer rules than the lower classes because they are going to behave properly. We've discovered that this isn't true, so it appears necessary to institute a regime of rules governing this conduct, especially when CEOs seem to be taking more money from the companies than they are actually worth. The phrase 'complicated salary caps' seems to a way of saying sh*t happens.

[Fraud Guy]

One of my favorite ideas to deal with some of the issues is that C-Level executives and board members of corporations are responsible for the actions of the companies, including criminal acts.

Step two (and this could also be useful for actions taken while in office for elected officials) is to lower the bar for needed evidence for conviction of corporate and political criminals from "beyond a reasonable doubt" to "clear and compelling".

[Bernard Yomtov]

I suspect those that are the most outraged on this thread have never made a payroll, at least not on a business that started small and grew.

I don't know if you include me in this, but if so you are wrong.

[ral]

I have only posted on the prior thread, but I am with Bernard on this [both outraged and having had to make payroll].

[ral]

I believe Gary is referring to the Skull of E.

[bedtimeforbonzo]

I have never met a payroll and probably never will. But I think one can admire someone who has, which I do, yet still be outraged over corporate greed and malfeasance, which is at the root of Wall Street's rape of the American taxpayer and its theft of consumer confidence -- not the ability to make a payroll.

Missing that point is simply missing the point altogether and essentially condoning bad and unethical business practices.

It's that kind of well-Joe-Six-Pack-has-never-met-a-payroll, above-it-all thinking that has given Henry Paulson a green light to give away billions of dollars to former colleagues and not blink an eye in doing so -- and not seeing the need for oversight as to how he is doing it.

It's what got us into this mess, and what will get us here again.

[John Spragge]

With all due respect to corporate executives (in whose ranks I happen to number), I'd like to propose the following:

1) At this point, our rate of corporate successes and failures seems to suggest that unitary command and high rewards for the people at the top do not deliver the goods as well as the alternatives. Consider the difference between Wall Street investment banks (multi-trillion dollar face plant) and the open source movement (still successfully releasing code). While I appreciate the difficulty of translating success in one industry to another, I think we ignore success at our peril.

2) That, in turn suggests we should tweak our tax incentives to support models that work, and away from the proven failures. That, to me, means a tax structure that penalizes, rather than rewarding, the excesses of pay granted to quite mediocre executives. Could executives dodge such a scheme? No doubt some would try, but law and social policy do not depend on perfect compliance.

[mckinneytexas]

I don't favor 'rules' for anyone and I certainly don't favor rules that impact a class of persons--any class, anywhere.

That said, the problem we see isn't excessive executive compensation--no one begrudges Bill Gates, Steve Jobs and a host of others the product of their hard work and vision.

The main problem is executives who lie about the value of their company, inflating profits, understating or misstating or refusing to even post losses, and who leverage these lies into huge bonuses. The impact this kind of thievery has on the market goes beyond the tragedy inflicted on company employees who lose their jobs and their savings. Investors today have no reason to believe that publicly traded companies are worth what they say they are worth.

Rather than cap salaries, I would imprison liars. To repeat my initial post, CFO's and CEO's would be required to sign their quarterly and annual SEC filings and would be subject to imprisonment for any material misstatement of the company's financial position, regardless of their actual knowledge of the misstatement.

This does not deal with under-performing companies who overcompensate their top executives. A federal scheme to determine executive compensation, however, is not the answer. First of all, the scheme itself would be so riddled with variables that a meaningful compliance mechanism would be impractical if not impossible to execute. One possible mechanism would be shareholder-derivative suits, but these have their own set of vices.

The punchline is that you cannot legislate good judgment or intelligence. Good luck trying.

And while you are limiting what people can earn, let's throw in NCAA coaches, all professional atheletes, actors, directors, college professors, etc. We'll have national performance standards across the board to ensure competence at all levels. Life will be great and everyone will be happy.

[john miller]

"That said, the problem we see isn't excessive executive compensation--no one begrudges Bill Gates, Steve Jobs and a host of others the product of their hard work and vision."

You may not begrudge them, specially Gates, but there are plenty of people that do, with plenty of legitimate reasons to do so.

Actually, part of the problem is excessive executive compensation without accountability. And there really isn't any accountability. There is no long term negative impact for running a company into the ground, unless there is something blatantly illegal done in the process. Indeed failed executives, such as Carly Fiorina still get major play without their past failures even being mentioned.

And I personally doubt that many of the highest paid CEO's even worry about making a payroll. They have other people to worry about that.

And like many people, I think there are plenty of people qualified to be CEO's but that the business community is starting to look like baseball used to, recycling managers even though some of them had never had a winning record in their careers.

As someone pointed out, when a company fails or suffers hard times, it is usually blamed on external things, but when it succeeds it is the CEO that gets the credit.

Just perhaps, if the anti-trust legislation of the past hadn't been ignored over the last generation (and am blaming both parties) things would have been a lot better all around.

[bedtimeforbonzo]

"Indeed failed executives, such as Carly Fiorina still get major play without their past failures even being mentioned."

And get to go on and take prominent roles in failed presidential campaigns . . .

[Phil]

To repeat my initial post, CFO's and CEO's would be required to sign their quarterly and annual SEC filings and would be subject to imprisonment for any material misstatement of the company's financial position, regardless of their actual knowledge of the misstatement.

Uh, we already have this. It's called Sarbanes-Oxley, and has been the law since 2002. As noted in 18 U.S.C. § 1350:

(a) Certification of Periodic Financial Reports.— Each periodic report containing financial statements filed by an issuer with the Securities Exchange Commission pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m (a) or 78o (d)) shall be accompanied by a written statement by the chief executive officer and chief financial officer (or equivalent thereof) of the issuer.
(b) Content.— The statement required under subsection (a) shall certify that the periodic report containing the financial statements fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act pf [1] 1934 (15 U.S.C. 78m or 78o (d)) and that information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of the issuer.
(c) Criminal Penalties.— Whoever—
(1) certifies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $1,000,000 or imprisoned not more than 10 years, or both; or
(2) willfully certifies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $5,000,000, or imprisoned not more than 20 years, or both.

So we actually implemented your brilliant suggestion six years ago. Fat lot of good it's done, huh? I'm sure it's entirely unrelated to the people that we've had in charge of the overseeing agencies in that time, all of whom belong to the same political party, but still.

[Bernard Yomtov]

McKinney,

I don't think we need a Federal Office of Compensation. We do need, as John Miller says, much improved accountability.

I'd begin by giving shareholders much more control over corporations. That's the way capitalism is supposed to work, after all.

Make it possible and easy to propose a binding resolution on executive compensation.

Make it easy for people other than management nominees to run for the board. Having all the "candidates" run unopposed is not a recipe for good governance, but right now an expensive proxy fight is needed to have any chance to elect an opposition candidate.

No management on the board. The board is supposed to supervise management, especially the CEO. So avoid that obvious conflict.

Require institutional investors, such as mutual funds and pension funds, to act in the best interests of their investors when voting on coprorate matters. There are conflicts of interest when a mutual fund company, for example, is also trying to get business from the corporation managing pension funds, etc.

I'm sure there are other things that can be done as well. None of these ideas require that the govt get in the business of determing pay. They do help put control back in the hands of the actual owners. They won't be a cure-all, but a step in the right direction.

Maybe more important is changing the image of the CEO, and to realize that an awful lot of the success of a company stems from the work of lower-level employees. Big ideas are easy. Making them work is hard.

This is well-explained here.

[ThatLeftTurnInABQ]

Speaking of double standards, one of these things is not like the other:

Morgan Stanley takes in $10 billion in TARP funds, pays out 8.3 billion in bonuses

Altoona, PA restaurant staff told to take their Xmas party out into the parking lot, because, well because they didn't have jobs any more. Any of them.

I've heard it said that the Great Depression wasn't bad, if you had a job.

[Sebastian]

I agree with Bernard's of 11:10

[Sebastian]

I agree with Bernard's of 11:10

[ThatLeftTurnInABQ]

Speaking of double standards, one of these things is not like the other:

Morgan Stanley takes in $10 billion in TARP funds, pays out 8.3 billion in bonuses

Altoona, PA restaurant staff told to take their Xmas party out into the parking lot, because, well because they didn't have jobs any more. Any of them.

I've heard it said that the Great Depression wasn't bad, if you had a job.