DZ: Anyway, I get your basic drift, and I still say that it is not really greed or evil which causes top exec pay to rise, because we all know some of these people who sit on these boards, and they are regular people for the most part.

Have you ever sat on a BoD? I know of what I write.

The only instance of when I’ve seen a board somewhat in check-and-balance is in Germany, where two members have been elected by Personnel. As I said, they did not have much sway in matters, but they did have full oversight of what was happening operationally. Which changed BoD behaviour dramatically.

So, what did Volkswagen do? It corrupted one of them to look the other way. As I recall, he was the Personnel Director and had a very good knowledge of total compensation.

At that level it is mostly about greed (me, me, me) and a minority part is real managerial competence based upon accumulated business experience. The frequency of temptation to succumb to the money-factor depends upon how often one must change their Porshe Carrera. Or, how many hi-cost Working Girls one may have in any given city where there’s good reason to visit on business. Or, maybe, a very large debt kept discretely at a gambling casino in Las Vegas or Monaco?

You’d be amazed how these people can burn through money.

Those directors of the latter kind, that is, truly modest, competent and dedicated to their business, are truly rare individuals. Most corporate directors are, as you say, ordinary guys but in exceptional circumstances. Which they profit from handsomely whilst the opportunity lasts.

Actually, more of a Mets fan than a Yankees fan. So…when they are playing each other, I’m ALWAYS for the Mets.  But when the Yankees play anyone else…ESPECIALLY the Red Sox, I’m a Yankee fan.

ITW,

I can’t believe you are a Jets fan.  Probably a Giants and Yankees fan also. 

I happen to live just 40 minutes north of Boston in New Hampshire, so you can guess who my teams are.

I am still irate when I watch that pass that Eli Manning threw to David Tyree which he caught with his helmet in the last two minutes of the game.  What a way to end a perfect season. 

I concur with your statements about incompetence.  It is rampant amongst the highest paid people in almost every area.  I love when a coach goes 4 and 12, so they fire him, and he gets a job with a new team for more money.  That is pretty much what I have been talking about all along.  I don’t remember if Eric Mangini got a raise when he moved to Cleveland, but I wouldn’t doub it.

There is some kind of unwritten law that says, once you are a member of a certain highly paid group, you are a member for life, and competence has nothing to do with it.  Kind of like when a women marries a billionaire, and then gets divorced after a couple of years, according to the courts, she is entitled to live like a billionaires wife forever and ever.

Go Red Sox!!

Lafayette,

Of the more than 24 million companies in the US, close to 1 million of them have revenues over 5 million.  Assuming about half of these must have Boards of Directors, your clique of 10,000 who know each other and run all these companies is a little improbable.  Even considering the 5,000 (+/-) companies who gross over 1 billion, the idea that only 10,000 people populate all of the BOD’s is not realistic. 

Anyway, I get your basic drift, and I still say that it is not really greed or evil which causes top exec pay to rise, because we all know some of these people who sit on these boards, and they are regular people for the most part.  Rich, yes.  Stupid, possibly.  are just pretty much grown up babies. 

I was on a non-profit board for a company which grossed around 5 million.  When it came time to hire an executive director, the budget committe told us we would have to spend about $100,000 to get a fully qualified, experienced director. (a number of years ago) We ended up spending $130,000, because after we interviewed everyone, the lady we really wanted insisted she was worth more than the going rate, and we more or less had to agree, as she beat out 12 other potentials.  We found a way to pay what she wanted. 

This transaction becomes public knowledge, and the next time a group is recruitng for a similar position, $130K suddenly becomes the going rate, at least in the mind of the top candidates.  It works like that for most highly qualified, semi-unique skill sets, where each new transaction sets the bar for the next.  So salaries rise quick.  And not just for execs.  That is only one area where it happens.

Of course the board of directors and the hiring committees are ignorant for falling for it, but they almost always do.  They want the very best candidate, and they believe they have to pay more to get him.  Not evil, just dumb.

Dave,
You are catching on.

C-level execs ARE the equivalent of star athletes, only they don’t have to worry about the degradation of their skills, only how well they can fake it.  The number of CEO-s with 8 or 9 figure golden parachutes despite records of TOTAL incompetence (Carly Fiorino and Michael Eisner come to mind) is truly disgusting. It’s like buying a top quarterback and watch him, over 5 seasons, consistently have the lowest QB rating.

I waited 11 years to finally get Jets season tickets. After 4 years I gave them up.  The Jets, moving to the new stadium, jacked up end-zone nose-bleed seats from $75/game to $95/game. You had to buy all 10 games (including preseason) and buy a pre-paid parking pass for all 10 games, at $25/game for parking that 15 years ago was $5 and you only paid if you came to the game.  So now each season pass was $950, + $250 for parking.  I had 4 seats so that was now $4050 for the cheapest seats.  For anything better, you also had to pay a “Personal Seat License”, a one-time fee that got you NOTHING (like “key money” on a NYC apt) and started at $1000 per seat, going up as high as $4000/seat for better seats, and up to $20,000 for club level seats (which also cost about $4000/game).

Ok, it’s only money, but one season’s tickets buys any big screen TV plus the service!

The Jets are in the new stadium in NJ because Mayor Bloomberg’s plan to build a $2 billion covered stadium on the West Side fell through. That $2 billion would be paid for by the citizens of NYC.  So…Billionaire Bloomberg was going to give a $2 billion dollar stadium FREE to Billionaire Woody Johnson—and the taxpayers would pay for this gift.  How disgusting can blatant corruption get? And Bloomberg TO THIS DAY doesn’t see the irony of freebies to billionaires on the tax-payers’ back.

Even that wasn’t it.  What got me was the Jets paid $48 million for a rookie defensive player.  Yet at the same time they were forcing office staff (at mere mortal salaries) to take unpaid leave to “cut costs”.  When questioned about the obvious unfairness, cold-blooded cruelty, the answer was “Oh, their salary comes out of a different bucket of money.”  Like that’s an answer.

So…A billionaire wanted a free stadium, makes 8 figure millionaires out of kids out of college, but is too fucking cheap to pay his office staff properly.

Woody Johnson will never get another nickel of my money.

As for the Giants? They are even worse—EVERY season ticket holder had to pay a “PSL” to keep their seats.

I’d rather spend my money on minor leagues that aren’t part of “organized baseball” (that just means they don’t answer to MLB and Bud Selig).

Dave: However, the idea that senior executive pay will almost always increase in advance of and faster than that of labor, causing an ever widening gap between the two is valid

True enough. It is valid. But why?

The disparity does not happen due to Supply and Demand forces. Labor is indeed a service sold on a market. But, as regards Executive Management, though it is indeed a market, and though there is indeed a “going rate”, there are other forces at work.

Read my post below ...

NOTA BENE

There are three labor markets:
* Un- and semi-skilled workers
* Skilled personnel
* Executive management personnel

The first two do respond to market Supply & Demand to set their “price” (Level of Comp & Ben.) But the third is wholly different in its determination of “price”. Which, of course, is the subject of this thread’s lead-article.

CO-OPTED

mack: corporatocracy.

Aka, Corporate Kleptomania.

Consider the mechanism. There is a Board of Directors who, for the most part, are a clique of individuals who know one another very well. They run Corporate America (and the Chamber of Commerce) - they are probably no more than about 10,000 individuals across the length and breadth of America.

Then on that Board there is the Compensation Committee. What happens on that committee? They co-opt one another. Based upon total sales, they decide who gets what salary. Typically upon the advice of a Salary Consultant, who gives them the “going rate”. Let’s not forget that the “going rate” defines the Salary Consultant’s Headhunting fee.

Based upon net profits, they then decide who gets to share the pot of gold at the end of the rainbow - the one containing stock options. Stock options cost the company nothing, since they are not costed. They show up no where on the books. Stock options are exercised in the equity market, so we pay for them. All they do is dilute somewhat equity-values.

Ditto year-end bonus. Yes, of course, if the company has a good year the bonus will be a good one. But, apparently, if the company has a bad year, the bonus wont be all that bad either.

And what about all those below the Top Management Executive Level? Well, you are considered “peons”. Necessary inputs to operational process of the company, but certainly not worth any extraordinary reward.

Why not? No reason, it’s just always been that way. You haven’t got a union that can shut down the operation? You are really ‘n truly a bonehead.

MY POINT

Europe years ago put into place laws that required large corporations to accord two places on the BoD to representatives of the Personnel (elected by the personnel). They don’t have that much say on the Board but their greatest advantage is as “whistle blowers”.

Where are the watch-dog whistle-blowers on American BoDs? Nowhere to be seen, which is why we hear damn few whistles blown from on high.

Everybody at the executive level is co-opted. Play along and get along. Get along and get rich.

Off your sweat and mine ...

I did confuse some issues in the last post, mainly the ideas that remuneration rates for talent or skills is comparable to commodity pricing, which is not true, and also that commodities have a qualitative consideration, which they do not.

However, the idea that senior executive pay will almost always increase in advance of and faster than that of labor, causing an ever widening gap between the two is valid, and this is definitely a function of free market forces, having very much to do with supply AND demand, but mostly on the supply/scarcity side. 

A clearer analogy would be that of a Professional NFL football team attempting to hire a superbowl quality quarterback.  Demand is established by an owner’s desire to win, and supply is established by how many veteran superbowl winning quarterbacks are entering free-agency in any given time period.

If there are ten quality quarterbacks available, the owners may have a chance at signing one for the going pay rate, or possibly even less, for that level of quarterback.

If there is only one quarterback available, it is probable that he will be able to negotiate a deal above the going pay rate.  And that rate becomes the going rate for future considerations. 

Of course there are a lot of other factors, but this is basic to what causes unique talent to be bid up quickly and affect future similar negotiations. 

On the low side of the gap, that same team needs to replace 3 waterboys.  They advertise for the position, and receive 125 applicants.  What chance do these guys have to receive more than the going rate? 

Of course there are other factors here also, and for any number of reasons, the owners may choose to pay the waterboys a little more than the going rate, but waterboy pay not being front page news, this will have little impact on the going rate for waterboys.

The principle is that scarce transactions have an immediate impact on going rate, while common transactions do not. 

A basic tenet of freedom certainly should be the freedom to negotiate ones own contracts, whether you are the owner, the quarterback, the waterboy or a union of waterboys. 

It is not really greed or evil which is at work here, but more the art of negotiation.  Asking for more than the going rate is a sign of confidence in your capability to perform exceptionally at highest levels, while asking for less is often seen as a lack of confidence in your capability.  All should ask for more, but only the scarce will have a chance to get it, thus having an immediate impact on going rate. 

In the end, the consumer is the judge.  If the price of the product is jacked up over the competition in an attempt to recoup the excess pay rates, consumers have the right to choose another product.  When teams don’t win, and/or they jack up ticket prices, it is not uncommon to see a whole bunch of empty seats.  That is the consumer speaking. 

The left’s hatred of free markets is primarily a ruse used to stir up claims of discrimination and unfairness against their base constituency, labor, IMO.  But to the libertarian, freedom, being objective and absolute, always trumps fairness, which is more subjective, often arbitrary, and almost always results in attenuation of the highest levels of exceptionalism. 

Society needs to have the give and take opposition of freedom vs fairness, right vs left, law vs grace.  But a free society also needs to have well educated members who understand how freedom works, otherwise they may mistakenly think fairness is everything, develop an entitlement mentality, and attempt to put an articial cap on somebody else’s pay rate.

Beanie Babies and Twenty cent pieces are no more commodities than executive skills, but they react to other market forces, mostly fad, fashion and popularity, which are variations of demand, as ITW pointed out.

You ever try to cuddle up to a barrel of oil?
**********

I’m happily ignorant of that pleasure, as well as any and all pleasures of beanie babies.  I’m still trying to figure what people saw in little naked trolls, and they first appeared in 1963, when I was 8. (“What’s the big deal?” says ITW scratching head and looking baffled).

I’d like to say something straightforwardly.  I do not believe that Congress
knows how to solve economic problems.  This barely disguised fight to keep
tax cuts for the wealthy affordable is the final battle to entrench the
corporatocracy.  Supporting corporate govt will be done by taking more money
from working people to give it to the corporations. 

This transfer of wealth is being done state by state.  Bust unions, reduce
pensions, benefits, salaries and cut corporate tax rates.  Suddenly this is the
solution.  These people don’t know what they are talking about.  The deficit has
been caused by trillion dollar wars paid for by money from China and tax cuts
for the wealthy.  End the wars, eliminate the tax cuts and sue Wall St for
destroying the economy for personal gain and you have a budget you can
believe in. 

The Democrats have already caved.  They are already setting the table. They will
extend tax cuts for the wealthy.  Shameful.

DzX3: With the global economy being the reality now, labor skills have remained at the bottom of the ladder with regards to quality, scarcity, etc. and thus labor continues to be unable to negotiate wages in line with the advancements in pay which have been experienced for much higher skilled workers.

Though a factor it is not the most important.

Labor is not a commodity but an input factor to the production process (of goods and services). At the beginning of the 1990s, and quite suddenly, the lowering of the Iron Curtain that separated communist countries from the world’s supply of labor doubled in magnitude.

This shock to the supply of labor was most felt in the un- and semi-skilled labor industries. Which is why, for instance, white goods almost disappeared from manufacturing in both Western Europe and America. Where are they to be found being produced? In Eastern Europe, China, Vietnam, et al.

MY POINT

What is the lesson to be learned?

It’s a difficult one with a challenge. That challenge is the race up the skills ladder. An example: The most popular car sold in France is designed in France but manufactured in Romania.

Very soon, the Chinese will be able to design quality cars - that technology and know-how is readily accessible to them. Let’s worry now about the challenge and not later when China has progressed from cars to making perfectly round ball-bearings in space ...

A FAIR SHARE

DS: This is the question after a recent Washington Post report on big corporations lobbying against a new regulation compelling them “to report the median annual total compensation for workers and the annual total compensation for the chief executive

Why should this surprise anyone? Corporate America has always been a preserve of the privileged class since the beginning of the Industrial Age. Neither is the fact that Income Distribution is warped hideously anything new as well.  Economic studies (Pickety & Saez) employing information that dates back to the origins of National Income Taxation at the beginning of the 20th century show that it existed then already. One must presume therefore it predates even that time and likely ranges back to the origins of the nation.

However, this is not an historical tradition of which the US can be proud. Not in view of the fact that other countries, equally as well developed, have adopted taxation systems that produce far more Income Fairness, principally by means of taxation revenues funding Public Services for the entire nation.

Why are American corporations so jealous of their compensation levels? Just as they are of their bonuses and stock options. Because, supposedly this is what “motivates” management to achieve. Nice theory, but even if there is a kernel of truth to it, that is no excuse for its exaggerated magnitude. Good years or bad years, executive compensation increases … and workers get the boot as companies dislocate production from the US.

Were it true that profits motivate achievement, then why does management garner for itself the biggest cut of the sweet corporate pie? Personnel further down the hierarchy, down to the shop-floor, they do not deserve their fair share of the return-on-capital?  I guess not.

Who decided that? No one, it just is.

GREED

Worse yet, and a factor that Sirota does not mention, is the fact that the motivation, when it turns to greed, induces people to take short-cuts to the pie. What happens is the country is brought to its knees, because Finance is so strategic to the nation that is Too Big To Fail. And if that is indeed the case, then it is also Big Enough to Be Highly Regulated by government.

MY POINT

And to that end, let’s start by increasing taxation in the stratospheric levels of income, where greed tempts individuals to forget that they are merely another cog in the economic wheel – and as such less important than the wheel itself.

Mitigating that greed should be a first priority, preferably before the Next Great Recession.

ITW, what does this all mean in regards to my extensive Beanie Baby,... actual empire collection? Those ass hole commodity speculators jacked up the price of oil, but they wouldn’t do it for my Beanie Babies, how can I get them to demand my Beanie babies?

You ever try to cuddle up to a barrel of oil?

An economic reality is that scarcer commodities always increase in value in advance and at higher rates than those of lesser scarcity.

If you examine any commodity that can be graded with regards to condition, quality, capability, skills or similar factors, you will see that over the past 40 years, the best quality and/or the most scarce have increased in value far in advance of those of lesser quality or scarcity.  The lesser quality or scarcity advance much slower and the gap always widens over time. 
****************

While these statements sound reasonable they are, in fact, either questionable or flat-our wrong.

Scarcity doesn’t affect value.  Demand does.  Items far more scarce than others may well not command anything close to the price.  That’s why the joke is teach a parrot to say ‘Supply and Demand’ and you have an economist.

Here’s an obscure example: a few years ago, in the coin collecting world, the price of common silver dollars in uncirculated condition, called “Morgan Dollars” sky-rocketed, tripling in value.  You can get ‘em anywhere—very common.  Meanwhile a far, far, FAR rarer coin, a US silver $.20 piece (a double-dime as it were) languished in value never really commanding the price its incredible scarcity would imply. Why? DEMAND.  Collectors, for whatever reason don’t find the mid-19th century $.20 piece desirable, but the common Morgan Dollars were, like Dutch tulips, “hot”....and the price fell when demand fell.

The second paragraph is only sort of true, but true in the sense of saying there is no ideal progressive tax rate, where as you make more you pay a higher percentage.  Yet optimal rates CAN be found (Had Laffer’s curve been properly interpreted, the PROPER response would have been to RAISE the tax rates on the richest Americans—and government revenues would have skyrocketed, instead of the deficit)

The third paragraph is absurd.  Look at technology.  Look at the PC you are typing on, at the fancy iPhone or Android phone in your pocket.

In 1984, an acquaintance paid over $5,000. for an IBM PC-XT, just as the PC-ATs were about to come out.

$5000. now is far less in real value to day.  An AWESOME car could be had for $15,000 in 1984.  Now that car is $40,000-$50,000 (Say, the Nissan 370Z).

And what does $5000 buy you? Multiple processors, multiple screens, terabytes of storage.  Not even top-of-the-line.  Yet in real terms the far, FAR more powerful machine costs far less.

Now, my $130 Android phone can do just about everything my first $2000 PC clone could do in 1985.  And it can do a lot of other things too, that couldn’t even be IMAGINED on that old PC.

Phones and PCs are virtual commodities.  So are plasma TVs, cars, etc.

True “commodities” like gold have shot up in price, but the quality of gold is, of course, unchangeable.  They have shot up due to demand…where I started.

This behaviour has been splashed across America, as well as Europe and various other Countries, in what was a standard feature of the systems currently operating in all these Countries and nothing has happened of any real consequence to change it, except for Greece, who have addressed the whole problem, not just corporate pay.
I take my hat off to the Greeks for actually trying to do something positive about it; there was a small event in my Country, the UK, about a strike over pensions and redundancies, which will be completely ineffective unless it is built on, but the ‘whole’ problem needs to be addressed also.
You Americans had something going for you in Wisconsin, but it will inevitably fail unless it is taken up as a States-wide issue, when you all demand proper controls at the top, to include remuneration over and above what would be considered equitable, valid and consistent.
If and when this true democratic state is ever reached, don’t ever let it be taken away from you.

An economic reality is that scarcer commodities always increase in value in advance and at higher rates than those of lesser scarcity.

There is no such thing as a some ideal, static, highest skilled to lowest skilled remuneration ratio. Statements like the first paragraph of this article are meaningless. 

If you examine any commodity that can be graded with regards to condition, quality, capability, skills or similar factors, you will see that over the past 40 years, the best quality and/or the most scarce have increased in value far in advance of those of lesser quality or scarcity.  The lesser quality or scarcity advance much slower and the gap always widens over time. 

With the global economy being the reality now, labor skills have remained at the bottom of the ladder with regards to quality, scarcity, etc. and thus labor continues to be unable to negotiate wages in line with the advancements in pay which have been experienced for much higher skilled workers. 

A case could be made that virtually everything has advanced in price except for the cost of labor, which has actually decreased over the past 40 years in constant dollars. 

The problem is not so much that everything increases in price according to its relative scarcity, but that labor has been cheapened over the years due to many factors, the main ones probably being globalization and the advancement of business machinery/computers.

The economic model we call consumerism, where millions of laborers toil in local factories to make a multitude of merchandise, which they in turn become the consumers of and utilize credit to purchase, only to take it to the local landfill a few months later, is about an absurd a model as one could dream up.

You don’t get paid enough to make all that crap, you don’t need all that crap, you can’t afford all that crap, and all it is doing is killing you slowly anyway.  So you somewhat disempower the CEO, and all his cronies, by abandoning consumerism.  God help those who live in cities who don’t have a clue.

Rodney, July 1 at 6:01 pm

You are correct but omit two names that certainly belong on that list….Clinton and Obama.

Our current tax code allows businesses to write off “reasonable” business expenses.  What is “reasonable” is established by regulations.  For example, usually a $500 lunch for two would not be considered a “reasonable” expense, so the business would not be allowed to write it off.

One way to stop this form of looting would be to cap compensation for any employee or consultant who works a certain number of hours at $250,000 as being a “reasonable” compensation, and nothing above that can be written off.  Further, everything in excess of that should be taxed to the receiving employee at 80%. 

Additionally, many corporate insiders now publicly proclaim that they “only” take a salary of $1.00/year, as if to suggest they are depriving themselves.  In fact, they take millions in compensation in other forms to reduce taxes such as in stock options or life insurance or pension, money to be taxed far in the future.  The law should be changed to provide that all compensation or consideration in any form, including the present value of any stock options, should be considered paid to the employee currently and taxed in the current year.

The unions should step up and be the first to adopt policies to cap insiders’ compensation at a multiple of the lowest-paid union member.  For example, if a union member earns $8/hour, $14,000/year, the highest-paid executive leader in the union should have all consideration (salary, benefits, pension) capped at 5 times that:  $70,000/year.  Instead of, for example, the half million per year, or hundreds of thousands per year I’ve read about with respect to some unions. 

In addition, the union money must be committed to organizing instead of just giving money to politicians which is used, in turn, to buy cushy jobs for union leaders when they leave the union.  We all know what I mean.

Finally, any political party or politician in the party who wants our support or vote should agree to have all consideration paid to them during the time they work for the party, or 5 years after they leave office, capped at some amount, and everything received in excess of that donated to a national healthcare fund, or national education fund.

We should not only attack the criminal enterprise on Wall Street, but also hold to account those people and institutions in our country who claim to be on our side while they’re making millions of dollars per year selling their contacts and their office.

They’d all pay each other a dollar on the books and a hundred million under the table.

Shame seems to be what is needed here…. Lets face it the Catholic church shows little or no shame for its pedophile priests, Republicans in congress and governors of Red states show no shame in shafting the people they intend not to represent, instead representing out of state benefactors. So why should CEO’s feel any shame or humiliation or distress caused by awareness of their obscene huge differences in incomes compared to the janitor or greeter at Walmart who happeens to be stupid enough to even pay taxes?

Maybe it is really shame and the obscenity of it which is needed here?

Hell, lets get rid of collective barging for workers, then the CEO s can become even more proficient in the true meaning of in your face obscenity! 

No…. we need more tax breaks for the wealthy, to grease the well endowed trickldownness to bring jobs back to China!

An interesting concept but one too easily avoided I think. Much of a corporations executives receive, in addition to salaries, large bonuses usually paid in stock options at zero cost. The former (thankfully) CEO of my own firm received, quarterly, stocks with a value of between three and four million dollars for which he paid nothing.

We stockholders were always told of his salary but these stock transfers were never included even though it was a matter of public record. When he was recently forced out, due in part to his lousy management, very poor record keeping across the board, and a small matter of eight deaths ( you might have read about this in a Northern California paper) his severance package added up to 35 million dollars! When inquiries were made as to why the high number we were informed, suddenly, that his stock options were considered a part of his compensation and figured into his severance package….

We the people cannot win until we restore our government back to its real responsibility, caring for the people, not just the wealthiest among them and not just the corporations.