Skip to comments.Gross pay inequity is simply bad business
Posted on 12/13/2008 7:42:52 AM PST by Radix
How much is a CEO worth? What is appropriate compensation for the leader of a large and complex organization? The standard reply has always been, Let the market decide. Lately, though, markets have proven themselves to be spectacularly ill-suited to be the last word on just about any issue.
Even before Alan Greenspan recently and belatedly figured it out, the invisible hand and magic of the markets were mostly what their airy nomenclature implies: figments of irrational economic exuberance. Markets have never been stand-alone forces of nature; rather they are shaped, controlled and guided by human beings as fallible and malleable as you and I and the Fed chairman. And in certain areas, they are just plain wrong.
Until recently, markets said it was OK for a CEO to earn 350 times what an employee at the firm was earning. And clearly the market pays no heed to performance - Lehman Brothers CEO Richard Fuld earned almost $500 million over the last eight years while leading a once-mighty firm into bankruptcy. But according to the market, he was worth it.
But dont some people by virtue of their skills, judgment and responsibilities deserve to be paid much better than others? Of course they do. Consider the case of Gen. David Petraeus: He oversees two wars, is responsible for the lives of tens of thousands of war-zone troops (themselves disgracefully underpaid) and is himself frequently in harms way. Hes paid $180,000 a year, equal to what the aforementioned Mr. Fuld made in 10 hours.
The market also says a police officer is worth $50,670 a year, a firefighter $44,130. Yet ordinary folks and people like Mr. Fuld expect to be protected by those public servants. No, markets alone cant judge the worth of peoples work.
CEOs talk about leadership and values, both of which are underpinned by morality. The problem is that gross pay inequity is imbued with immorality. CEOs like Max DePree of Herman Miller understand that a true leader cannot so distance himself from those he would aspire to lead. Thats why DePree capped his compensation at 20 times what his companys lowest-paid employee received. Gross pay inequitys unfairness undercuts allegiance and loyalty; the military does not allow it.
But arent some people worth more than others? Kenneth Feinberg, the 9/11 special master, used to think he should do what the law required him to do: compensate according to the circumstances of each victim. But his mind changed when a firefighters widow asked him: Why are you giving me less money than the banker who represented Enron? Why are you demeaning the memory of my husband?
Feinberg came to realize that all lives should be treated the same. Later, as special master after the Virginia Tech massacre, he compensated all victims equally.
CEOs, who would claim the mantle of leadership, must answer to a higher standard than athletes, entertainers and other excessively compensated individuals. The bottom line is this: Excessive compensation and ethical, values-based leadership just dont compute.
I am not suggesting this be made a law or anything like that but I would think it would be one way to entice executive management to work harder.
The inequities of the market are legion. Govt solutions are far worse.
Ask people if they think executive compensation should be capped and a lot of people would say “of course!” Now ask them if their favorite professional sports team should cap their quarterback’s pay at twenty times the entry level salary for a rookie. If a team did this, the fans would say the owner is “to cheap to get a really good quarterback.”
This is my general concern as well. I too am often left bewildered and disgusted by the huge pay granted to CEOs and other executives of mediocre or, in the case of Lehman Brothers, floundering firms. But the "solution" often offered to this problem - to have the government regulate pay - is worse than the problem. Another solution occasionally offered - to sue or prosecute suspect executives, also can lead to a number of problems.
Thanks to the cozy relationships with the financial community, the large stakeholders, the directors and the financial press it's been a scam for many years.
As far as paying for "performance", look at what happened at Fannie Mae and Freddie Mac. The bosses just "cooked the books" and so far no one has gone to jail.
The supposed "free market" was more like a "free for all".
Or entice them to "cook the books."
Equality and fairness are not synonyms. Compensation and “value” are not equivalent, nor should they be.
And CEOs on the whole are not the most blatant examples of the mismatch between “value” and compensation (there are of course exceptions, as in every profession) - look instead to actors, singers, pro athletes. Regardless of their performance, their activity, in a hard sense, does not justify compensation above subsistence.
I don’t know anyone who touts the free-market because they think it will lead to “equality” or a stronger correlation between compensation and “value”. If such a person exists, they suffer from a variant of the utopian delusion of lefties.
As they are in life. Dame Fortune has never been 'fair' when handing out life's blessings and curses.
“But his mind changed when a firefighters widow asked him: Why are you giving me less money than the banker who represented Enron? Why are you demeaning the memory of my husband?
This makes a good story and tugs at the heart strings. It is the cry of the Communist that all mens labor is equal.
However, if one man spends years in college or learning a trade, his value to the company MUST be worth more than the man holding a shovel.
CEOs pay MUST be tied to performance though. theft should be punished and “golden parachutes” need to be replaced with “concrete shoes”
Would this be 900-dollars-for-a-floor-model chairmaker Herman Miller?
Or entice them to "cook the books."
Or incentivize them even more than they already are to maximize short-term as opposed to long-term performance.
The shareholders are ultimately responsible for everyone’s pay in their corporation. If things go badly in a corporation, they the shareholders should lose their investment. If they lose their investment they may pay more attention to what is going on next time. That is unless the government steps and gives them a bailout. Government interference keeps the market from keeping the proper balance.
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