Editore"s Note
Tilting at Windmills

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January 26, 2006
By: Kevin Drum

EXECUTIVE PENSIONS....Here's a story from the Wall Street Journal that comes with a hearty dose of cognitive dissonance for well-meaning liberals. The good news is that Congress is set to pass a bill that prevents companies from funding lavish executive pension plans if the pension plan for their regular workers is underfunded and going bankrupt:

Disclosures about bankruptcy-proof supplemental executive retirement benefits at some airlines, including a $45 million fund set up a few years ago for 35 top officials by Delta Air Lines Inc., have galvanized bipartisan support for reining in such perks at other beleaguered companies.

"We've heard too many stories of top executives of bankrupt companies sticking workers with unfunded pensions while running off with millions of dollars of so-called nonqualified pension benefits," says Senate Finance Committee Chairman Charles Grassley, an Iowa Republican.

Hooray! I say. The brewing pension fund crisis is a scandal of epic proportions, and anything that helps rein in the venal behavior that caused it in the first place is fine with me. But then there's this:

For decades, executives relied on the same pension plan as other company employees, so they had an incentive to make it generous. The shift toward a dual system started in 1994, when Congress passed a law intended to limit the cost to taxpayers of runaway executive pay. The law barred companies from taking a tax deduction on compensation in excess of $1 million a year for any current employee. The result: Companies began setting up supplemental pension plans that encouraged senior managers to defer compensation.

Well. That's certainly a good example of the law of unintended consequences, isn't it? I mean, I'm sure the $1 million cap seemed like a good idea at the time.

So the lesson is to be careful. Corporate executives are greedy and devious and they get upset when anyone suggests their pay should be less than 500x that of the average worker. With that in mind, a simple requirement for transparent present-value accounting of all executive pay would probably be a better idea than the one-off reform on offer right now, and an even simpler requirement that all employees be paid out of the same pension fund and accept the same risks would be better yet.

Kevin Drum 12:13 AM Permalink | Trackbacks | Comments (69)

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Comments

i've always been curious about the effectiveness of the average ceo and corporate profits. sort of like baseball managers and how they affect a team's record. clearly there are a few that are really good and a few that are really bad. my guess is most are somewhere in the middle, and as long as they don't do something horrendously stupid, their companies will plod along about the same with or without them. they risk next to nothng -- they're literally nothing more than corporate bureaucrats. so why have they been able to con shareholders into giving them such huge pay checks, and by extension, overly generous pensions?

Posted by: mudwall jackson on January 26, 2006 at 12:31 AM | PERMALINK

Of course if everybody in the company were paid an equal amount and shared equally in a part of the profits and were elected by the membership to their positions and awarded bonuses by election of the working membership....but wait....America just spent Trillions of dollars and millions of it's young men's lives to prevent that very thing. The shareholders of course would have made even more money but that is treasonous talk and I am sure I am now on some no-fly list and will be sent to some country for interrogation....not torture just persuasive questioning with a feathery soft sleeping bag...

Posted by: murmeister on January 26, 2006 at 12:36 AM | PERMALINK

For the flip side of the executive pay story, see:
" Ford Joins GM on the Brink."

Posted by: AvengingAngel on January 26, 2006 at 12:38 AM | PERMALINK

Capitalism is supposed to reward risk, and corporate CEOs don't take any. These obscene packages rob from investors who do take risks.

If these guys are really such hot shit, let them open up across the street from a Chinese restaurant that sells lunch for less than $5. Then we'd see if they're really worth 500 times what the busboy makes.

It would not be hard to write a law that says the CEO's package (including perks) must be no more than 10x minimum wage. If that's not high enough, raise the minimum wage. Said law MUST include jail time for violators.

The one perk that would have social value would be a no-interest SBA Loan for any of these guys who is willing to step down and start a small business--which is where the jobs and innovation come from.

If enough do it, maybe they'll pressure Congress to put the inheritance tax back and remove the payroll tax on payrolls of fewer than 100 people.

Posted by: Steve High on January 26, 2006 at 12:42 AM | PERMALINK

Well. That's certainly a good example of the law of unintended consequences, isn't it? I mean, I'm sure the $1 million cap seemed like a good idea at the time.

Well, no.

They COULD have required the company to offer everyone the same pension and deferred plans and limited them, too.

Posted by: Lettuce on January 26, 2006 at 12:44 AM | PERMALINK

If an eighteen year old kid can make millions in the majors right out of the college, there is no reason to begrudge the CEOs the compensation that they get.

We should actually pay them more so our chiildren can aspire to be like them. Imagine four year olds saying that they want to be rich like Skilling and Fastow.

Posted by: nut on January 26, 2006 at 1:06 AM | PERMALINK

one reform worth considering is to make it more difficult for companies to dump their pensions funds in the laps of the government bailout fund. there are absolutely no consequences to doing so right now, and the potential obligation of the pension benefits guaranty corp. is soaring well beyond its means to pay out to retirees the money that's due them. that makes it more likely that taxpayer money will be needed to keep the fund going and it also makes it more expensive for responsible companies to maintain their pension funds.

Posted by: mudwall jackson on January 26, 2006 at 1:08 AM | PERMALINK

According to Nut's philosophy, we should also be paying our politician's in the multi-millions so that our children will look up to them instead of athletes. I don't see that any of them are worth being looked up to and if they are adored by your children, then you parents need to give yourself a shake. You are supposed to be setting the standards. Very few of these people even understand what the word means and very few of them have any worthy of your children emulating outside of their publicity agents.

Posted by: murmeister on January 26, 2006 at 1:17 AM | PERMALINK

If these guys are really such hot shit, let them open up across the street from a Chinese restaurant that sells lunch for less than $5. Then we'd see if they're really worth 500 times what the busboy makes.

Posted by: Steve High on January 26, 2006 at 12:42 AM | PERMALINK

I agree your status in life should be determined by your Chinese restaurant running abilities. Finally you recognise the greatness of the Middle Kingdom! Ten thousand years.

Does this mean you are now cool with outsourcing?

Posted by: McA on January 26, 2006 at 1:18 AM | PERMALINK

That article is a mess. The reporter is working from almost zero understanding of how nonqualified plans work and why companies set them up. The $1 million limit may have had an impact, but mostly they're there because of the limits on how much compensation qualified plans can take into account and how much benefits they can pay out. And to work at all for tax purposes, nonqualified plans can't have assets irrevocably set aside to cover benefits. Delta's execs were willing to take a tax hit in order to avoid losing out completely, but what they did was basically just equivalent to paying themselves big bonuses right before bankruptcy. Executive pay is obscene, but the problem is the level of pay, not how it's structured. This bill is about 99.99% cosmetic.

Posted by: DaveL on January 26, 2006 at 1:18 AM | PERMALINK

In a free and capitalistic society, you are worth (in terms of your earning power) no less than what you can get. Each of you guys may be worth more than what you are getting, but may I suggest the acquisition of better marketing skills so you can get what you deserve.

Posted by: nut on January 26, 2006 at 1:39 AM | PERMALINK

If you are OK with business governace reforms like non-staggered board elections and allowance of shareholder resolutions from the floor, then maybe. It's a fixed game currently, though, not a free and capitalistic one.

BTW, I am a business owner and these fixes are well known.

Posted by: techs on January 26, 2006 at 1:47 AM | PERMALINK

hence the problem, nut. It works well in theory but the problems are so obvious that only the the extremist right can even hang on to the philosophy and they muddle the ideas with religion to confound the minds of the less clear thinkers. They do the same in Canada, creating class and state enemies to distract the people from the simple avarice which is at the base of the so-called free capitalist society. There is a book called the Vertical Mosaic which lays it out but it was quickly banished from bookshelves in the United States because of it's anti-capitalist themes but it explains the illusion that makes the poor and semi poor support the capitalist idea

Posted by: murmeister on January 26, 2006 at 1:48 AM | PERMALINK

PS - you sound like an MBA, Mr. Nut. Join the real world. Never met a stupider bunch of puds than MBA's.

Posted by: techs on January 26, 2006 at 1:50 AM | PERMALINK

The Economist had an article a while back normalizing company performance for industry growth (ie, instead of claiming that XYZ Tech company grew by 20%, note that tech companies grew that year by 23% and call XYZ Tech company's growth -3%).

The gist of the article was that CEOs don't provide nearly as much value as they would like to claim.

(Although they certainly turn to market performance when the company does poorly.)

Posted by: Saam Barrager on January 26, 2006 at 1:53 AM | PERMALINK

OK, for the record I am not an MBA. Nor am I a libertarian or a conservative.

The question that I am posing is very simple: who decides how much is someone worth if not the entity that pays him?

Posted by: nut on January 26, 2006 at 2:02 AM | PERMALINK

注册香港公司, roughly translated, has declared that he will gladly open a restaurant across from any one of you, and will kick your restaurants' sorry capitalist asses.

I like reading economic suggestions in places like this.

Engineering is so much easier to deal with. When somebody stands up in a meeting and suggests that car exhausts would smell a lot better if we just poured honey in all the gas tanks, we can just throw him out the window. Economic ideas along similar lines just go on and on and on...

Posted by: tbrosz on January 26, 2006 at 2:06 AM | PERMALINK

By the way, situations like the Delta Airlines one mentioned above are probably best dealt with by stockholder or employee suits in civil courts, not half-baked legislation.

Posted by: tbrosz on January 26, 2006 at 2:09 AM | PERMALINK

tbrosz, you are not using the appropriate Solidworks module for economic analysis.

Posted by: lib on January 26, 2006 at 2:13 AM | PERMALINK

In engineering, it either works or it doesn't.

In economics, you can toss some government monkey wrench into the system and pretend it worked.

That $1 million cap is nothing. Our current employment-based health insurance system traces back to a wartime government limit on compensation. The companies issued benefits instead. If that had never happened, who knows? Maybe health insurance would be like car or fire insurance, something you just go out and buy, and it wouldn't vanish every time you changed jobs, or cost an arm and a leg.

Posted by: tbrosz on January 26, 2006 at 2:17 AM | PERMALINK

Wait...honey doesn't make petrol smell better? What should I do with all these bees?

Posted by: KathyF on January 26, 2006 at 2:44 AM | PERMALINK

try mixing sugar with your petrol until you find the right odour

Posted by: murmeister on January 26, 2006 at 2:50 AM | PERMALINK

who decides how much is someone worth if not the entity that pays him?

Posted by: nut on January 26, 2006 at 2:02 AM | PERMALINK

The directors of the compensation commitee who:

1) Don't really own the entity
2) Have some responsibility to shareholders who barely read annual reports
3) But being CEO's and former CEO's like big CEO paychecks as a matter of principle...
4) And can be initimidated by a celebrity CEO when the share price has been rising....

Unfortunately there is a better way. This is one reason why big business can be outmanuvered by small business. However small business tends to suffer from lack of access to capital.

Posted by: McA on January 26, 2006 at 3:16 AM | PERMALINK

When somebody stands up in a meeting and suggests that car exhausts would smell a lot better if we just poured honey in all the gas tanks, we can just throw him out the window.

Posted by: tbrosz on January 26, 2006 at 2:06 AM | PERMALINK

But sometimes business is about organizing things so that anyone who thinks you shouldn't get paid vastly more than everyone else gets thrown out of the window with the lousy engineer...

In compensation theory, we call this 'misalignment' between the shareholders and their management.

Strangely enough one of the common 'solutions' turns out to be options...which vastly inflates CEO salary and creates some incentive to take risk.

The underlying problem is once the founder dies, its often hard to find the right leader for a firm. That leader is rarely a major shareholder or prepared to buy most of the firm.

Posted by: McA on January 26, 2006 at 3:31 AM | PERMALINK

I live in what used to be considered a big house, 2000 ft, in an artsy beach city in paleoconservative Orange County, CA. Though it's probably worth nearly $2M today, and has been extensively remodeled over the years, it would be considered a tear-down now. Something more palatial is expected. Look, it only has a two-car garage!

O Lord, won't you buy me
a Mercedes Benz
my friends all drive Porsches
I must make amends

My neighbors are the same sort of people we are (and I mean that inclusively) but the drivers I encounter in town tend to be pushy to the point of obsession: moving their luxury SUV two parking places over to save a little walking.

Posted by: bad Jim on January 26, 2006 at 3:39 AM | PERMALINK

The exhaust from the buses in Rio de Janeiro, running on alcohol, actually had a vaguely fruity smell. Nothing that a little cilantro wouldn't have improved, but actually a step in the right direction.

Posted by: bad Jim on January 26, 2006 at 3:42 AM | PERMALINK

live in what used to be considered a big house, 2000 ft, in an artsy beach city in paleoconservative Orange County, CA. Though it's probably worth nearly $2M today,

Posted by: bad Jim on January 26, 2006 at 3:39 AM | PERMALINK

Nice, why not sell it. Live with the working class and donate the rest to charity.

That money could pay for someone's healthcare bills.

Proving once again, that the loudest liberals seem to be compensating for their decision to live in the whitest suburbs. You and Kevin in the OC are a case in point?

Did you realise that if you lived in a condo, you could probably buy 3-4 cheap homes in the hood and make 30-40 homeless, less homeless?

Posted by: McA on January 26, 2006 at 4:16 AM | PERMALINK

I have to admit though a US$ 2 million house. I'm impressed!

Posted by: McA on January 26, 2006 at 4:18 AM | PERMALINK

live in what used to be considered a big house, 2000 ft, in an artsy beach city in paleoconservative Orange County, CA. Though it's probably worth nearly $2M today....

Posted by: bad Jim on January 26, 2006 at 3:39 AM | PERMALINK

Nice! Why don't you sell it and donate huge amounts to charity.

Posted by: McA on January 26, 2006 at 4:20 AM | PERMALINK

The topic was originally something about executive compensation, wasn't it? My point was that greediness seems to be getting out of hand, and of course the party in power sees no harm in exacerbating that tendency.

Posted by: bad Jim on January 26, 2006 at 4:41 AM | PERMALINK

s/wasn't it/neh/

Posted by: bad Jim on January 26, 2006 at 4:43 AM | PERMALINK

My point was that greediness seems to be getting out of hand

Posted by: bad Jim on January 26, 2006 at 4:41 AM | PERMALINK

But greed is relative.

I mean, you live in a house about 4 times the average in California.

I presume you earned it somehow.

But many a Californian without health isurance might criticize a typical Californian liberals resistance to high property taxes and willingness to live in suburbs like the OC - whose well-funded high schools don't subsidize the needy public schools in Los Angeles.

Does everyone person who worked in or on your house get minimum wage? Or do you leave that to the 'contractor' to make his own decisions.

Posted by: McA on January 26, 2006 at 5:03 AM | PERMALINK

Get a little history. Liberals, most notably those of the Hollywood variety, are not particularly averse to taxation. It's generally conservatives who consider taxes sinful.

My Republican neighbors, the Newport right-wingers in their Lexus sedans and Land Rovers festooned with brush guards, reliably elect homophobic troglodytes like Cox and "B-1 Bob" Dornan.

Posted by: bad Jim on January 26, 2006 at 5:20 AM | PERMALINK

By the way, I'm sorry to have fueled any fantasies you might have treasured about latte liberals. Hereabouts the fatcats vote their pocketbooks. My affluent county isn't the reddest in the nation, but we've had more than our share of nutcase representatives.

Posted by: bad Jim on January 26, 2006 at 5:25 AM | PERMALINK

But why blast your neighbours. Just sell out and move. You wanna do more for the poor - start with you.

I mean its hard to bitch about a Lexus or a LandRover when you have a US$ 2 million house.

And isn't it kind of hypocritical to benefit from the effects of Newport right-wingers (well run neighbourhoods that minorities don't seem to be comfy in) while criticizing their politics?

I mean you have the power to do more than vote liberal - you can live it.

I mean Newport is 88% white / 0.53% black (excluding Latino's). How can you bash Southern Rednecks and live a life like that?


Posted by: McA on January 26, 2006 at 5:36 AM | PERMALINK

Liberals, most notably those of the Hollywood variety, are not particularly averse to taxation. It's generally conservatives who consider taxes sinful.

Posted by: bad Jim on January 26, 2006 at 5:20 AM | PERMALINK

You are missing my point. You don't have to wait for taxes to subsidize a poor community's education bills. Make a donation. Say the effect of a rise in property tax of 1% of the value of the house every year would be US$20,000 per year.

Posted by: McA on January 26, 2006 at 5:40 AM | PERMALINK

Oy, have you got the wrong polity!

Certainly, if the wealthy were sufficiently generous, poverty could be substantially alleviated.

That's a pretty lousy plan, though. Rich people tend to be greedy assholes. Relying upon their generosity is a proven loser.

How about ... a general plan in which everyone prospers, in which general costs are shared ... a republic, if we can keep it.

Posted by: bad Jim on January 26, 2006 at 6:06 AM | PERMALINK

I see Kevin Drum has suspended his concern about the government usurping our civil liberities for this issue.

He certainly doesn't want freedom here.

What was that Ben Franklin quote again?????

Kevin? Anybody?

Posted by: Patton on January 26, 2006 at 6:18 AM | PERMALINK

Relying upon their generosity is a proven loser.

Posted by: bad Jim on January 26, 2006 at 6:06 AM | PERMALINK

But if you believe in cross-subsidizing, shouldn't you do it through charities?

I mean you are living in a community that is reliably conservative and keeps property taxes low. You have made your views on your neighbours clear. But you are taking the benefits.

How's this for fair. Universal healthcare is possibly 10% of pay in taxes. Drop the quality of your cover to Kaiser Permanante levels. Subtract that from 10% of pay - then pay the rest to charity.

If you can't do that, are you advocating liberalism for 'feel good' or because you believe it works? If its just for 'feel good', how can you bash your neighbours.

I donated 4 weeks pay to a secular charity (and not a political organization). Strangely enough one in a foreign country richer than mine.

My conscience is clear when I advocate lower taxation. It doesn't make a difference to the good I do because of my charity. And I believe it makes the pie bigger.

I don't see a need to compel the rich who don't want to contribute from contributing. Especially at the expense of further growth.


Posted by: McA on January 26, 2006 at 6:22 AM | PERMALINK

Actually Kevin, there is some legitimate fear (though I'm personally uncovinced) that the new disclosure laws are going to have a "ratcheting up" effect, as CEOs demand to be compensated as well as their peers. We'll see.

Posted by: Jane Galt on January 26, 2006 at 7:11 AM | PERMALINK


"The salary of the chief executive of the large corporation is not a market award for achievement," John Kenneth Galbraith noted back in 1980. "It is frequently in the nature of a warm personal gesture by the individual to himself."

Posted by: CFShep on January 26, 2006 at 7:27 AM | PERMALINK

"The good news is that Congress is set to pass a bill that prevents companies from funding lavish executive pension plans if the pension plan for their regular workers is underfunded and going bankrupt"

Maybe if we apply this to our gov't (refering to SoSec) from members of congress on up they might actually fix it.

Posted by: Lurker42 on January 26, 2006 at 7:49 AM | PERMALINK

Those who are decrying the high executive pay so much should look in the mirror with a wider perspective.

Even if your making the US median income of around US $36K p.a. you are making at least 75 times the income of a lot of people in the third world who are lucky to have a job. Does this make you evil and greedy?

Or envy is a better emotion than greed?

Posted by: nut on January 26, 2006 at 8:52 AM | PERMALINK

It's interesting. For years, the conservatives bashed liberals by claiming that liberals were too idealistic. From what I read here, it seems we've gone full circle. McA is arguing about the benefits of voluntary charities and how this can alleviate the plight of the poor. Well, maybe it can, but it hasn't.

This cuts to the root of the issue: conservatives say that all we have to do is cut taxes, deregulate business, and shrink gov't (which means eliminating all social programs, but not touching the military), and we'll live in a utopian paradise. Well, HELLO!, we tried that once. Remember the Great Depression? All of those regulations, all of those social programs, all of those laws were put in place for a reason. And the reason was that it didn't work the way the conservatives say it will.

Same with exec compensation: back in the Gilded Age, you made as much as you could, by squeezing every last nickel out of your workers. Mine regulations? Who needs 'em? Safety regulations? For wimps. Fire exits? Let 'em burn (think Triangle Shirtwaist Fire).

Conservatives ramble on about the 'free market' setting these wages, but the 'free market' is a first cousin of the Easter Bunny. Just another idealistic fantasy. We have a crony capitalist system. That's what we had before the Progressive Movement, and those are the "Good Old Days" that Karl Rove wants to bring back. Excessive exec pay is just another facet of this agenda.

Posted by: klaus on January 26, 2006 at 9:24 AM | PERMALINK

"which means eliminating all social programs"

No it doesn't. I believe in smaller federal gov't but I am for using the present programs to TEACH and EMPOWER the poor to pull themselves up by their boot straps.
Give a man a fish and he eats for a day, teach him to fish and he eats for a lifetime.
It's an old saying but holds a powerful lesson.

"We have a crony capitalist system"

I don't believe that is 100% true. Nobody cares about cronyism at your local bank, the doctors office, best buy, microsoft, etc. That may be true in the upper echelon of, say Exxon among others but I don't see how that would apply to a poor person working their way out of poverty.

Posted by: Lurker42 on January 26, 2006 at 9:44 AM | PERMALINK

"Corporate executives are greedy and devious..."

How about SOME or even MOST corporate executives are that way? Would you include the small cap CEO who hangs on because he really does give a rat's ass about the workers who would be jobless if said small cap company went belly up? The guy who doesn't take a raise for years on end so that the underlings can get some well deserved salary adjustments when there is a few cents to divy up? The guy who works at such a small, struggling company that cannot give execs "perks" anywhere near the kind of usual benefits handed out to midlevel staffers at many other much larger companies? Huh? News flash: Not every "corporate executive" is some fat cat sitting in tall cotton. Some of em are in small towns in poor regions of the country. Places that are lucky to get enough capable staff to keep a business running that employs lots of otherwise rural poor people.

Such decent creatures DO exist in business, Kevin. Especially in these times and in some parts of this country, although perhaps you have not noticed that out there in Orange County CA since you are too busy painting with a broad brush?

Granted, altruism, stewardship and the leadership of service mentality may not be the norm these days in business as a whole, but your sweeping generalization is as disgraceful as saying that poor people in Mississippi who have been on public assistance are stupid, lazy slugs because they didn't manage a Harvard MBA while they were pulling themselves up by their bootstraps at the cotton mill for barely minimum wage.

You completely negated your point with that misinformed, sloppy and tasteless remark. And you and the "gotcha posse" mentality are the reason a lot of really decent, honest and hard working people are opting out of public companies. Too much grief and shit from people who just don't know what they are talking about. It is easier to get the rabble all worked up with a lynch mob to blame all on business or "greedy executives" when the problems in society are a hell of a lot larger than some guy who gets his own office.

With this kind of mentality, you hand the Republicans the kind of "class warfare" ammo that they thrive upon. Especially in some red states where most business men are small businessmen busting their hump to make a go of things.

Posted by: mama on January 26, 2006 at 10:31 AM | PERMALINK

Of course if everybody in the company were paid an equal amount and shared equally in a part of the profits and were elected by the membership to their positions and awarded bonuses by election of the working membership...

Something I've been advocating for years.

But that's SOCIALISM and SOCIALISM will POKE YOUR EYES OUT.

Or something like that.

Posted by: Dr. Morpheus on January 26, 2006 at 10:34 AM | PERMALINK

As the Wall St Journal also pointed out a few days ago, the pension legislation also contains provisions that could seriously hurt the rank-and-file. For example, pensions considered as under-funded would be required to be frozen - something that many employers may welcome but which continues the erosion of employee security. It strikes me that this legislation should be receiving much more urgent attention from progressives.

Posted by: Aidan on January 26, 2006 at 10:47 AM | PERMALINK

It was not an unintended consequence. It was done purposely, and it was bipartisan.

Posted by: Powerpuff on January 26, 2006 at 10:59 AM | PERMALINK

alleviate the plight of the poor. Well, maybe it can, but it hasn't.

Posted by: klaus on January 26, 2006 at 9:24 AM | PERMALINK

That's great, bash charity, target the rich. The bottom line is you want someone else to pay for your positions.

Noticed Bad Jim has disappeared. I knew he got that US$ 2 million house for being smart!

-----------

Note that Bill Gates is giving 1 billion per year to charity. His new worth is 50 billion.

If Bad Jim gave half that percentage of giving to charity (based on his house alone), he could cough up US$20,000 per year.

He doesn't but he want to bash CEO's.

Posted by: McA on January 26, 2006 at 11:00 AM | PERMALINK

Mama, ALL corporate executives are baby killers. They produce sleeping bags to torture and murder brown skinned people in order to obtain their livers for ritual cannibalism, honoring their god Moloch.

Posted by: Hostile on January 26, 2006 at 11:03 AM | PERMALINK

There is a very simple solution to the problem of CEOs overcompensating themselves at the expense of their shareholders, and it doesn't involve any additional or new regulation. The fundamental problem is that CEOs face few constraints on their power to pay themselves too much. Attempts to regulate this are foolhardy and as Kevin notes, ineffective.

All you need to do is restore the market for corporate control, that is, to bring back hostile takeovers. Repeal the Williams Act, repeal all the state laws protecting corporations from hostile takeovers, make poison pills illegal, and presto: CEOs with extravagant pay packages will become takeover targets.

It is impossible to deny that this would be effective at controlling CEO excess. However, you have to be able to accept the consequences of hostile takeovers, which are as unpopular with workers as they are with management. For my money, hostile takeovers are a necessary part of a healthy advanced capitalistic economy where ownership is separated from management.

Posted by: DBL on January 26, 2006 at 11:16 AM | PERMALINK


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Posted by: 注册香港公司 on January 26, 2006 at 11:50 AM | PERMALINK
Of course if everybody in the company were paid an equal amount and shared equally in a part of the profits and were elected by the membership to their positions and awarded bonuses by election of the working membership...

Even equal pay is not a requirement. Worker-ownership in a labor cooperative form naturally creates incentives to limit pay of even top managers (also, it reduces incentives to form unitary mega-structures that would need God-Emporer CEOs rather than networks of smaller firms), and worker-coops generally have limitations on the spread of compensation like 5:1 ratio limits between the most and least well-compensated workers. The importance is that, even if the compensation is unequal, the distribution of voting rights is equally distributed among the worker-owners.

But that's SOCIALISM and SOCIALISM will POKE YOUR EYES OUT.

Well, yeah, your joke there is the usual counterargument, though, really, encouraging or requiring corporations to be worker co-operatives is no more "socialism" than the current system of corporate governance is. In both, the state creates a special form of legal business structure, regulated based on someone's perception of social good. A purely "free market" "anti-socialist" system wouldn't have corporations at all, but individuals and partnerships governed in their relationship by contract principles and fully accountable for their own actions rather than protected from liabilities by an artifice created by the state to advance some perceived public interest.

Once you've accepted that kind of state involvement as appropriate, the debate is over what the real public interest is and what the evidence shows is the best way of acheiving that interest. Selective accusations of "socialism" against certain ways of applying the exact same kind of state power are ridiculous distractions.

Posted by: cmdicely on January 26, 2006 at 11:50 AM | PERMALINK

Hostile:

Sorry. You are entirely correct. I stand corrected. I entirely forgot that we live in the land of "All and None": The land of the free and the home of syllogism--where Democrats and Republicans meld into one.

Posted by: mama on January 26, 2006 at 11:57 AM | PERMALINK

i worked for this organization that was in disaray , so they hired this new manager. when he arrived , he called all of the employees and supervisors togather for what we thought was to be a tyrant to give a company ass chewing . instead , he said that we were all adults and each of us knew what our job consisted of and how to perform said task. managers and supervisors are here to answer questions or solve problems that may arise. it is a fact that only about 2% of the employees wil have any serious problems . we know that you will come to work and do your work well and go home at night and come back the next day .
every thing went beautifuly . better products , better relations by all. company was prospering so they got rid of this bunch of sons-of-bitches that took control of their company and made a success of it
this is a comman occurance in the good ole U. S. A.
TREBEL WINGNUT

Posted by: TREBEL WINGNUT on January 26, 2006 at 12:32 PM | PERMALINK

cmdicely - Leaving aside your other points about the desirability of worker-owner/management (but see United Airlines for a textbook case of how that can go wrong), I just want to point out that the limited liability corporation is probably responsible for a very large percentage of the economic growth over the past 200 years. Without limited liability companies, you could not effeciently aggregate capital in the amounts needed to build railroads, steel factories, auto factories, etc. etc., except through the state, and the world has learned, the hard way, how horribly inefficient and unproductive the state ownership of the means of production is (not to mention its tendency to produce evil, totalitarian regimes). There is no other social reason to have limited liability entities.

Why, though, do you think the State has a greater interest in regulating the compensation of the CEO of a limited liability corporation than it would, say, in regulating the compensation of the CEO of a general partnership? I don't see any difference. The State's interest, it seems to me, comes only in the case of publicly held companies, where, as I've noted, the separation of ownership from management creates agency problems that can lead to CEO overcompensation at the expense of shareholders. The cure for this is to restore the market for corporate control.

Finally, remember what you surely learned in law school: God can make a tree, but only a lawyer can make a corporation.

Posted by: DBL on January 26, 2006 at 12:59 PM | PERMALINK

The only people for whom the pension issue is a surprise,apparently,are congresspeople,voters and shareholders. There hasn't been a year in the last 20 when you could have missed the potential problems in pension and retiree health payments in any large,old,manufacturing company like GM or Ford or the steel companies or the major airlines.
The PBGC has had a negative position for years and they publish a report every year,too.
It isn't just because of executive pay and perks but the symbiotic dance between labor and management,better to get an increased package now,pay the piper later.
Social security is one of the few cash flow positive entities in the government,how else would the on-budget deficit of over $500 billion show up as only $330 billion? According to the last Trustees report,GDP growth at the rates reported for the last year pushes the SS problem much further out.
The same shareholders who don't pay close attention to financial statements,don't pay close attention to who's running for office. Voila! Kevin's comments reflect an ability to go from zero to outrage in no time flat,but don't ask the voters or the shareholders to pay attention all the time either. Let's just gin up some faux outrage,pass a bill that will contain the blueprint to avoid its intended effects and we can all go back to sleep.
Next tragedy,please.

Posted by: TJM on January 26, 2006 at 1:11 PM | PERMALINK

Kevin wrote:

"That's certainly a good example of the law of unintended consequences, isn't it? I mean, I'm sure the $1 million cap seemed like a good idea at the time."

It was a good idea and is still a good idea.

Compensation was to have subsequently shifted to performance based pay, but Corporate America dumped that and went to an entitlement system after such poor performance by CEOs:

http://www.usatoday.com/money/companies/management/2005-03-30-ceo-pay-2004-cover_x.htm
.

Posted by: VJ on January 26, 2006 at 1:11 PM | PERMALINK

Part of the problem with "performance based pay" is that, usually, performance is measured by stock price. And since the increased compensation is generally in the form of options, the CEO and other executives have a double incentive to increase the stock price by any means necessary, including those that are detrimental to the fundamentals of the business. Take Enron as the classic case - there is no -business case- for destroying your company's reputation in order to report short-term profits, but if everybody involved is getting paid with stock options and they jacked up the share price twenty percent, hey, they just got twenty percent raises.

The key is going to be reforming corporate governance... but the difficulty is that the majority of shares are held by large institutional investors (pension plans, essentially). If the only reason you're invested in a company is to see the stock price go up by a few percent, so that you can post profits in your pension fund and attract a ton of new capital, then you're dealing with the same false incentives problem as the executives. Even without the "crony" features, this means that reining in CEO pay will be difficult.

So what's the solution? Honestly, I dunno. It's one of those situations where if you push it here, it will fall over there. Specifically, we have every reason to expect (from precisely this past experience!) that if we put some kind of tax disincentive on executive options, compensation will simply be moved over into another category. (Perhaps the corporation will simply "provide the CEO with accomodations and transportation" that turns out to mean a mansion in LA and a fleet of Ferraris.) Hell, Kevin has a pretty good idea here - drop the tax penalty on one-million-plus pay and encourage companies to (a) pay in plain old cash, and (b) fully disclose said plain old cash payments. It's not going to chop CEO pay signficantly, but at least it makes it easier to keep track of, and removes some of the incentives for the CEO to take the company up on the rocks for his own profit.

Posted by: Avatar on January 26, 2006 at 2:21 PM | PERMALINK

When somebody stands up in a meeting and suggests that car exhausts would smell a lot better if we just poured honey in all the gas tanks, we can just throw him out the window.

"The Defenestration of TBrosz's Workplace"!

Posted by: tam1MI on January 26, 2006 at 2:38 PM | PERMALINK

"The question that I am posing is very simple: who decides how much is someone worth if not the entity that pays him?"
Posted by: nut on January 26, 2006 at 2:02 AM | PERMALINK


It IS a fundamental and important question.

Why DO boards of directors pay CEOs such outrageous compensation packages?

How much input do the stockholders have in that decision?

Posted by: MarkH on January 26, 2006 at 4:46 PM | PERMALINK

How about "clawbacks?"

If a compnay dumps its' underfunded pension on the government then all of the bonuses, options, pensions, etc. of senior officers for the past 20 years would have to be repaid to the company and deposited in the pension.

Posted by: save_the_rustbelt on January 26, 2006 at 4:47 PM | PERMALINK
Leaving aside your other points about the desirability of worker-owner/management (but see United Airlines for a textbook case of how that can go wrong)

UAL is not, and never was, a labor cooperative with guaranteed equal democratic voting rights, so its hardly an example -- positive or negative -- of the kind of ownership I was talking about.

I just want to point out that the limited liability corporation is probably responsible for a very large percentage of the economic growth over the past 200 years.

That's distinctly unprovable and, again, irrelevant to my point; labor cooperatives are usually limited liability corporations, and the corporations that existed before states in the US largely abandoned serious remedies for misbehavior were also limited liability corporations. Indeed, the abandonment of such remedies was a result of the concentration of wealth (and, therefore, political power) resulting from the industrial revolution in the hands of ultra-rich captialists, not the cause of the growth. I'm not arguing that liability limits are bad, I'm arguing that they are massive state intervention in the marketplace, and that changing the conditions attached to the privilege of limited liability isn't socialism. If there is socialism in limited liability corporations, its in the concept of seeking to advance the public interest with such an intervention in the first place. (Personally, I don't think that its useful to use "socialism" there, either, but its beyond ridiculous to use "socialism" for a system that makes worker owership a condition of limited liability and not use the same term for any system of limited liability corporations.)

Without limited liability companies, you could not effeciently aggregate capital in the amounts needed to build railroads, steel factories, auto factories, etc. etc.

This has not been demonstrated, and there is little reason to believe that it is true. But, at any rate, its entirely off point. I'm not arguing against limited liability, I'm arguing for recognition of the fundamental nature of the artifice involved as an intervention in the market based on the perception (which I don't dispute is accurate) of public value.

Therefore, it is irrational to use the term "socialism" as criticism of a proposed reform to the details of the regulation of the special privilege of liability limitation; if government intervention in the marketplace is "socialism", then limited liability corporations are themselves a socialist institution.

If you are using socialism to refer only to state ownership of the means of production, then worker-ownership of limited liability firms is clearly not socialism at all.

There really is no reasonable definition of "socialism" under which worker-ownership but limited liability in general is "socialist".

Why, though, do you think the State has a greater interest in regulating the compensation of the CEO of a limited liability corporation than it would, say, in regulating the compensation of the CEO of a general partnership?

I don't think there is a categorically greater interest, OTOH, partnerships (in general) do not receive categorical special benefits and are, very much, individuals exercising contract rights without special state benefits. Therefore, no matter how much public interest, there is no special basis for authority to regulate executive pay issues.

OTOH, corporations receive considerable special benefits which are concentrated in their controllers on the expectation of public benefit, which provides a legitimate basis for any regulation of corporate behavior designed to assure the intended public benefit or prevent any unintended public costs of the effort to produce that benefit.

The existence of limited liability corporations requires sacrifices of property rights for everyone else in society. For the state -- as the agent through which "consent" for such sacrifice is made -- to make judgements as to the conditions and limitations of the privilege thus granted is not only appropriate, but it is the only responsible course of action. That doesn't mean every imaginable state regulation is appropriate, but it does mean that once the decision is made to have limited liability corporations, the terms and scope of acceptable behavior can and should be set based on expectation of net benefit; corporations do not have natural rights, and people have no natural rights to liability shields.

The State's interest, it seems to me, comes only in the case of publicly held companies, where, as I've noted, the separation of ownership from management creates agency problems that can lead to CEO overcompensation at the expense of shareholders.

Since shareholders are voluntary participants who are the private direct beneficiaries of the public privilege of limited liability corporations, harms to them resulting from their voluntary participation are probably the weakest basis for government regulation of corporate behavior, unless the harm is so great that it causes such a disincentive to stock ownership that it threatens the public beneficiaries of the existence of the such corporations.

OTOH, the devotion of corporate resources to extreme executive compensation packages that can endanger commitments to other employees, who are public beneficiaries, rather than private beneficiaries, of liability protection (that is, they benefit from the actions incentivized by the protection, not from the protection itself) are a stronger basis for public regulation, as the public purpose is the benefit to public beneficiaries.

Finally, remember what you surely learned in law school: God can make a tree, but only a lawyer can make a corporation.

That saying is, popular or not, somewhat inaccurate. Only the State makes corporations. Lawyers may participate, as agents of the State, but the corporation is a creature of the State, not an individual lawyer.


Posted by: cmdicely on January 26, 2006 at 5:07 PM | PERMALINK

It's interesting that this subject should come up for some debate. It's awfully similar to the current debate around the Unitary Executive - George W. Bush - and how the federal goverment is to be run. Should the Legislature (Congress) direct policies and methods only to be carried out by the Executive (the President) or should they just set up a rough outline (offices, departments, perhaps goals) and then let the Executive take the ball and run with it?

Generally, we've gone with government by committee to avoid the creation of any abusive dictators. But, we also realize the importance of tasking one person with a job and then giving them a lot of freedom to get the job done. We do this with janitors, soldiers, generals, Secretary's of Departments and the President. But, it's never with complete power and freedom. So, in corporations should we consider the same themes of business by committee and checks & balances?

How would such a corporation work? Who would be on the Corporate Guidance Committee? Who would select the CEO? Who would decide pay levels?

It's an interesting idea to consider: moving from dictatorial CEOs in today's corporations to a Modern more-Democratic Corporation.

Posted by: MarkH on January 26, 2006 at 5:09 PM | PERMALINK

Avatar posted:

"Part of the problem with 'performance based pay' is that, usually, performance is measured by stock price."

But, as you can see within the article I linked, CEOs are still given more and more even with extremely poor performance.

It's a scam.
.

Posted by: VJ on January 26, 2006 at 5:44 PM | PERMALINK

"Well. That's certainly a good example of the law of unintended consequences, isn't it? I mean, I'm sure the $1 million cap seemed like a good idea at the time."

I can't tell if Kevin's being serious about this, but if he is, he should join that woman at Amherst who was suprised to find out that some students didn't write their own college essays.

I mean, give me a break. This was entirely about Congress showboating by undertaking a cosmetic reform. Should we then be surprised that some corporations figured out a way to get around it?

"I'm shocked, shocked to find that gambling is going on in here!"

Posted by: Dave on January 26, 2006 at 6:17 PM | PERMALINK

Ford has an unfunded pension liability of $12.3 billion. For this problem to have been accumulating only since 1994, they would have had to rack up shortfalls to the tune of over $1 billion each year. That doesn't seem credible. Something else is going on.

Posted by: pjcamp on January 26, 2006 at 9:51 PM | PERMALINK

Bad Jim, where are you? We need rich liberals like you to fund the revolution!

Posted by: McA on January 27, 2006 at 12:17 AM | PERMALINK




 

 

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