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Here’s a light weekend thought to chew on. I accept that many firms are thought to pay “excessive” amounts to compensate their top managers. Indeed, this is one reason the “99%-ers” are dismayed at the world. Under what model are we operating then that finds that firms are extremely benevolent toward one class of employees and at the same time are irrationally stingy and greedy in not compensating another class of employees (i.e. the folks farther down the totem pole)? Tournament theory would be one way to reconcile it – but I don’t suspect the 99%-ers have that in mind.

8 Responses to “Worker Pay and Firm Stinginess”

  1. Rod says:

    And here I thought most companies pay their salesmen the top salaries. You can manage the innards all you want, but if you don’t have the customers, you’re sunk. The same goes for “rainmakers” in a law firm.

    In the brokerage business, that’s what “executive bonuses” are all about — they go to the people who sell and thus make money for the company. A word to the occupiers outside: those tattoos and lip piercings will diminish your sales appeal.

  2. Harry says:

    If you own a business, you pay yourself whatever you have left after you have paid everybody else, including the bank and the government.(The government gets to own a special class of variable percent preferred stock, at zero cost.) That is, if you have anything left over.

    Many public companies hire executive compensation consultants to determine the pay of officers and directors, and that process is spelled out in the proxy statement. From the stockholder (owner) point of view, this process has many pitfalls, unless the officers and directors receive a signifigant part of their income as stockholders. (Think Koch Brothers, Steve Jobs.) The CEO’s pay determines the pay of the rest of the people below him on the pyramid, so the taller the pyramid, the better for him. The flatter the pyramid, the better is the chance there will be for some money to be left over for the stockholders in the form of retained earnings or dividends.

    But even some small companies hire compensation consultants to determine compensation at all levels, saving the expense of employing a human resources vice president, who would get vice presidential fringe benefits, etc.

    In any case, it is the owners’ money at stake, and how anybody gets paid is nobody else’s business. There are exceptions, of course, when government is an owner, for example in a company that makes exploding electric cars.

  3. chuck martel says:

    What’s the criterion for compensation of a high-level executive in any organization, maybe a university president? Ordinarily, when this individual assumes his duties, there is an existing organization that he is expected to lead, in pretty much the same manner his predecessor did. Oh sure, improvement is expected, but nobody thinks he’s going to invent a completely new method of instruction or fire all the current faculty and hire new people or replace the buildings on campus. His job is to make decisions and he has only so many options. It’s not that complicated. If the decisions don’t work out, maybe he’ll get let go but it won’t be the end of the world for him.

    The point is that all through the world of business the goal has been to configure employee duties in such a manner that they can be done by a normal person rather than a genius or even a real hard worker. This theory is just as applicable to upper management. Heading a publicly held company is not the same as being an entrepreneur and doesn’t require the same talents. But the incestuous relationships of boards of directors basically loot companies.

    It’s not a direct comparison but some of the same factors are apparent in professional sports. Albert Pujols has signed a monster contract with the California Angels baseball club. Keep in mind that the fellow that plays first base next year for the Cardinals won’t bat .000, hit no home runs and drop every ball hit to him. So the value of Pujols in in performance terms is the difference between his stats and his replacement, which might be 8 or 9 home runs and 20 rbis, at a hefty price. You could say that the Angels are paying him because Californians will flock to see him play. That might be a little harder to measure. Or you could say that paying him that much might make it more likely that the team would have post season success. Maybe, maybe not. The real point is that those considerations don’t enter the equation with an executive. Nobody bought an HP laptop because Carly Fiorna was the CEO.

  4. Harry says:

    Chuck, I agree that the system of executive compensation at big institutions is incestuous and screwed up in many ways, but it is not the business of anybody who does not have a stake in the organization.

    Now, mutual fund companies, in which many people are invested, have been passive often when it comes to corporate governance. The managers of those funds have a fiduciary duty to their investors to represent them better. TIAA-CREF, CALPERS, the big pension funds could do better. But that is not Chuck Schumer’s business, nor is it the business of my congressman (a Republican).

    The way the current system works is that the Compensation Committee, composed of outside directors (!) hire a consultant who determines what the executive compensation is in the company’s “peer group”, and produces a chart to be reproduced in the proxy statement. The peer group approach is used to ensure that drug company managers are not to be compared to railroad managers, which would be unfair, assuming that managing a drug company is tougher than managing a railroad, or vice versa.

    Then the consultant determines the average compensation, the lowest compensation, and the horrifically highest compensation. This is a complicated job because every company has a different mix of options (in the money or out of the money) restricted stock, insurance, jets (Gulfstream, Lear).

    Then the consultant determines, or puts up to a vote of the Compensation Committee whether the current chairman of the board and CEO is above or below average. This is the key moment where the outside directors have a decision.

    If it has been a bad year for business among your peer group — let’s say on average everybody lost money — then if your company lost less than your competitors, maybe your chairman is above average, or maybe just average. (University professors can identify with this phenomenon: grade inflation.)

    Not wanting to be a directors of a below-average company, every director gives a rating of average or above.

    Built into the package adjusts for the CPI, etc., etc.

    Yes, it is a racket. Pay anybody an extra three percent more than you have to, and Einstein’s Miracle of Compound Interest comes into play. A stupid system, and a straw man.

    Let them fail if they overspend, and let them be as stingy as they like, and if that results in failure, too, then let them fail. They have to figure it out. It’s not my business.

  5. Rod says:

    Everyone will get a kick out of this. Years ago I was a trustee at a private school, and I often had arguments with the other trustees about what the marginal cost of another boarding or day student was. The headmaster and the chairman of the board would divide the school’s expenditures by the number of students and cite that as the “cost of providing an education” for one student at my school. Then they said that “tuition covers only part of providing an education at the school, and annual giving makes up the difference.” So give until it hurts. The headmaster also asked the board to approve ever-higher tuition rates so we could “stay competitive” with the other private schools like us. In other words, competition was turned on its head. My thesis was that the marginal cost of an extra student was only the incremental costs of food in the dining hall, and that adding extra scholarship students would only benefit the school, particularly if the partial tuition they paid was greater than the incremental costs. Alas, now the tuition for a boarding student is over $40K a year, and the sticker price just scares a lot of people away. Where this is headed is anyone’s guess, but I think the limits of what the school can charge are near at hand.

  6. Rod says:

    I should connect the anecdote above to the question of how executives are compensated. That inverse idea of competition came from NAIS, the National Association of Independent Schools, which always put its two cents in about how much to charge and how much to pay both teachers and management. Of course, they preached the notion that teachers and administration officials were always underpaid in terms of the value of their labor, as opposed to what the market might bear in attracting qualified academics. Forty years ago, teachers were in a revolving door, so to speak, as salaries were low in relation to what a college-educated person could find in the non-academic world. Now it’s the opposite: most of the teachers at my school stay until they are fired or retire, and only a few openings for new teachers occur in a given year.

  7. Jason B says:

    I think the difference between the CEO’s compensation and an average laborers salary comes down to the different competitive landscape that each person faces in their job market. Firms assert that they need to offer high executive salaries to compete for the best people for the job. Unskilled laborers, on the other hand (especially in our current market), are competing for the job. Unskilled workers and CEOs face different competitive forces in this way. It’s almost as if the CEOs have a “monopoly” on skilled labor while unskilled workers face a competitive market. There is an excessive amount of unskilled labor so firms can offer low wages and still fill the position while there is a restricted amount of skilled labor so firms have to compete on price to acquire that labor. There is nothing intrinsically wrong with this, but I think this is what the 99%ers are upset about.

  8. chuck martel says:

    I hate to go back to a sports analogy but it might be simpler for me. There are about 115 D1 football programs in the country. Just about every high school has a football program and there are many others at lower and higher levels. There might be 5 or 6 thousand active football coaches in the country, maybe more. And the goal of all of them is to coach a D1 team. A school should be able to get a coach to PAY THEM for the privilege of standing on the sidelines in front of national television coverage. OK, the CEO position at someplace like Delta Airlines doesn’t get you on TV much but there are all kinds of other perks, free travel, lots of frequent flyer miles, if you put an add for the Delta CEO on Monster.com how many jillions of pixels do you suppose would be generated at a guaranteed salary of $150 K? And tell me that none of those applicants could do the job.

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