Complexity and Consideration of Compensation

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There is a new book that has sparked my interest, titled "The CEO Pay Machine." In 1978, an executive at a large American company was compensated at 26 times what the average worker was being paid. At present time, that compensation has exploded to 300 to 700 times what the average worker is paid, or more. J.C. Penney and Chipotle are examples of executive compensation that is exponentially greater than what the average worker is paid. Wage stagnation of blue-collar workers is not a subject I wish to dwell on, it is an obvious fact whose consequences I have elaborated on countless times. According to the non-profit think tank Economic Policy Institute, “Wage stagnation for the vast majority was not created by abstract economic trends. Rather, wages were suppressed by policy choices made on behalf of those with the most income, wealth, and power.”

 

The review “Excess at the Top” of the book “The CEO Pay Machine” in The Wall Street Journal describes the CEOs making astronomical sums thusly: “These aren’t founders of major shareholders but hired guns, managers playing with the house money.” So many of apologists for the excessive pay are insisting that it’s the global economy that is creating this situation, and we’re just going to have to accept it. The apologists, however, aren’t very well informed of the average worker versus CEO pay differences. The U.K., the fifth largest economy in the world, the pay ratio of average worker to CEO is 84 to 1. Let me point out that 84 to 1 is nowhere near the 300 to 700 to 1 found in America. But let’s not stop there, shall we? In Japan, the third largest economy in the world, the pay ratio of average worker to CEO is 16 to 1. So much for the “global economy” argument.

 

According the author of “The CEO Pay Machine” Steven Clifford, says, to quote The Wall Street Journal: “The outsize income, he thinks, feeds inequality and mistrust in our democracy.”  Could the mistrust have led to the election of a Washington outsider, fueled by the anger and resentment of people who were supposed to be leading, and were simply taking all they could get, without consideration for the people whose toil and sweat generated wealth? I would offer a resounding yes to that premise. Further, the review notes: “a system of compensation has emerged over the past four decades that rewards mediocre executives by stiffing shareholders, employees and society at large.”

 

Ah, yes, society at large. The present compensation plan, where wealth concentrates in just a few hands, and then is distributed in the economy in small, limited sectors, whereas if it were in the hands of employees and shareholders, it would be distributed much more diversely and have a much greater impact on the economy at large. Of course, those that hold the millions in compensation put it in banks and such, but if the millions were distributed to thousands of small economic players, the money would flow through many more hands. Take any country you want in our “global economy” where wealth is concentrated in the hands of a select few, and you will see a country where poverty is rampant. I’m not a socialist who believes in taking money from the wealthy, but too much concentration in the hands of a few never has nor will ever result in a prosperous society. Pick any country you would like, it just doesn’t happen that way.

 

So how to the CEOs get this compensation you ask. The book describes “compensation consultants” who wish to get in the good graces of the potential CEO so that they can design pension and health-care plans, to name but a few aspects of the money generators that the compensation analysts earn. So the “compensation consultants” objectively recommend healthy and high salaries so that they get the next assignment to set up other compensation plans. After salary comes, of course, short and long-term incentive plans. Those plans can be as diverse as reorganization or just doing what is expected of a CEO. Les Moonves, the CEO of CBS, was paid in 2014 a cash bonus of $25 million, of which almost half of that bonus was mostly just doing his job. Failing to meet the goals that are established can result in the lessening of bonuses. So if you didn’t hit the numbers, instead of $1 million, you only make $900,000, not bad for not hitting the numbers, wouldn’t you say?  Increasing the stock value, even if only short-term, is the goal of almost every CEO, and is the basis of their compensation. Per the article: “It turns out, though, that stock awards and bonuses often don’t align the interests of managers and shareholders; they encourage short-term boosts to earnings rather than investing for long-term growth.”

 

The book mentions Milton Rock, who is described as the “godfather of compensation consultants” who started comparing executive pay between companies. As the review points out: “Few executives can transfer their talents from one company to another, let alone from one industry to another, and yet they are paid as if they are basketball free agents.” J.C. Penney, taking a computer executive and having him direct an old brick and mortar retailer is pure living proof that talents do not automatically transfer from one industry to another.

 

Bill Clinton and the Democratic Congress tried, in 1993, to cap executive salaries, making salaries in excess of $1 million no longer tax deductible, linking executive pay to performance, with performance pay being the new tax-deductible expense. Of course, with that change in the law, to no one’s surprise, performance compensation went through the roof. Every time the government has tries to tax executive compensation, the accountants and the lawyers got together and figured out another way to pay the CEOs more money, be it performance or stock options.

 

My favorite quote from the book: “Apart from the galaxy of Zork-El corporate directors are the only sentient group who think that CEO pay levels are justified.” An important question to ask is if a CEO is already making millions of dollars, how much more motivation do they get from a few more million? There are plenty of millionaires who simply have no incentive to go out and work anymore, as they are already wealthy beyond any expectation. No names necessary here. The economic rules for millionaires are different than the working class. As far as the working class, those who say money is a poor motivator understand neither money nor motivation.

 

Of course, there are CEOs who deserve what they get paid, and do not let it be said I object to all of them and what they get paid, I don’t. There are people who turned around companies, and then there are people like Jeffrey Immelt of GE, who has made multiple millions for years and never, ever restored GE’s stock price to what it was before his leadership. Some people are just lucky, like when in the early eighties the economy bounced back and the GM executives gave themselves healthy bonuses. My question was then, what was it that they had done to improve the cars, which were nothing to brag about, and were nothing much more than they were before, but, like a lot of people, if they were standing around when something good happened, they got to take credit for it. And of course they got the money, too. There are plenty of people who create value, and I have no intention of disparaging them, but they aren’t just the folks in the offices during the day and the country clubs on the weekends. There are people who have taken risks and they paid off, as many entrepreneurs have shown us. There are just as many who were, as the review stated, “playing with the house money” with nothing much to lose. As Pierre Corneille said, “To win without risk is to triumph without glory.” I consider “The CEO Pay Machine” one of the more important books of 2017. The impact of wage disparity on business, the economy, and society in general needs to be examined, and it cannot happen too soon.

 

Comments

Infidel753 Added Aug 4, 2017 - 7:07am
It's the international comparisons which are the most telling.  Would anyone claim that the typical American CEO is 20 times better than the typical Japanese one?  Not credibly.
 
The ratio is also much lower in Germany, the world's fourth-largest economy and actually a bigger exporter than Japan.  One obvious reason for this is that Germany has very powerful unions and a much higher unionization rate -- so there's a built-in tendency to route a larger share of corporate revenue to the wages of the workers who, after all, do most of the value-adding.
Jeff Jackson Added Aug 4, 2017 - 7:39am
Thanks for the information, Infidel, more evidence that the global economy isn't a justification for excessive compensation. A quick search reveals that you're correct, the American execs make easily twice what the German execs make, and again, not really much justification for it. Thanks again, you've got a nice insight into things.
George N Romey Added Aug 4, 2017 - 8:16am
I believe there is no justification for this wild CEO pay.  Its become a good ole boys (and girls) club with Board of Directors out to lunch on their responsibility.  Moreover, much of that pay is coming from stock prices being ginned up by the market and stock buy backs.
 
At some point more money doesn't improve life.  You can only live in so many homes or sail/power so many boats.  Sadly our public and private leadership in this country is dismal and getting worse.  Those at the top seem to have forgotten what they do has a huge impact on the lives of many.  
 
I'm at a loss for answer.  I don't think we can legislate morality nor should we.  As I've said before only an economic meltdown that totally destroys wealth will be the answer and along with that a total reset on our values and culture.  Otherwise, the US will become a permanent under developed and corrupt nation.  
Dino Manalis Added Aug 4, 2017 - 8:52am
That's why we need business tax cuts and repatriation to stimulate the economy, including employee salaries, but it goes beyond that.  Profits should be shared among all workers when a company does well, while bonuses ought to be rewarded competitively to any employee who demonstrates exceptional qualities beyond normal work requirements, like a good idea for the company; humanitarianism; or something else.
Leroy Added Aug 4, 2017 - 9:07am
If it was by the sword and die by the sword, I wouldn't have a problem with it.  But, when they fail and they still get rewarded, it boggles my mind.  If a trained monkey could get 90% in the worse case, there is something wrong.
 
In my work, if I execute flawlessly, I get a mediocre raise--that's is if the company is doing well.  We have company wide indicators today for which I am responsible but have no influence over.  All the stars have to line up just to stay ahead of inflation.  On the other hand, one missed milestone--even if it is due to the customer--and I am screwed.  If you miss one milestone, you are likely to miss the second.   It doesn't matter that you take on ten times the responsibility of others.  Two late milestones and you are a zero, deadwood.  It doesn't matter that your colleague only took on one project and you challenged yourself with ten.  Not only that, but you have to show growth, your ability to do more things than the year before.  It's easy when you are fresh out of college.  It's not so easy when you are at the top of your career.  It is just one more way of suppressing wages.  I think this is what frustrates most workers today.  You're judged like a piece of meat.  You are picked apart.  The French have an expression for it;  we are told "three truths" about ourselves.  In other words, when it comes time for evaluation, your manager is obliged to tell you three things that you suck at. I just wish I had equal opportunity to judge those above me.  The work place would be fairer if they had to live in fear of the judgments of the workers.  If I were the owner or CEO of a large company, I would implement such a system.  Feedback should not be one way.  There shouldn't be a we versus them.  Everyone is in it together.
Yet another great article, Jeff.
 
 
 
George N Romey Added Aug 4, 2017 - 10:18am
Leroy I've been around the 1% and even the upper crust of the 1%.  They see the world very differently.  They never have to worry about money and I don't give a damn about what anyone says most acute stress is about money, or the lack thereof.
 
Their priorities in life are different.  They fret over whether little Johnny can get into the right private school or the NYC 92nd Y while most people tear themselves apart because they aren't able to give their children what they need to even compete in this world.  They spend hours and loads of energy wondering how they want to redecorate their house or Manhattan condo while increasing more Americans stress over just paying the mortgage or rent.
 
What's even worse is that they believe those below them intellectually inferior and not worthy of high consideration.  They sincerely believe that if you do not rise to the top it was your lacking.  Never mind many were born into privilege or had the opportunity to attend an Ivy League University.
 
Leroy Added Aug 4, 2017 - 11:06am
I can believe it, George.  In addition to that, having the right race and gender can give you an advantage.  You are more likely to be tagged a "high flyer" if you are minority or female.  In the forced ranking system, females are automatically bumped up.  That in itself creates stress watching people less qualified or a better BS'er blow past you.  If you are a "high flyer," you can do no wrong--up to a point.  I'm sure the 1% could care less about them.  It's just good business, something to put on a resume for promoting diversity.
 
I dream of a work atmosphere where all jobs and all people are considered important, where there are no masters, no one is inherently better than another, people rise or fall according to their abilities.  I am not saying all jobs are the same or everyone is equal.  If a janitor gets paid more because no one is willing to do the job, I can accept that.  
Jeff Jackson Added Aug 4, 2017 - 11:08am
George, tax and fiscal policy are the answer. The new rules of the SEC are that public companies must publish the ratio of worker vs CEO, and the corporations fought that tooth and nail, and it was put to a vote (since when did regulatory agencies vote on whether to enforce policies?) and by one vote they ruled the corporations must publish the ratio. I don’t want to shade my solution, so I will likely present that as another essay coming soon.
Jeff Jackson Added Aug 4, 2017 - 11:09am
Dino, I agree we need repatriation. I don’t know where the policy went but the Trump administration was going to have a tax amnesty period, where they could bring the money back with very limited tax liability. They need to get it back here in the U.S.
Jeff Jackson Added Aug 4, 2017 - 11:20am
Leroy, I see what you experience as well. I think some of what you are referring to as the cause of some of the lack of competitiveness in American business, as well as some of the bureaus, specifically the FBI. In the last few decades, FBI agents (or so I am told) have lost 449 firearms, and 184 laptop computers. The Immigration and Naturalization Service has 539 weapons unaccounted for. These people would have lost their jobs under the leadership of people like J. Edgar Hoover.
George N Romey Added Aug 4, 2017 - 12:16pm
Most of this goes back to allowing the surge in huge industry controlling corporations and highly rewarding financial hocus pocus.  The people putting together derivatives rather than working in engineering or science research are making millions.  Grossly paid CEOs lose touch with the inner workings of their companies.  A company goes out and engages a consulting firm that suggests closing factories and licensing the manufacturing to Chinese firms.  No one speaks for the workers that will suffer untold financial horrors, including pre mature death.
 
We've lost touch as human beings.  RR and Tip O'Neil got things done and were friendly to each other.  Even Bill Clinton 20 years ago cooperated with a Congress that was his adversary.  People are no longer proud of their employer.  I watching a documentary the other night about the 1950s and factory workers were damn proud about the product they produced even if their jobs were laborious and repetitive.
 
I really don't see much change coming down the pike.  We are just going to see more and more of a world of a few haves and too many have nots. At least change won't come voluntarily. 
Jeff Jackson Added Aug 4, 2017 - 12:42pm
It's quite true, George, the workplace has changed a great deal. I remember as a young person when my father was friends with all the other people that worked where he worked, even the boss, and they had picnics together in the summer. I remember going to a party at my aunt and uncle's home and the boss and most of the coworkers of where he worked were there, it was all one big family.
I think the pay disparity that has occurred has really tightened the division between management and workers, and given that a worker makes $30k and the CEO makes several million, the differences are too wide to bridge.
Offshoring and automation have only added to the lack of pride in American labor, not to mention the vitriolic fights that unions and management have had. There are still the mom and pop operations, mostly now restaurants where great pride in the work and products produced as well as tradition are important, but they're slowly being squeezed out. The corporate mentality, the greed and incompetence have taken over, and it has done nothing for the economy or the workers in that economy.
George N Romey Added Aug 4, 2017 - 12:49pm
A few large companies have been able to retain that bond between management and line workers (Costco, Southwest Airlines) but its become rare.  Today we have more and more of a CEO professional class.  Educated at Ivy League schools, recruited by Washington DC think tanks or Wall Street and eventually recruited into top corporate positions.  They've never been rank and file just in a protected micro bubble of privilege, money and economic but not practical theory. 
Jeff Jackson Added Aug 4, 2017 - 3:04pm
All the while the Costcos and Southwests do better in the marketplace, have lower turnover and happier customers. I have been amazed at the top corporate people who have no idea how things run. It's all on paper to them.
John Minehan Added Aug 5, 2017 - 7:28am
Couple of thought come to mind:
 
---The "hired gun Manager" idea is one of the things that subtended Michael Milken's attempt to create a new order of 'owner-managers."  Not a new issue.
 
---Japan and the UK have vastly different cultures from the US.
 
---You mention "founders;" the compensation of genuinely innovative figures like Gates and Jobs influences what other C-Suite folks are paid, rightly or not.
 
---A really good CEO, someone like Jack Welch, who turned around a successful company that was ill-suited when he took charge for the business environment of the 19802 and '90s, is almost impossible to properly compensate.
 
---On the other hand, boards, whose main job is executive search and retention, rarely know if they have a Jack Welch or an Al Dunlop.
 
---To really see what Jack Welch did at GE, compare it to IBM.  Welch really had a "weather eye' that his successor did not (and as no one at IBM had, until Lou Gerstner took over 14 years after Welch took over GE) .  (Welch was not as astute in picking a successor as Reg Jones had been, one reason Peter Drucker thought Jones was the best CEO he had ever worked with.)
 
---At least part of what drives executive compensation is that "there are no second acts in American lives," as Scott Fitzgerald said.  Failure as a CEO is an end to economic viability.  That's why "golden parachutes" are so sought after at those levels. 
 
---Carly Fiorina will never be a CEO again.  She took on a risky job, changing the culture of a revered company that had grown dysfunctional in today's market.  She did it and she alienated people doing it.  Her compensation reflects those facts.       
John Minehan Added Aug 5, 2017 - 7:34am
"Would anyone claim that the typical American CEO is 20 times better than the typical Japanese one?"
 
Different culture, different role, though.
 
 
Jeff Jackson Added Aug 5, 2017 - 8:44am
John, regarding Carly Fiorina or any other person who makes changes in organizations, they can count on getting a lot of resentment. Yes, Jack Welch is an American icon of leadership, but Jeffrey Immelt, as mentioned in the essay, was nowhere near what Welch was. I'm guessing that "American culture" is some justification for income disparity? That being the case, John, it is a characteristic that only started in the 1980s. Sorry, I'm not buying the "culture" argument. Read management guru Peter Drucker, and he will tell you CEOs making too much money will ruin and organization. We're well on our way on that program.
George N Romey Added Aug 5, 2017 - 8:46am
John most CEOs might not get that role again (although many do in less high profile situations) but most go onto consulting where they still make big bucks.  Lets face it even if you are making 20 times the average worker you are up around the $800K range, nothing to sneeze at.  That's the chance you take for the big bucks, the need to perform.
George N Romey Added Aug 5, 2017 - 8:59am
Jeff my own hunch is that when companies begin to pay CEOs outlandish salaries they begin to disconnect from reality and think everything they do is golden (evidenced in their mind from the pay allotted by the BOD).  
John Minehan Added Aug 5, 2017 - 9:29am
"That being the case, John, it is a characteristic that only started in the 1980s."
 
Pretty much, where it started.
 
"Engine Charlie" Wilson of GM in the 1950s was not known to the man on the street (until, perhaps, he became Ike's SecDef), not so of Lee Iacocca or Roger Smith in the 1980s.  CEOs became the "face" of their company  as only some outliers like Henry Ford and Walt Disney had been before.
 
Not true in Japan, except for some odd ducks like Akio Morita of Sony, who was more of a Jobs or gates like Founder.  
Jeff Jackson Added Aug 5, 2017 - 12:24pm
Read P.J. O'Rourke's review of Iacocca's autobiography and, as P.J. said, Iacocca was full of "managerial balloon juice," but Iacooca only took $1.00 a year trying to bring back Chrysler from the dead.
The traditional American culture was not one of the excessive greed that emerged around 1980. That same greed infected the financial sector. I do not see the unbridled greed of today's America reflected in the Puritanical culture that has been so often characterized as traditionally "American." In fact, the Anglo/Puritan/Christian traditional ethic looked askance at greedy people for quite some long time. Of the seven deadly sins of America's largely Puritanical ethical beliefs, covetousness and gluttony describe much of the behavior of the CEOs quite well. The behavior is certainly not what could be described as traditionally American. 
wsucram15 Added Aug 5, 2017 - 1:12pm
Why dont you study a book, Like Harvard has for decades on how a company distributes shared profits to employees, based on salary of course.  Each person gets a percentage annually (depending on net profit) of their annual income.  The lowest in the companies history I believe was 21%, the highest being 131%.   When I was around them they got bonus' in the 80% margin..give or take.
Only two companies have successfully been able to work this process and keep this mindset.  It is a process. Its actually quite fascinating to watch and read about. Quite different to work that way for the average worker, I dont think 99% of people are able to do it and they know that.
https://www.amazon.com/Spark-Old-Fashioned-Twenty-First-Century-Corporation-Electrics/dp/1610390539
 
Stop thinking CEO and start thinking like this..its not perfect.  But if American workers could do this, which most cant, we would be very competitive.
George N Romey Added Aug 5, 2017 - 2:55pm
Jeanne sadly the modern CEO doesn't think he/she needs loyal and tenacious employees.  Its all about the "data" not the "people."   
Jeff Jackson Added Aug 5, 2017 - 8:08pm
I actually studied Lincoln Electric in one of my senior classes in business. They have been around a long time, and I am certain that their respect for their workers is an important reason for their continued success.
wsucram15 Added Aug 6, 2017 - 12:48am
Jeff...they dont respect their workers, the workers are shareholders in the company.  A majority share.
They dont get vacations, sick time..no paid time off. None. No healthcare is paid at all.  If they miss a day, they lose pay.  But they get that bonus at the end of the year.  Then vacations (unpaid) are taken, healthcare is paid in full from bonus'...etc.  Everything is given to the company to make it succeed year round.
On bonus day..the police escort these people to their cars, the ones who get checks still.  There are piece workers that make 100k a year at LECO with that bonus.  Ive never seen anything like it.
But it is almost impossible for the average American worker to work there. It really is..
on the CEOs, lets say you make 110,000 a year and you get an 80% bonus..that gives you almost 200k for the year.
A piece worker at 45k would make 81K..and so on. I was told by the workers you learn to live on the lower salary and the bonus is a bonus. 
 
Jeff Jackson Added Aug 6, 2017 - 1:25am
CEOs don't make $110K, they make ten times that and much much more. American CEOs make hundreds of times what the average worker makes, that's the point of the essay and the new book that picks apart the reasoning, or lack of it. Commissioned sales is piece work, by the way. I sold things while in college and sometimes made enough to pay tuition in one day, obviously a very good day. There are still piece workers, salespeople, and also freelance writers who get paid by the page.
Mircea Negres Added Aug 6, 2017 - 7:21am
"Oh, no. Not another CEO bashing piece", will say some people. Not me, babe. Nice one, Jeff! About the idea that concentrating wealth in the hands of a few does not translate into a good spread, it's true, at least in South Africa. The post-apartheid government tried it with what it called Black Economic Empowerment, and found those who got economically empowered did not "spread the love" like they were supposed to. What did they (ANC) do eventually? Well, they realized it wasn't working, changed its name to Broad-Based Black Economic Empowerment (B-BEE) and let it go on pretty much as it did before. I mean, it's not as if the average mine worker at Lonmin has ever been able to bid millions for a share in a buffalo, but Cyril Ramaphosa certainly did, 34 miners were shot dead by cops (after those workers killed 10 cops, security guards and non-striking workers) in scenes reminiscent of the 1922 miners' strike on the Witwatersrand, and South Africa is the most unequal society in the world today- or it was the last time I looked up its Gini coefficient... Good post, sir. Got my thumbs way up on this one. And now for a "Like" from one of your readers... Piiiing! 
Jeff Jackson Added Aug 6, 2017 - 9:34am
Thanks so much Mircea. I'm not bashing the really good ones who turn things around, but, as the article and the book both state, it is not a cultural thing, as much as those who insist it is rationalize. Yes, Mircea, the problem is that you cannot have a successful economic society with wealth concentrated in the hands of a tiny, not small, but tiny majority. Any country you would care to name, when all of the money is in the hands of a tiny few, the standard of living becomes dismal, and eventually, the poor seek income equality by means other than the voting booth, and that never turns out well either. Thanks again and I love your perspective on this issue.
wsucram15 Added Aug 6, 2017 - 10:40am
It was a number and our head of marketing which got hired on at LECO did make 110,000 a year.  Everyone at LECO, including sales has degrees in engineering with the exception of HR and Accounting.
The CEOs and Vice Presidents (there were so many of those) I am sure made tons of money. But as I said, it was a number I threw out there.  I believe the sales is commissioned but after our companies purchase in 2011, they are now the only company to make nickel welding wire, which is better for water processes, high pressure processes, etc.
 
I know for a fact that internationally it kept us in the 100 million dollar range as a business.   It is unlikely the sales will do poorly
 
The piece workers build the racks the wire is held on...the company has an affinity for making what it has to buy to produce its product.  Its more cost effective. 
Bigger bonus'es.
opher goodwin Added Aug 6, 2017 - 11:40am
There is no justification for these exorbitant pay levels. They are simply stealing money from everyone else. The system is corrupt. The rich run it for themselves and make all the rules. They buy off or threaten politicians and control both politics and the market. It stinks. There is no democracy while these people control the media and buy off the critics.
Katharine Otto Added Aug 6, 2017 - 12:27pm
Jeff,
I wonder what all these CEOs do with all that money. I've found having too much or too little both contribute to stress.  Partial answer is that many CEOs have a short life as CEO.  Jeffrey Immelt is an exception.  Also, I think many companies now depend on stock churning more than product sales for revenues.  The CEOs seem to be cutting lots of corners, closing offices and factories, cheapening products with inferior materials and workmanship.  All this to show "profits" in quarterly and annual reports, to sell more stock. 
 
Also, shareholder dividends bleed money that could be re-invested in the company.  I believe this is a major reason companies are buying back their own stocks.  Maybe a highly paid CEO sends a message that the company is more profitable.  
 
Family-owned and community-friendly companies like Kodak and Hershey used to be lose that "heart" when the companies go public.  The money-churners and asset-plunderers take control and plunge the companies into debt, with labor squeezed to increase profits.  That requires a cut-throat CEO who is willing to do the dirty work to make the company look good on paper.
 
George N Romey Added Aug 6, 2017 - 12:42pm
Katharine it's why so many CEOs are psychopaths and sociopaths. It's about human exploitation and only someone with no conscience can act so. 
Jeff Jackson Added Aug 6, 2017 - 1:26pm
As has been mentioned many times, "activist" investors insist on be granted positions on the board, and blackmail these companies into doing things that make the activist investors wealthy and screw everyone else. Interestingly enough, activist investors are responsible for turnover of CEOs, but the activist investors are never insisting that the workers get paid more. Activist investors fit the quote in the first paragraph of the essay: “Wage stagnation for the vast majority was not created by abstract economic trends. Rather, wages were suppressed by policy choices made on behalf of those with the most income, wealth, and power.” If they're so talented, let the activist investors start their own companies and make themselves rich with their own brilliance.
Katherine, you are right on the money when you note that going public takes the "family" out of a lot of businesses. Perhaps that is why companies like Koch, Cargill, and BMW, to name just a few are staying private.
George N Romey Added Aug 6, 2017 - 1:52pm
1% of shareholders own about 70% of shares. These are large institutional investors out for a quick buck. Many private companies are owned by VCs or private equity also interested in immediate higher profits.
 
 I worked for a small company in Manhattan that was acquired by VCs. They were clueless and listened to no one. Eventually facing bankruptcy they let go the senior staff people me one of them. If it hadnt been for these clowns I'd still be enjoying a good job and good income. I've seen the Wall Street crowd up close. The disaster of 2008 was self induced by this crowd.
wsucram15 Added Aug 6, 2017 - 4:09pm
But Jeff, I got your point.  I just wanted to add that.
Jeff Jackson Added Aug 6, 2017 - 7:11pm
Gotcha. I appreciate contributions. There are always aspects that are worthy of consideration, and points of view to be considered.
Phil Greenough Added Aug 7, 2017 - 10:42am
I’m not sure what or who is an executive pay apologist.  My stance on the matter is simple, it’s none of your business what a private company thinks an executive is worth.  You should worry about your own pay and how to make yourself more valuable so that you make more money than you’re currently making.  I would also add that both greed and envy are one of the seven deadly sins and getting paid a lot of money is not evidence of greed. 
George N Romey Added Aug 7, 2017 - 10:57am
Phil outlandish executive pay takes away from proper investment and it removes the CEO from reality.  More to the point its destroying the Middle Class as more and more jobs are part time and low wage. Maybe you think a successful economy can run on a few highly paid privilege and the remainder on part time low wage jobs.  There are countries like that in South America and Asia, maybe you need to visit one.  Maybe you need to visit certain cities in Thailand where you will be propositioned in the street by boys and girls for sex because that is the only way they have to survive.
 
There are many CEOS in this country that run big companies like Southwest Airlines and Costco that do not make eight and nine figures.  Their employees are well paid, get benefits and are part of building a great company.  Oh and they are consistently profitable in very tough industries.  Both have a philosophy of putting their employees.
 
Too many CEOs run to their $5,000 a plate be seen and to see charity dinners and somehow think they are giving back.  Giving back means providing decent jobs and in return expecting your employees to help make the business  a success.
Jeff Jackson Added Aug 7, 2017 - 11:31am
Phil I would suggest you read more carefully and not bring up points not addressed in the essay. At no point are private companies brought up. The examples, GE, J.C. Penney, and CBS, are all public companies.  I have no idea what the CEOs of private companies make because that is private information, and thus, few people outside the company know what they make. I was not commenting on what people are paid if and when I have no idea what they make.
I would suggest that making yourself more valuable to a company that doesn't like to pay employees much money is only pricing yourself out of a free market. An impressive education and experience often means that you will be asking too much money and the companies will not so much as talk to you because you are overqualified. Overqualification brings up another point. The number of Americans with college degrees is vary large, and yet many people with college degrees are serving up lattes at Starbucks.
The underemployed in America is staggering. We have people with finance degrees driving buses, people with engineering degrees pushing people around in hospitals. I would think that if they made themselves even more valuable, they wouldn't get any more attention. I'm all for "making myself more valuable" but with 3 undergraduate degrees and a master's degree, spending more on college would be a waste of time and money, but thanks for the advice.
George N Romey Added Aug 7, 2017 - 11:38am
Jeff great comments. Its the liberal nonsense that a college degree is the end all and be all of becoming successful.  As you correctly pointed out underemployment is a huge issue in this country and as you get older experience works against you, not for you.  I'm working contract and as far as a permanent role (interview this afternoon) I've been told too many times to remember, great interview, great skills but this job is below your skill level.   When people are not working up to their potential you are in a country with troubles.  We used to laugh at countries in which lawyers were driving cabs or waiting tables.  We've now become part of the comedy and its actually no fun.  Not surprise as wages and salaries have decline pay at the top soars even when there is little evidence that executive talent is bringing enough value to justify their pay.
Jeff Jackson Added Aug 7, 2017 - 1:43pm
George, if the execs who are paid all of this money are so smart, why are we not blowing the doors off all the other economies in the world? We should be leaving Germany, The U.K. and Japan, not to mention China, in the dust, if the CEOs are so gifted at making organizations work efficiently and profitably.
As I have mentioned before, every year that talent wastes away and does not produce anything, it is that addition to our economy that is lost. This is an economic theory that states when productivity is not utilized, the benefit of that productivity is lost to that economy and society. We have a lot of talent wasting away.
In the mean time, we have some skilled trades where the firms needing them are going begging. I sincerely believe that after the wage stagnation that began in the 1980s, most young people (me included) saw the ticket to nowhere was learning a skilled trade, because by the 1990s they had not seen a pay raise of any kind. What the carpenters, painters, and electricians were earning in the 1990s was the same as they were earning in the late 1970s. All the while, we know what the C-suite folks were earning, even as the colleges produced more and more of them; more and more money, and yet all the same pay for the working class.
We are watching the concentration of wealth, and the prospects do not look favorable for America. That's just how it is.
Katharine Otto Added Aug 7, 2017 - 2:37pm
Phil,
I would contend that publicly traded corporations are not private.  They are presumably owned by shareholders, who have a right to know about and have a say in financial transactions, including CEO pay.  I would say the same thing about the USA Corporation, but everyone except me thinks the USA has a right to carry on in secret while taxpayer/voter/shareholders pay their way.
 
Jeff,
I'm coming to believe that "under-employment" may be a good thing, for individuals and society as a whole. Who ordained the 40-hour work week, after all?  If someone can get by on less, or wants to, why should the Labor Department care?  It may be good for employers, especially those who can't afford full-time workers or have seasonal or other uneven demand for workers.
 
By the way, I read an interesting article in the 7/31/17 issue "National Review" this morning.  "A Wage-Growth Conundrum," by Robert Verbruggen, addresses the lack of wage growth despite a recovering economy.  He offers a lot of good ideas.   I especially like his suggestion that Republicans address payroll taxes, as these, more than income tax, hurt the low wage earner.  He doesn't say it, but a cut in payroll taxes would also help business owners.  My longstanding preference, to make payroll taxes optional for worker and employer, has not yet taken wings . . .
George N Romey Added Aug 7, 2017 - 5:17pm
Katharine the issue is that the underemployed are not making enough to survive hence the surge in government assistance. Dependency on the government is never a good thing and leads to as we have seen generational poverty and ignorance.  
 
I agree that exempting certain small business for a certain period from formation (say 5 yeas) from income and payroll taxes is needed. One thing that is hurting this economy is the dwindling new businesses being formed.  That jobs number presented each month is based upon a 1990s birth/death model that is far outdated and like the actual unemployment rate is bogus.
 
We need to live simpler and have more time for family, self and community.  Professionals because they are exempt from overtime are often expected to put in 12 hour days while other professionals are grossly underemployed.  There is something very wrong with this picture.  
 
As Jeff said if these highly paid CEOs were worth their huge pay why is the global economy hurting?
Katharine Otto Added Aug 8, 2017 - 1:06pm
George,
 
We agree more than you may know.  I certainly don't defend CEO salaries, but for the same reason, I'm not a fan of shareholder dividends, either.  Both bleed the companies of money that could be used to raise wages, for instance, or improve products.  That's a major reason I got out of the stock market.  
 
Unfortunately for me, Washington and Wall Street are married, for better or worse, and federal policy is driven by corporate interests, either directly or indirectly.  My most obvious example remains the ethanol mandate. Obamacare also ranks high, but here, there's a multiplicity of corporations heavily invested in the captive market the ACA pulls in.  This affects me directly way more than CEO salaries do.
 
George N Romey Added Aug 8, 2017 - 7:31pm
Katharine read the story of Stan O'Neil CEO of Merrill Lynch when it was failing and taken over, reluctantly, by Bank of America.  Its typical when CEOs are massively overpaid compared to the rest of the population.  Could you objectively run a company being paid nine figures?
Saint George Added Aug 11, 2017 - 5:46am
The shareholders don't seem to care what the CEO receives as compensation. Why should you?
Jeff Jackson Added Aug 11, 2017 - 7:17am
You might want to read a bit more Saint George. Seventy percent of Chipotle shareholders voted that $25 million was too much for the CEO, and yet they paid him anyway. Several of the REITs have had the same thing. Even the compensation analysts are advising to reduce executive compensation.
George N Romey Added Aug 11, 2017 - 1:36pm
Because we are quickly turning into a two part society and its straining not only public and private resources. 
Saint George Added Aug 13, 2017 - 9:48am
There is no book titled “Excess at the Top.” That may or may not have been the title of some newspaper article about Steven Clifford, but it isn’t the name of his book.
 
Steven Clifford's book is titled “The CEO Pay Machine: How It Trashes America and How to Stop It.
 
The link to the book on Amazon.com is here.
 
Clifford is probably just another disgruntled C-level executive who suffers from the envy of other, more successful executives than he. In fact, top executive compensation in the U.S since the 1980s directly correlates with MARKET CAPITALIZATION of the sector (the SECTOR, not the individual firm). Since business sectors have grown so much larger in the U.S. than in the U.K. or Japan, it is not only unsurprising that executive compensation would be larger, but it is predictable that it must be so. What’s keeping executive compensation from growing in Europe is the very fact that welfare state economic policies simply prevent businesses from growing the way they could otherwise.
 
See
 
http://www.nber.org/papers/w12365.pdf
 
"WHY HAS CEO PAY INCREASED SO MUCH?
Xavier Gabaix Augustin Landier
Working Paper 12365
National Bureau of Economic Research"
 
"ABSTRACT:
 
This paper develops a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO’s pay changes one for one with aggregate firm size, while changing much less with the size of his own firm. The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance. The sixfold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies during that period. We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences. The data broadly support the model. The size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries.”
 
* * *
 
You mentioned the Economic Policy Institute as a "non-profit think tank." EPI might be non-profit but it sure isn't non-biased. It's a well-known leftist organization founded by, among others, far leftist labor secretary Robert Reich. The EPI is beloved for cherry-picking its data, starting out with a conclusion congenial to the "progressive" left, looking for data that support it, and ignoring data that challenge it. Thanks for citing them as support for you position.
Jeff Jackson Added Aug 15, 2017 - 10:36pm
Yes, the book is entitled The CEO Pay Machine. As for compensation, when the market crashed in 2008, because of, um, overvalued stock, and overvalued stock means overvalued market capitalization, which in turn means overpaid CEOs. The crash of 2008 meant that a lot, and I mean a lot of market capitalization went right down the toilet (as just one example, Nanometrics (symbol NANO) went from $12.00 to less than $1.00, or $.78. We didn't see many pay adjustments because of the loss of market capitalization.
If the firms were more valuable, then it would stand to reason that the employees who built it were also worthy of an increase in their consideration, but that hasn't happened. The market capitalization one-sided position that only the CEOs deserved more money because of greater market capitalization is a shallow and indefensible position. No one with any sense believes that a CEO is solely responsible for the growth of a business. As The CEO Pay Machine notes, the chairman of CBS was paid $25 million just for maintaining the position of CBS, or, as some would call it, just doing his job. Twenty-five million dollar bonuses for doing one's job is a poor management decision, and reflects exactly the overcompensation that the book The CEO Pay Machine documents.
 
Clifford might "probably just another C-level executive who suffers envy of more successful executives than he" is not really an analysis, just another ad hominem. As The Wall Street Journal has pointed out so many times, every time the government sought to tax CEO salaries, the accountants and lawyers sat down and figured a way around paying the tax. It is terribly sad the lawyers and accountants didn't do the same for the workers, the people who made the corporations run. As one of the management professors stated some time ago, "if they can't get pay right, think of all the other things they can't get right."
The citation of Economic Policy Research Institute made one and only one point of which I stand by: “Wage stagnation for the vast majority was not created by abstract economic trends. Rather, wages were suppressed by policy choices made on behalf of those with the most income, wealth, and power.” Saint George, if you are under the impression that working people determined that their pay should remain stagnant for the last several decades and CEO pay should expand exponentially, then I challenge you to find any blue-collar worker who was in favor of CEOs pay expanding exponentially and working-class pay stagnating. The Economic Policy Research may cherry pick information, but their description of who has been making the decisions of compensation is right on 100% true.
Saint George Added Aug 19, 2017 - 2:48am
every time the government sought to tax CEO salaries, the accountants and lawyers sat down and figured a way around paying the tax. It is terribly sad the lawyers and accountants didn't do the same for the workers,
 
How will higher personal income taxes on CEO compensation help workers? You're confused.
 
Wage stagnation for the vast majority was not created by abstract economic trends
 
Prove that wages, in fact, have stagnated. They haven't. You are wrong and the EPI is wrong. The majority of workers enjoy high wages in the form of company benefits: paid sick days, paid days off, paid vacation, reduced group healthcare insurance, etc. You want more money in your paycheck . . . that is, a BIGGER NUMBER on your semi-monthly paycheck? Do two things: Vote for fewer tax hikes and take fewer company benefits. Then your paycheck will have a bigger number on it.
 
The Economic Policy Research may cherry pick information
 
In which case, they aren't taking into account facts that challenge their conclusions. You're OK with lies as long as they come from those you agree with? Interesting.
 
I posted a link to substantive research published by the National Bureau of Economic Research regarding CEO pay and market capitalization. Refute that first.
 
Saint George Added Aug 19, 2017 - 3:43pm
On real wages being proportional to productivity, and productivity being a function of more technology per worker:
 
"In 1930, British economist John Maynard Keynes, reflecting on the progress of technology, predicted that his generation’s grandchildren would have a 15-hour workweek. Assuming that a generation is 30 years, we should have had that 15-hour workweek in 1990.  Did we? Not even close. Twenty-seven years after 1990, we still don’t. But why don’t we? Where did Keynes go wrong?
 
It wasn’t in his assumption about increasing productivity. Rather, Keynes was probably assuming that people would work enough to get the same standard of living they had in 1930. If that was his assumption, then he was quite accurate in predicting our productivity per hour. In the four score and seven years since Keynes made his prediction, our productivity has doubled and doubled again. We could easily have what we had then if we worked 15-hour weeks now.
 
MIT labor economist David Autor estimated that an average U.S. worker in 2015 could achieve his 1915 counterpart’s real income by “working about 17 weeks per year.” Seventeen weeks per year at 40 work hours per week is 680 hours per year. Spread over a 50-week work year, that’s 13.6 hours per week. And that overstates the workweek required for a 1930 standard of living for two reasons. First, the quality of almost everything we buy that is not produced by government has increased. Second, we can buy things that were simply unavailable then. Cell phones, anyone?
 
Why don’t we work 14-hour weeks? The answer, briefly, is that we want more. We are acquisitive people.  Consider cars. Those few families that had cars in Keynes’s day usually had only one. Even 30 years later, when I was growing up, my father had one old Ford. And we were not poor: Dad’s income was probably just below the median income in Canada. Now, many families have two or three cars. We could do without televisions and smart phones, but we don’t want to. We could settle for being like most Brits or Americans in Keynes’s time, never traveling more than 200 miles from home. But we’ve heard about places called Las Vegas, Disneyland, and Florida—and, we want to go there. Also, antibiotics and other life-saving medicines come in awfully handy—but they cost money to get. The reality is that we want more and we will always want more."
 
Real wages, as measured by the choices workers have for consumption, have vastly increased since the 1930s.
 
http://www.hoover.org/research/will-robots-steal-human-jobs
David R. Henderson