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Have You Bought Into the Pay Double Standard?

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Literature is rife with quotes and vignettes illustrating the gulf between the rich and everyone else. And those quips generally take class differences as a given.

Far more interesting and corrosive are the anecdotes that seek to get the public to accept status differences when the basis for them is shaky indeed.

One of my favorite examples comes in Animal Farm, when the original seventh commandment, “All animals are equal” becomes “All animals are equal, but some are more equal than others.” Because hardly any of the animals (except the pigs, the leadership group) can read, most do not recognize that they have been had.

Consider the way in which views that are contrary to most wage earners’ interests have been internalized (or at least are promulgated in the media). One meme I have noticed surfacing in the debate over the automaker bailout is that UAW employees are paid more than average workers.

Now in and of itself, that statement is meaningless. You need to have an idea of worker productivity to see whether that it out of whack (and for some odd reason, the bloated and highly paid management cohort almost never gets mentioned in these discussions, nor do the massive state level subsidies to the foreign transplants). Perhaps I missed it, but I do not recall seeing any longitudinal work on labor costs (that sort of analysis would help bring some badly needed facts to the table).

But why is framing the discussion around averages alone dangerous? Let’s say we collectively want to bring car worker pay down to some sort of average. That has the effect of lowering the average. You will have groups that were formerly at the average that are now above it. And if you accept the implicit logic “above average pay is bad” (fill in the blank as to why), you have a race to the bottom due to pressure on the relatively better paid to take less which puts pressure on aggregate pay.

I imagine now that some of you are snorting that the automakers are an isolated example and I am generalizing beyond a single (albeit very large example). Well, this sort of logic is at work, with a vengeance, but in reverse among CEOs. And it certainly has proven remarkably effective.

While most commentators on CEO pay correctly focus on the role of options-based rewards in goosing pay from generous to stratospheric, the role of compensation consultants seldom gets the attention it merits.

One practice that I have seen get perilous little mention is where the pay targets are set. Based on their belief of what constitutes good modern practice (influenced in no small degree by the pay consultants) most boards set general target ranges for how they would like the CEO to be paid relative to peers. The comp consultant then helps define and survey the peer group’s pay ranges, setting a benchmark for how the CEO in question is to be paid.

That all sounds fine, right? Well, except just as all the children at Lake Woebegone are above average, no board likes setting a target below peer group norms. I have heard of numerous examples of targets being set somewhere in the top half (66th percentile, top quarter, top 20%), hardly any at the mean, and none I know of below average (although GE’s Jeff Immelt set his pay at a remarkably modest level, saying it was bad for morale and inappropriate for the CEO to be paid vastly more than other C-level executives). If readers know of any examples of companies (other than those with substantially owned by insiders) where the target for CEO pay is below the median of comparable companies, please let me know.

So with this mechanism in place, any CEO who has fallen below median pay who is targeted to be in a higher group will have his pay ratcheted up, independent of performance, merely to keep up with his peers, This increase raises the average and creates new laggards. The comp consultants have institutionalized a leapfrogging process that keeps them busy surveying competitor reward levels and keeps top-level pay rising relentlessly.

And there seems to be a creep in cultural values that accepts, nay endorses, the opposite process at work further down the food chain.

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56 comments

  1. CrocodileChuck

    re: exec pay: The only way I can see to arrest it is by way of Internet voting of shareholders, whipped up by some grass-roots activism, eg Act Up! in Australia.

    Strange that, with all the investment in e-commerce, supply chain automation, crm, etc over the last decade no company has embraced this. I wonder why?

    CrocodileChuck

  2. john

    Yves,

    Very interesting.

    On the one hand we have the race to the bottom at the lower end of the food chain, and on the other the race to the top at the top end of the food chain.

    The mechanism for the race to the bottom being the demands of lowering the pay of above average wage earners in a land where everybody is below average and down with the Smiths, contrasted against a mechanism of levering an increase in pay at the top of the food chain to keep up with the Jones.

    Carl Icahn, please visit his website on shareholder activism, as a checks and balance means to keep company management from straying egregiously as they are so wont to do. When we come out of the backside of this mess, shareholder activism that holds managements accountable is absolutely a path to follow or shall we say a means of redirecting management interests

  3. vlade

    Re UAW – isn’t it that the workers at Toyota and the like earn less (for, I’d presume, about the same productivity, at least given results)?

    In general, I consider average as the great means to mislead – median is much more meaningful for the comparison.

    Of course, you’re right on with the CEO compensation. There is a number of problems there:
    - we gave the monkeys keys to the banana plantation and have no (easy) way of taking it back (I still believe that shareholders not being able to vote on the compensation is a reduction of their ownership rights).
    - the pay is disproportional to any real positive impact most people could have.
    - not the best, but often the best connected get the job. Moreover, even when we look at the best,we often see the luckiest instead, as the lucky ones taking pot shots end up in the last 1% tail of the distribution – not the best.
    - at some point, the pay is reduced to just keeping the score, and becomes sort of arms-race (as you described).

    Personally, I think the problem is more with the publicly owned companies than with private where the management is the owner. If you’re the owner, it’s up to you how much you scr*w your own company. In public one, you’re scr*wing someone else.

    The more I think about it, the more I’m starting to believe that publicly trading companies wasn’t really that great an invention, due to the disconnect of ownership and management/responsibility.

  4. Richard Kline

    Just as a point of info, the ‘Northern autoworker’ vs. ‘other [read Southern] autoworker’ talking point, not to dignify it as an argument, is a total crock. Those non-Big Three plants built in the south were built there for a reason: prevailing _local_ wage rates were, then and now, historically lower than in areas where existing autoplants were built. Those areas also had much lower local benefit rates and expectations. Because those plants were explicitly non-union, and the UAW had no impact in organizing there, wages and benefits conformed to local rates rather than national rates. The appropriate comparison would be to compare northern autoworkers rates to prevailing local rates, and the same for the south—but not directly to each other. There are many, many other issues of this kind in comparing wages; these are not simple arguments.

    What we get from those primarily Republican, Southern Congressfolk repeating hard right anti-union memes to an enabling media is simply, as it has been for two generations, a grab for job share, an attempt to syphon off a larger share of national production from existing plants by undercutting labor costs. Totally dishonest, but that should be obvious given the side of the aisle this is coming from.

    And those pay consultants for the CEO class: when was the last time you heard them recommending a _decrease_ in wage levels for the sector and individuals they advise? The next time will be the first time. Sooooo, the game is rigged, in other words. The only variance in recommendations is between up and way up.

  5. Jim

    All the apologists in the world cannot justify GM, Ford, and Chrysler paying so much more in labor, while taking so much longer, to produce cars that are less reliable and less attractive to consumers than those produced by the foreign automakers. You can blame management, and criticize their bloated pay packages. I’ll agree with you. But you cannot excuse the UAW’s constant reaching for more. The union, in cooperation with management, is responsible for Detroit’s lack of competitiveness. There are no other actors that can be blamed.

  6. bg

    It is all well and nice to talk of pay. But the primary problem with both CEO’s and UAW workers had very little to do with pay.

  7. Anonymous

    I vaguely remember reading that the UK had a period after WW2 into the fifties where executive compensation reached a level that was considered grotesque by the general population. the gov’ts response was to raise the top tax brackets with a rate of 85% for the uppermost bracket. That was England and that was then. This is the USA and now. Plumber Joe in Ohio comes to mind he would probably object to 85% on incomes over 10 million.

  8. ruetheday

    What we have in the US is the seemingly unshakable belief that one’s earnings represent fair compensation for one’s contribution. It’s the layman’s equivalent of marginal productivity theory. Oddly enough, this belief cuts across the political spectrum. The fundamental error of this belief is exposed when we look at where each group on the political sprectrum sees the _exceptions_ to the rule. The left sees the “greedy CEOs and their _excessive_ pay” as the exception. The right sees the “greedy union workers and their _excessive_ pay” as the exception. The unbiased observer should quickly see what these two groups have in common – bargaining power. What needs to be discarded is the belief that market allocations of earning always represent fair estimations of contribution. They don’t. They represent differences in bargaining power (and differences in available information, the institutional enforcement structure, etc.)

  9. kjmclark

    Jim apparently has utterly missed the point of unions and their relationship to management. The purpose of a union is to attempt to push the envelope for workers. Jim is blaming the union for doing a good job. The role of management in this relationship is to push back. It’s inane to expect the union to be equivalently incompetent in negotiations. If the company got a bad deal in negotiations, it’s because management didn’t do its job.

    We don’t have to go to Britain to find an example of tax rates that could help fix the broken executive pay system. In the US, as recently as the 70s, the top income tax bracket was 70%. I’d say we should put a 90% tax on total compensation greater than that of the US President, and 70% from there down to $200,000. Then make compensation greater than $200,000 ineligible for corporate tax deduction, and limit board compensation to the level of a US Senator. We could clear up this over compensation problem fairly quickly.

  10. DownSouth

    kjmclark,

    Well said.

    I would only add that there also need to be inheritance taxes of 90% or more on inheritances in excess of $250,000, and capital gains need to be taxed at the same rate as salary and wages.

    If it is not nipped in the bud soon, the rentier mentality will be the destruction of the nation.

  11. Jerry

    I have no objection to the UAW and management negotiating whatever contracts they can agree to. My objection comes in when I am expected, as a taxpayer, to subsidize above-average salaries for the UAW.

    Similarly for CEO compensation.

  12. john bougearel

    kjm,

    never thought I’d see the day when and under what circumstances I’d like to see a tax hike, but yes, a 70% or greater tax on incomes above that of the president ought to do nicely.

    I would recommend that to be on a graduated scale however. 70% of 250k, is 75k,

  13. Anonymous

    Am I mistaken in believing that the main argument against the UAW labor figures (and hence then ‘bloated’ hourly wage numbers)arises from the benefit costs for past and present workers. Just as the country as a whole has mismanaged funding for past and present benefits obligations, so too have the big 3. As these mistakes have taken place on the watch of the demographic who is to be receiving the benefits, shouldn’t they be the ones to bear to majority of the cost (reductions) of the shortcomings, rather than push it upon the next generation which has no culpability?

  14. Anonymous

    john b…i make over just over 250k a year…if you are going to raise my taxes to the point where i get only 75k of that, what is to prevent me from taking a much less stressful, less time consuming job which pays, say 85k, allowing me to have the same 75k after tax? very little…if you want to push a significant number of workers into the lower middle class of gross income, go ahead with your plan…punitive income taxes never work…

  15. Jim

    kjmclark and I disagree on the purpose of unions. I don’t believe that ‘The purpose of a union is to attempt to push the envelope for workers’, when that envelope takes workers out of the realm of prevailing wages at the expense of the consumer, i.e…the rest of us. In Japan, individual plants are unionized, and workers enjoy protections, but management and unions seem to interact more smoothly to promote the common good. The United States has followed a more adversarial model, with the result that heavily unionized industries, such as airlines, autos, and steel, have become sick. Edwards Deming, who taught the Japanese statistical quality control, thought that money was a poor incentive for quality work at any level. Instead, workers and management have to believe they are contributing to the common enterprise.

    If we were to adopt kjmclark’s and DownSouth’s tax policies, very little work would get done. I’ve been waiting for years for a return to subsistance farming; now maybe I’ll have my chance.

  16. a

    “The union, in cooperation with management, is responsible for Detroit’s lack of competitiveness. There are no other actors that can be blamed.”

    Sure there are. Back in the 1950s car makers started to put finance whizzes rather than engineers as head of the company. That was the beginning of the end; it always is and always will be.

  17. Guttersnipe

    Once upon a time executive compensation was based on corporate department, division, or company performance. Nowadays execs have developed an entitlement mentality regardless of profit levels (i.e. the financial and auto industries to cite examples). Compensation reductions rarely occur anymore even in the face of reduced or poor performance. Thusly, management continues to be well rewarded despite obvious shortcomings. The true test of executive competence comes not in good times but in difficult times.

  18. Anonymous

    Today’s NYTs stresses that American workers are unwilling to work in 2008.

    Dec 24, 2008

    Are Employers Unwilling to Hire, or Are Some Workers Unwilling to Work?

    http://tinyurl.com/7ueng6

    For those of you who don’t know, the NYTs is pushing for expanded immigration to wipe out all those lazy Americans. The NYTs is essentially an extension of the Ivy league academic establishment. Grow the population base fast, and keep
    the number of students at Yale constant, and you’ve increased the value of a Yale degree.

    Yes it is a conspiracy!

  19. curious-er

    On the question of appropriate executive compensation, instead of complaining about the excesses, it might help to ask what actually limits it to the present levels we see. Is it because the CEO’s are modest folks who don’t believe they deserve more? I doubt it. I suspect what stops them from doubling, or tripling their own compensations every year is the outrage they fear it might create in the media and among the shareholders. So from experience they have found the level that might trigger an outcry, and they play the game of leapfrogging each other by just the right amount every year without waking up the masses. If we’re going to fix the problem, as shareholders we have to become more sensitive to this issue and raise hell every time some Thain tries to get away with daylight robbery. Regulations will help but won’t solve the problem. There is nothing more powerful than an informed public.

  20. kjmclark

    Jim again is blaming unions for management not doing their jobs. So let me spell it out. Management should have prepared for a strike by overproducing, then letting the union strike, and waiting them out until an acceptable bargain had been struck. It is not the responsibility of the union to know the financial situation of the company or plan for the company’s long-term financial health; management is supposed to be doing that.

    Jim and an anonymous poster seem to think that the only people working are people making more than $200,000 per year. The Bureau of Labor Statistics reports today that there were 144 million people employed in the US in November. Wikipedia notes that in 2006, there were 116,000 households in the US, and 1.93% of households had income greater than $250,000. That means somewhere around 141 million Americans go to work every day and earn less than $200,000 per year.

    Finally, I would propose a top *bracket* of 90% for compensation above that of the President, 70% bracket for earnings from $200,000 to that of the President, and lower brackets below that as we have now. I didn’t make that clear; my mistake. I can’t see any justification for anyone in this country – or the world for that matter – to be compensated better than the world’s most important executive.

  21. Anonymous

    I am well aware of my fortunate position to be in the top 2 percent of income earners. I intended to point out how dramatically higher tax rates will preclude many from sacrificing day to day lifestyles in order to get ahead for the future. I am not an executive. I produce consistant results for my company and as such get proportionately rewarded. But I think the 12-15 hour days will go by the boards once someone else decides how to spend 70 percent of my earnings. Is something wrong with the system? Yes. But be wary how and where you draw your arbitrary lines. Outside of the very few who are the really gifted ones who love what they do, there are many who will choose the easier road. As a side note, how anyone can use the Presidents ‘salary’ as a benchmark for taxation is beyond me. Since he (or she) needs exactly zero dollars of that salary to live, is the effective salary infinite? Is it 30 million usd, when you add up the mile long list of perks? C’mon….

  22. Anonymous

    IMO, the progressive income tax structure is the only way to reign in the grotesque CEO, financial services, and health care pay. Each group is part of a monopoly structure, able to demand more for less.

    The idiot claim about the quality of foreign cars versus the domestic cars is being repeated without challenge, and without any basis in reality. Like all right to work libertarians, Jim makes his claims with a hint of truth but no appreciation of the facts.

    IMO, excess compensation is the single greatest, private sector cause of the financial services industry meltdown. What other perverse incentive could have caused an entire industry to destroy their very own golden goose but short term compensation rewards. The quick kill and a lifetime of security. There is no other explanation that comes close.

    I laugh at Mr. $250k/yr taking an $85K/yr job as a result of a reasonable progressive tax structure. So what. Someone else, probably more deserving, will gladly take over the perks and autonomy offerred the higher level job. The idea that higher pay means more skill doesn’t deserve the status it has attained over the last 30 years. Tell a lie often enough …..

  23. Anonymous

    The focus is now on the little guy to see where the blame can be laid. Even bearish commentators like Denninger are now blaming the guys on the street for wanting to make a buck.

  24. Tortoise

    ruetheday is, of course, absolutely right. As a bargaining consultant used to say, “You do not get what you deserve, you get what you bargained for.” That applies to CEO, physician, or janitor salaries. The difference is that some groups are most successful than others.

    My favored union is the all powerful AMA. While we are expected to buy everything from anywhere and get workers from you name it, the AMA will not let physicians licensed in other countries practice in the USA. Where are the free markets when you really need them? Why not allow, a million physicians, dentists and surgeons licensed in other countries come and set shop in the USA? Consumers may choose them, being aware that they are licensed in the UK, Germany, Jamaica, or whatever. That would be a tremendous relief for the economy.

  25. Anonymous

    As usual, a response w/o thought. I never said I had special skills, almost anyone can do my job. No joke. I am nothing special. Put myself through a state school. BUT, upon graduating, I have worked twice as many hours as my friends who chose other, less financially rewarding, careers. This is not a judgement. Just fact. They chose lifestyle over sacrifice. ABSOLUTELY nothing wrong with that. But, if they wouldnt do it before, why would they do it for 1/3 of the pay? As for perks, you probably watch too much tv. The pay was the perk. Hard to believe, I know.
    Changes are welcome, but, as usual, there will be unintended consequences. The people who sacrificed, worked hard, produced actual things and results – not derivative mortgage bs – will be feel the pain, just an ever larger portion of it, and sooner or later, they say no mas…

  26. Jesse

    A significant part of the problem in the US is that real median wages have been stagnant for a long time. A second part of the problem is that the capital allocation and financial system are hopelessly compromised, inefficient, and essentially broken.

    What I find particularly discouraging is the notion is that if we just provide additional funding to systems that are so broken that they verge on Ponzi schemes that this will somehow ‘fix them.’

    Until we institute real reforms, reshape the national priorities to favor savings and productive labor over financial manipulation, and allow the median wage to increase there will be no recovery, and the crisis will become steadily worse.

    In that sense we are in the same ‘deep capture’ problem that Japan Inc. faced, with MITI and the keiretsus at the control. We cannot change course because the ship of state has been hijacked.

  27. Anonymous

    While it seems reasonable that higher taxes be levied from higher earners, there is the question of how those taxes are collected. In this day and age, it is not clear that such an effort would meet with success.

    First, and foremost, the patriotism and Christianity of upper crust cannot be relied upon to the same extent as in the past (50 yrs ago) Even in the 1970s, a good chunk of the upper-earning demographic lived through evangelical revival and war, both contributing to a sense of duty to society as a whole. Sir Templeton, for instance, is a good representative of the spirit of this era. At best, it is unclear whether America’s rich can live up to this standard.

    Worse, today there are more options available to the wealthy that are reticent to lend a hand. Changes in technologies, whether the tax code, criminal laws, regulatory bodies, and/or communications, have made it immeasurably easier to hide taxable income in ways that are legal and illegal. So the temptations to skirt pious taxpaying are considerably greater.

    In any case, the Cold War has so effectively destroyed any sort of publicly-expressed leftish sentiment that such a change to the tax code is unlikely to be debated, let alone enacted.

    But What do I know?
    Merry Xmas.

    ignorantmike

  28. asphaltjesus

    Jim’s comments are political doublespeak. One at a time they are:

    produce cars that are less reliable
    **Domestic auto production has long ago made up the gap between their quality and so-called foreign manufacturers. This is left over animosity from the bad-old 70′s.

    and less attractive to consumers
    Union workers are to blame for this? Assembly workers are approving product designs now? No. This is explicitely senior management’s responsibility and there is no accountability, no foresight, nothing in regards to keeping domestic auto products relevant.

    But you cannot excuse the UAW’s constant reaching for more.
    **But, executives “reach for more” and have gotten plenty more. Yet they are not criticized for it. THAT is a good indicator of the generalized hostility towards manufacturing pretty much anything in this country.

    The union, in cooperation with management, is responsible for Detroit’s lack of competitiveness.
    *The Union decided to stick with truck and SUV design and production no matter what eh? I didn’t know they ran the domestic auto manufacturers. What is executive management doing at these companies then?

    There are no other actors that can be blamed.
    *Yes, there are. The general political climate of outright hatred manufacturing as a viable economic engine in the U.S. Many Western countries have viable manufacturing operations regardless of their high wages and yet for some reason it’s an impossibility in the U.S.

    This kind of black-or-white definitive doublespeak is lazy thinking.

  29. Jim

    I’m sorry if I implied that it was the unions alone that sunk Detroit. By saying ‘in cooperation with’, I meant both management and labor are guilty of hubris. Management bears a lot, perhaps greater, responsibility. Perverse incentives have damaged management quality across many industries, most recently the banks. We need to get rid of stock option compensation, since stocks can be manipulated to achieve short term goals.

    I am sympathetic to resource dependence theorists, who believe that the great, all seeing executive is a myth, and that anyone would have made the same decisions on most issues, most of the time.

    As for the quality of the cars, don’t listen to me, read Consumer Reports. American cars have improved, but they consistently trail Japanese models in reliability, year after year.

  30. Anonymous

    Yves,

    All the apologists in the world cannot justify GM, Ford, and Chrysler paying so much more to thier executives, while taking so much longer, to produce cars that are less reliable and less attractive to consumers than those produced by the foreign automakers. You can blame the UAW, and criticize their bloated pay packages. I’ll agree with you. But you cannot excuse the the leaders of GM, Ford, and Chrysler of a constant reaching for more. The union, in cooperation with management, is responsible for Detroit’s lack of competitiveness. There are no other actors that can be blamed.

    Couldn’t resist.

    Have any of the commentators worked in the Auto industry (as in, worked in a factory)? Or even worked in any Union environment (again, on the plant floor)? I thought not.

    As related to labor at the Big 3,the roots of the labor-management problem are: 1) Work Rules, and 2) Intended advesarial relationship. Not pay. Not benefits.

    And as far as the cult of “CEO as Dear Leader” (and it is a cult), in 95% of the cases in large companies CEO’s are excellent and lucky bureaucrats. Nothing more. If you don’t believe that, then how many major companies’ equity values suffer when the Dear Leader retires (or is even rumored to be leaving)? I can think of two:

    Apple (Steve Jobs)
    Berkshire Hathaway (Warren Buffett).

    One final comment to “curious-er” on why CEO’s don’t double their pay (you think it’s due to potential public outrage). Well, they do, but they do it through stock options, special retirement plans, etc. Remember Jack Welsh’s original retirement package? It’s there, but hidden. Executive compensation at today’s levels is obscene and a rape of the shareholders.

  31. tompain

    When we measure the income of the president for the purposes of this tax-rate exercise, let’s be sure to impute some income for:

    free room and board at the white house;
    free unlimited travel on private jumbo jet;
    various other perks

    We may also want to keep in mind what 8 yrs as president does to the present-value of one’s income stream after being president.

    We also might want to consider that there are reasons people want to be president aside from that fat $250k annual paycheck.

    On a side note, do we need to adjust at all for the fact that $250k doesn’t even buy you a studio apartment in Manhattan, but it buys you a lovely 4 br house in other parts of the country?

  32. Jim

    Anonymous, I think you have a bright future writing comedy. I can both chuckle and agree with your last post.

    Jack Welsh is America’s most overrated executive. I remember standing with a group a students listening to him pontificate about how GE only hires the best and brightest, and therefore wouldn’t be hiring any of us. I don’t understand how someone who would say such inanities can claim to be a leader.

  33. bg

    “Management should have prepared for a strike by overproducing”

    Madness.

    In our Just-in-time inventory world, margins are razor thin. This is suicide against a competitor without labor unions.

    If I owned a company under the regime you propose I would consider it my lifes work to break the unions.

  34. Anonymous

    Jim

    Your thoughts on Deming are dead wrong. He sought to duplicate the Japanese manufacturing style. He analyzed the companies using what he had, statistical methods. The Japanese, and specifically toyota, used this as a tool. It is not the be all and end all. It is part of the process, and one which looks backward.

    This is exactly what Detroit MANAGEMENT has been doing for years. “Hey, Japan uses statistics in manufacturing. We should to. As a matter of fact we are going to use twice as many as Japan. That should make our cars twice as good.

    I have done a lot of research on Lean Manufacturing and the Toyota methods. The problem with Detroit is that they think all of these ‘tools’ are an end in themselves. They are not. Detroit MANAGEMENT thinks that they can just drop ‘supply chain management’ into its manufacturing process, and they will be competitive again. Manufacturing processes are not like a car, you can’t just replace parts and expect to get any benefit. A fundamental rethinking of processes, business, and manufacturing, must be done by MANAGEMENT.

    I spoke with several Detroit companies, from the car makers themselves to the construction companies building the plants. They all said that they were “LEAN”. When you asked how, they would just regurgitate the latest buzz words and their implementation schedules. Just drop it in, like a power steering pump.

    On a side note, one of the GM execs at one of these meetings started clipping his fingernails, in the middle of a presentation by a manufacturer who was very successful in implementing toyota like manufacturing methods.

    Real class.

    Lean method and manufacturing do nothing to help demand for automobiles, as Toyota is finding now.

    As for the Gov’t subsidizing the unions, you really must be crazy. Look down south. They are subsidizing anything that is not union, and will say it out loud.

  35. Anonymous

    First, a comment on tax brackets:

    A 70% tax bracket for incomes above $250,000 does not mean a tax on all of the income earned by someone making $250,000 or more. It means that 70% of the income declared after deductions that exceeds $250,000 will be taxed at 70%. A simple exercise is illustrative. Assuming I didn’t take any deductions and earned $350,000/year, and that all income below $250,000 was taxed at 10%, and all above was taxed at 70% I would pay $25,000 for taxes on the first $250,000, and $70,000 for the next $100,000. My $350,000 earnings would be brought to $255,00 from $350,000. This would be an effective overall rate of taxation of 27.14%.

    The reality on taxation, however, is far from this. The effective tax rates of our top 1% of income earners is comparable to our poorest and second poorest quintiles of the population, lower than most of the middle class. This has come about due to numerous loopholes, a tax evasion industry of monumental proportions, and the lowering of the upper income of tax brackets that make evasion all the much easier. We don’t have a competent tax system. We have one that takes from the middle class to give to the poor and sustain the rich as an independent entity.

    Yves, as to your question, I know that Costco (COST) keeps executive pay in – relatively – the same ballpark as their employees. They see very good compensation in the form of company stock, but nobody’s salary plus bonuses breaches six figures. This seems relatively unheard of for such a massively successful new business. Further, it doesn’t pay any of its employees less than $11 an hour.

  36. Anonymous

    The problem is that pay scales, pay grades etc. as used as a means of “pay equalization” where there are no palpable reasons to do this other than to tidy up a spreadsheet. The manufacturing company I work for has units (factories) throughout the United States and has had several different names on the masthead in recent years.

    Pay grades were initiated for bid managerial positions several years ago. There is some latitude to work with within, but ultimately this assumes that a manager or superintendent at Plant A is as worthy as the same titleholder at Plant B. Pay equalization is also attempted at the rank-and-file level. Never mind the economic and tax rate difference between states, lead process operators at Plant A may run different machinery and have completely different responsibilities that their peers do at Plant B.

    Corporations take the lazy way of trying to level pay structures across their divisions, without looking at pay for merit or the real differences between jobs with the same titles at differing operating units. But its true that the higher-paying factories are always viewed as the “problem” without a real exploration into why their pay scale evolved to where it is now.

    Sad to say that when this data appears on a spreadsheet all the real-world operating differences evaporate, and corporate heads would rather lower or freeze higher wages than increase lower pay scales across the platform (even if an objective finding would say this action is indeed proper, with the job responsibilities that are performed).

  37. CJS

    W/r/t CEO pay, anonymous hit the nail on the head: it’s the shareholders who are getting raped. The agency problem is severe, and boards are generally captured because the CEO has such a say in nominations. Just like how wasteful government spending doesn’t cost an individual taxpayer enough to make him care in a particular instance, wasteful executive comp doesn’t affect the average small shareholder enough to make him care (particularly if one only focuses on the publicly announced compensation levels, and ignores the insurance policies and other benefits). Public companies need big shareholders who are not also the senior management holding board seats, like in private companies.

    As for Yves original post, if you’re going to bring up tax breaks for the Southern plants, it seems we should look into all the tax breaks/incentives that the Big 3 have received.

    Additionally, the reason management salaries aren’t often brought up is the context of the discussion: how to cut massive costs at the automakers to make them viable businesses going forward. Labor costs and benefits, for both current and former workers, simply make up huge costs. The shareholders will likely be wiped out; the debt holders will be forced to take a substantial hair cut. Labor will need to take a cut too. So long as we are committed to the seemingly foolish course of responding to a global overproduction problem in the automobile industry by propping up each of our Big-3 domestic auto companies, the first goal should be to make them viable (if possible).

  38. Gloppie

    SOoo…let's see if I get this straight;

    it would be ok for "the Markets" to constantly make >more< money, but it would not be for the workers to have increasing wages ?

  39. kate

    Tompain:

    The President of the United States earns $400,000 per year. The position received a substantial pay upgrade recently. That is the figure people are talking about as a reasonable benchmark for executive compensation.

  40. Evelyn Sinclair

    I’ve been in small businesses as an entrepreneur all my adult life. In good years, we were able to make a profit on the hard work of ourselves as owners, and on that of our employees. In lean years, we cut back our own salaries before we considered trying to ask our employees to sacrifice.

    I have never been able to fathom the wastefulness of large companies with multilalyered management. I have a friend who worked in large companies who assured me that the Dilbert cartoons were not that far off from “corporate culture” realities.

    Lean?

    I went on 1/2 pay when my company got in trouble a few years ago. Pay raises? I took cuts. Back when I had a lot of money I paid off my mortgage, but I’m now trying not to outlast my savings (yes savings!) so I’m living on about $20,000 a year, and avidly devouring information that might help me understand whether my little nest egg will become worth a lot less, threatening my survival, or if deflation will hold sway — and if the recession does keep its grip, whether it will be worth continuing to invest in my NEW company or to pull the plug before the next round of investment is required.

    Whew!

    I’m doing everything backwards.

    Where’s MY bailout?

  41. Evelyn Sinclair

    Let us not forget that this is all taking place in a GLOBALIZED economy. So the worker in China who gets paid (I almost said “earns!”) about one fortieth of the average wage in the US will increasingly be the standard.

    Wages in the US can try to race to THAT bottom, and we will see a USA that looks like the WTO went through it. Globalization for CEOs is more likely to look like increases offshoring of everything from profits (in places where they will not have to pay any US taxes on their obscene profits) to whole factories, such as the newly expanding GM plant in Mexico. Yes, hat in hand for a bailout, they’re expanding in Mexico!

    People are finally putting 2 + 2 together and coming up with the realization that capitalism minus rules and regulations = socialized costs and privatized profits.

    Merry Xmas, Mr. scrooge from Tiny Tim….

  42. Glen

    You see Gloppie, workers can’t have wages rises as they are inflationary and to counter this effect, must be met with increased productivity. As increasing productivity has diminishing returns, wages are therefore inflationary and result in increased interest rates which are just no good for business, sorry, the workers as your real wages decline. As for us executives, our massive increases are not inflationary and are inverse to our ability to run a company; the more we get paid, the worse we perform. You see, it takes an awful lot of talent to do that’s just not available in the common ranks and has to come from someone who spent many years at the roulette, sorry, board tables. So there you have it, we create wealth so deserve our pay; you lot just spend it recklessly so should not have any more than enough to get you buy as you’ll only blow it.

  43. Anonymous

    Yves,

    Happy holidays to you.

    I have not seen any discussion of the complicity of large corporations management to conspire to manipulate governments to support their products like the auto/oil combination that has given us the transportation infrastructure we have, not the one we might want or will get with the new monies.

    It costs a lot of money to pay monkies to pervert society for the benefit of the oligarchs.

    Some call it fascism. YMMV

  44. Anonymous

    There’s no imagination in any of the comments I read here.

    You people either:

    1. Complain and try to use past remedies to create a new future under the false pretense the present and the past are the same.

    or

    2. Complain and say we should duck into a bomb shelter and eat freeze dried chicken till it’s all over.

    What we need is to do is DECOUPLE AMERICA.

    1. Rearm Japan as a counter to the
    Chinese. China will then have to divert its resources to fighting off Japan. America will be able to divert resources back to USA.

    2. Rearm Germany, as this will serve as a counter to the Russians.
    USA pulls out of Europe diverting resources back home.

    3. When Japan and China fight, domestic industries in US will flourish and we’ll be able to sell arms to the Japanese. Same deal with the Russians.

    4. When Germany and Russia fight we’ll be able to arm the Germans.

    That’s a recipe for a prosperous America. Perhaps you tepid economists should wake up and smell the coffee.

    As if borrowing more from the Chinese will solve all our problems. None of you seem to realize the country is bankrupt.

  45. jkiss

    the problem with both union and management pay and benefits is that they are not competitive with the transplants; loaning them money will not change this, they will just come back for more until overall wages and benefits, or total labor inputs per car produced, are more or less in line… it simply does not matter how much subsidy the transplants received to build in the south, they are there, and they’re not going away.

    Proof of this assertion is that the big three are continuing to lose market share; true, toyota sales were down 35%, but gm sales were down 47%.

    In fact, more needs to be said of the fact that the big three collectively no longer produce a majority of the cars in the US, they are down to 48% with no end in sight. Why not do what we need to do to save the real big three – toyota, honda and nissan. And why not rely on them to transition to tanks if such a conversion is ever needed – they will convert faster, and the tanks will perform better, with lower fuel consumption, and more reliably.

  46. spare some change?

    Many in the working class feel outraged by the apparent greed of the UAW rank and file. But from the point of view of the UAW workers, it’s very reasonable to fight hard for UAW concessions because it’s scary as hell out there.

    I think they wouldn’t be clinging to their jobs so much if there was some sort of basic social safety net, like basic health care.

    The lack of a social safety net adds considerable friction to the job market because people aren’t willing to leave a job for one which they might be a better fit, due to the fears over healthcare and pensions.

    Bring everyone up, don’t drag the UAW down.

    Unfortunately some retard like Krugman is going to get a whiff of this post and propose massive spending programs to bring the masses up. That’s not really what I mean at all.

    It should be possible for individuals to largely opt out of the financial system, the fact that they can’t makes everything more expensive for everyone. It necessitates a huge central government (and all the corruption and planning inefficiencies that follow).

    That’s a concept that would make Krugman’s head explode.

  47. Richard

    The Indian tribes that populated the Pacific Northwest coastal areas had a very interesting approach to property ownership. Highest status was granted to the individual who threw the biggest party at which he gave away all his worldly possessions.

    Since there is no sign that our Masters of the Universe will adopt this ethic soon, I suggest we should institutionalize it into a legal requirement. The richest 100 individuals in each state should be required to give away 50 %of their total net worth each January 1 or face the alternative of being put up against a wall and shot. That, combined with a 100% estate tax with equal distribution of the proceeds to every young person when they reach the age of 24 should go along way toward creating economic democracy to replace the “representative” democracy we now have!

  48. spare some change?

    Richard,

    Unfortunately that kind of wealth redistribution doesn’t work out too well, because rich (and/or successful) people will avoid a society that comes up with rules like that. Just look what happened in Zimbabwe after the land redistribution.

    There have to be rules, there has to be moral justification, you can’t just invent new rules that give you the right to do whatever you want.

    I would argue that if an enterprise gets government monies because it has been run into the ground, the government has the right to claw back bonuses on the grounds that the bonuses were embezzlement, exploiting accounting tricks to make the company look profitable when it wasn’t. That’s something everyone can get behind (except the embezzlers) and it has a moral basis to it.

    Amoral capitalism is what got us here in the first place. Don’t make it worse.

  49. Richard Kline

    Jerry at 8:58: “Ihave no objection to the UAW and management negotiating whatever contracts they can agree to. My objection comes in when I am expected, as a taxpayer, to subsidize above-average salaries for the UAW.”

    Jerry, look . . . your inability to see that you in fact _gain_ by this happening is exactly WHY the right has been able to slash wages and gut manufacturing in this country, to everyone’s loss. I’ll explain just two parts of this for you. First, union wages peg prevailing _local_ wage rates. If the union sets a number, other numbers fall in line. This means that wages _generally_ have a floor under them EVEN THOSE NOT IN THE INDUSTRY. The bosses and the political right understand this very well: by convincing _you_ that the peg is unjust, they knock it out _and_ take everyone else’s wages down a couple three stepss, too. This is why Walmart employees have crap wages and diddly-squat benefits, because you don’t understand how this works.

    The principle is exactly the same for executive compensation, BTW, as dicussed in Yves’ post. This is why those executives have rigged the game, getting nominally ‘independent consultants’ to perpetually ratchet their peg upwards, so that CEOs in ‘comparable firms’ catch the rising tide.

    Point two, those autoworkers go out and _spend_ most of what they earn. In our present demand-collapse situation, that is important. If that autoworker is unemployed and bust, the ripple effect of his/her spending is reversed to a syphon effect on demand. To be blunt, if that person doesn’t spend, there is a little less money in motion to land in your pocket, son. The fact that you do not get how this works while the bosses and the right understand it very well, again, means that you will cut the nose of demand off your own face to spite the person next to you. Oh btw, what goes around comes around. If you won’t support the other persons wage-base and demand ripple, they won’t be there to support YOU, either when you are in a pinch. And also btw, that person isn’t going to be paying in taxes for the services which you draw upon, either.

    The bosses have convinced you that wages are zero-sum: That is their genius and their great political victory—while they take an ever bigger rakeoff off the top.

    Should union wages ratchet to the sky? No, of course not. Here’s something that seems news to you: they didn’t and they don’t. Those wages, btw, aren’t close to what a plumber, a dentist, or a programmer (if they’re any good) makes, either. It’s the benefit packages which make the number seem larger—and those packages are in line with jobs which typically have a significant physical labor and degree of safety risk involved; folks retire with bodies with a lot of wear and tear on them from manufacturing jobs.

    Should you and I go on subsidizing those wage rates in manufacturing _indefinitely_? No, absolutely not. That is not the idea, however. Jobs _will_ decline in this industry at plants that don’t cut it or which make products that are unwanted, and they must. And the companies either will put out a competitive product or be put out of business, yes. Those are the demands we should make in return, absolutely. We should be smart about supporting manufacturing. Being stupid-mean just profits the profiteers.

  50. Anonymous

    My observation is that the less one actually does the more one makes when it comes to public companies. One of the fasts ways to get to the top in one that I worked for was to screw up a large project or get someone hurt or killed. The transfer would go out along with a safety type job and a raise or some management job to get the misfit out of the actual day to day hands on operations. Don’t recall any being canned for being the incompetent dipsticks they were.

  51. John

    For those that actually talk with the real peasantry (the semi-psychotic majority) have you noticed how they (the peasants) are much more pissed out of their minds about bailouts for OTHER peasants than they are about the nobility. Oh sure, they might complain about “rich guys” getting some tax-money but their REAL anger is directed at “those lazy auto-workers”. I find US peasant self-loathing to be the wild-card in any future “plans” for the up-coming socialist stimulus. The US peasants are truly odd ones. They’d much rather cut-off-their-noses-to-spite-their-faces than peasants in other countries. Your fascist Republicans have always been able to use this trait to their advantage. Too bad the socialist Democrats have yet to figure it out.

  52. Boris

    The comments about punitive taxes above the compensation level received by the US President seem to be missing a few things:

    1) The Presidential salary is hardly the only source of income a US President has (and is usually the least important, even for the Obamas, much less for some of the other presidents we’ve seen recently).
    2) There is a lot of non-cash compensation going on for a President (fairly good pension plan, free housing, free transportation, free food all come to mind; I’m sure there are more, not to even mention the various gifts that the President receives). In a lot of comparably paid jobs (say very good IT contractor), there is no such compensation.
    3) The president doesn’t have to take on any loans to get the job.

    Compare this to, say, a medical doctor. Given the current setup of medical education, he or she emerges from medical school with several hundred thousand dollars worth of loans. I’m assuming that the $200,000 number spoken off refers to AGI and not gross (for otherwise the doctor cannot afford malpractice insurance in many specialties). Even so, paying interest on a large-mortgage-sized loan takes a good amount of disposable income. Actually trying to buy a house in the process makes it even worse.

    Now perhaps house prices and medical school costs would come down significantly with the new setup. Or perhaps only the already-wealthy would be able to enter medicine as a profession or buy houses in certain parts of the country.

  53. STS

    “Well, except just as all the children at Lake Woebegone are above average, no board likes setting a target below peer group norms.”

    I like to call this effect the “Dominated Divergence Theorem” — it’s a bad math pun, playing on a real result called the Dominated Convergence Theorem. So instead of having everybody’s comp “dominated” by some reasonable upper bound, we have each exec’s compensation bounded *below* by some multiple of his subordinates’ comp (say 1.3 x best paid subordinate) and also by some multiple of his peer’s comp (maybe more like 1.05 x peer comp).

    Stack executives up in a management hierarchy and you get “Dominated Divergence”. Raise 1.3 to the nth power, soon you’re talking real money. ;)

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