naked capitalism

CrocodileChuck says:

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

vlade says:

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.

Jim says:

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.

Anonymous says:

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.

kjmclark says:

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.

Jerry says:

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.

Anonymous says:

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?

Jim says:

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.

Guttersnipe says:

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.

Francine McKenna says:

Shareholders binding Say On Pay is the only way to bring equity to all workers in the USA.

Quite a variety pack of discussion on the subject here. http://blogs.law.harvard.edu/corpgov?s=say+on+pay&submit=Go

curious-er says:

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.

Anonymous says:

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….

Anonymous says:

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.

Anonymous says:

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…

Anonymous says:

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

Jim says:

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.

tompain says:

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?

bg says:

“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.

Anonymous says:

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.

CJS says:

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).

kate says:

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.

Evelyn Sinclair says:

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….

Anonymous says:

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

jkiss says:

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.

Richard says:

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!

Richard Kline says:

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.

John says:

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.

Boris says:

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.