I love the phrase, "in this wintery economic climate." To me, nothing is funnier than saying this to justify something. You here it a lot these days. I heard it on the radio saying that the current economic situation made this the perfect time to buy a new car. Paul Krugman used it to argue for $600 billion in government spending. The most recent time I heard it was in this video from CNN.com.
The video is a commentary from Campbell Brown. According to the video, the CEO of Merrill Lynch, requested a $10 million bonus this year. Why so much money? Because he kept Merrill Lynch's losses down to $11.67 billion. In a frigid economy where other companies like Bear Stearns and Lehman Brothers are going bankrupt, that is actually quite an accomplishment.
Brown's opinion is that this CEO shouldn't get the bonus, but (and I'm sure you already guessed it) my opinion is that he should get the bonus. Many people hate the idea of the huge CEO compensation packages and ask, "if the company does badly, why should they get paid millions?" But let's extend this logic...
Let's say we pay a surgeon only if she saves the patient's life. The result will be that surgeons only operate on patients that are a safe bet. The severely sick and injured patients (the ones who need the best care) will suddenly be unable to find doctors willing to help them*.
What about our education system? Most people claim the way to fix it is to pay teachers more, but let's say we only pay teachers if they're students pass. Same thing is likely to happen. The worst students will suddenly be unable to find teachers.
We're in a deep financial mess and are people reacting by saying, "the solution is to pay CEO's less," but the truth is that CEO pay is high and the contracts pay even in the event of failure because that is the only way to attract well-qualified candidates to companies that need good leadership.
The other big objection to high CEO pay is that if the company is laying off employees, then the people at the top shouldn't be earning bonuses, but if you examine this "fairness" argument, you see that it doesn't help people either.
If a manufacturing plant is no longer earning money, then it will be shut down regardless of what the CEO makes. Unprofitable operations are stopped if the CEO earns two dollars or two million dollars. People act as if there is a fixed amount of money to go round and if it goes to CEO's then it must necessarily come from the workers**. Capping CEO pay doesn't suddenly make it worthwhile to keep employing workers. In fact, a good CEO will know which branches are worthwhile and which aren't so you need to pay CEO's a good salary in order to incentivize them to find the parts that aren't working.
My feeling is that the prejudice against CEO pay is based on jealousy. Everyone likes to think that a CEO job is a nice cushy job that any idiot can do and so they shouldn't earn more than anyone else. In reality, these CEO's are working in a market where things are very uncertain and even if they pick the optimum strategy, they could still fail based on the outcome unknowable variables.
To assuage concerns you may have about the overpayment of CEO's think about the Board of Directors. They don't want to give the CEO money that could be theirs. They'll work hard to make sure the contracts don't pay out more than the CEO is worth. If the Board makes a mistake, then they'll get burned.
As I close I'd like to point out one ironic thing in this video. The tagline for this segment is "No Bias, No Bull." However, halfway through, Brown says that she has a neighbor that was laid off by Merrill Lynch. Perhaps she and this neighbor aren't friends, but if they are that then that probably qualifies as bias.
*I've seen several studies showing that the best hospitals actually have the worst survival rates because the patients that are worst off flock there.
**This is how Marx sees it.
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I agree.
ReplyDeleteExcept when you have more than one CEO, you should spell it CEOs instead of CEO's.
You are brilliant. Thanks for breaking it down to the hospital analogy and the teacher analogy. Those were the two coming to mind in my way of arguing. I like the way you think, dude.
CEO salary caps are ridiculous.
ReplyDeleteBut I also think CEOs running their companies into the ground and then getting my tax dollars from the gov't (which were supposed to go to roads, defense, education, and help for my community) when they crawl to a lobby-loving Congress with their sob-stories is pretty ridiculous too.
I think this is the understandable sentiment behind a lot of the bad ideas floating around today.
If these CEO's companies are "too big to fail," they never feel any of the harsh realities of the market at work, just the benefits.
Actually, the better analogies here would be:
ReplyDeleteIf a CEO is assisting the company in capping losses, it is akin to a doctor going to work to not kill people for a day.
If a teacher is putting out bad students year after year after year and it can be proven that the students aren't A) lazy as twat, b) misdirected of the special needs course, then they should be fired, not paid less.
Overall, you make some really good points, but it would be like me standing up in front of any local church here in NC and explaining to the congregation that no matter how they pray, the Bible is simply a work of literature.
It doesn't matter if they capped losses or not. The amounts, and frequently the fact that these morons are getting paid at all is ridiculous. Most of them were capable of doing this job for years (and the jobs on the ladder on the way up) at far less money with far more results. We should stick to that.
And I guess we are officially socialists now that we are bailing companies out. I mean, the very definition of being capitalists would be the strongest, most market-centric companies survive. But, no, we've decided to pick and choose who survives by borrowing money from Asia and doling it out in such a fashion that it will never be traced.
That pause alone is enough to flip the switch back in favor of not doling out any bonuses of any kind.
I guarantee if my job (the one I have now) resulted me in not losing the company as much money as the last guy or next guy, I would be fired, not rewarded. And it doesn't matter how big the company is. It matters that they are losing money. Typically that's a sign that no bonuses are to be had, and when they start moving the other direction you give bonuses.