Chattermailbox: How Often Do You Vote Your Shares?
Bob,
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StumbleUponSorry to be so late getting back to you. I got distracted by a fistfight that's broken out on the New York Times op-ed page.
Your last e-mail overstated our areas of agreement.
1) Yes, I agree, as you put it, that "CEO pay is outrageous on social and ethical grounds." But:
2) No, I never said that raising marginal taxes on high incomes was the best way to tackle this problem. I merely said that raising marginal taxes on high incomes would be a good idea. I'd be in favor of doing so even if CEOs weren't taking home 350 times what the typical worker earns. The tax system, I believe, should not be a vehicle for confiscating money from people who have too much of it. Rather, it should be a means of funding a government whose competence and breadth best serves its citizens' needs. The richest people should pay the most, proportionally, only because they have the most to spare.
From a redistributive point of view, that may be a distinction without much difference. But I want to be clear about my purpose.
3) I don't agree that reforms in corporate governance will never bring CEO pay under control. I merely sought to separate the question, "Is this a problem?" from "Can it be solved?" By "problem" I don't mean moral problem, though I think it's that, too; I mean an economic problem. In other words, is something getting in the way of the smooth functioning of market forces? I believe there is. You believe that if stockholders didn't want to shower corporate executives in greenbacks with little regard for performance, they wouldn't do it. I say: Slow down, fella! Give them a little time!
I can't seem to interest you in a recent study (by W. Gerard Sanders of Brigham Young University and Donald C. Hambrick of Penn State University) that appeared in the Academy of Management Journal. It suggested that CEO pay packages heavily dependent on stock options—probably the most significant factor driving CEO compensation into the stratosphere—were likelier to lower stock prices than to raise them, because they push CEOs into taking too many risks. I mentioned the study in my original discussion of this topic; I mentioned it again in my response to your opening salvo; I mention it a third time here. If stupendous paydays for CEOs really are pushing stock prices down, I have to believe that stockholders (and maybe even corporate boards) will wise up eventually to their folly.
According to Graef Crystal, some companies already are. In a Sept. 5 Blooomberg column, Crystal identified 35 CEOs of large corporations who performed well in 2006 despite receiving relatively modest pay. Relatively is the key word here, since they still averaged $10.8 million; their companies' average rate of return was 35 percent ("more than double that of the S&P 500 Index"). But it's a start.
I'll grant that reform in this area is seldom swift. You probably haven't spent much time lately in Rock Creek Cemetery (most famous for its Saint-Gaudens memorial to Clover Adams), but if you happen by you might consider taking in the monument that Evelyn Y. Davis, the (still-living) shareholders' rights advocate, has built for herself. The woman is so worried that no one will remember her when she departs this vale of tears that she's thrown up three pink slabs with ample room for assorted bizarre addenda ("Recognized at White House press conferences by several presidents since 1978"). This photograph will give you some idea, though it doesn't show a marble bench and a couple of pink stones lying flat on the ground. All three bear her initials. Davis' capacious final resting spot is mostly a ghoulish specimen of the particular strain of status anxiety that flourishes in our nation's capital. But it's also a sad comment on how little Ms. Davis expects to leave behind. Not for her the epitaph (to paraphrase Christopher Wren's in St. Paul's), "If you seek my monument, notice how reasonable CEO compensation has gotten."
But she's still plugging away, bless her heart, at 78. We've seen you persevere in much more quixotic causes, and at 61 you're still a relatively young man. So I hope you'll reconsider, and resume your fight to restore market sanity to the compensation of chief executives.
Tim
E-mail Timothy Noah at .
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Remarks from the Fray:
High CEO salaries don't make the CEOs work harder or reward what they do as CEOs. They reward hard work and luck when the person was not yet a CEO. In short, they are an incentive for the workers who aspire to be a CEO. In this sense, they are inspiration for others rather than pay for the CEOs.
The system isn't less 'fair' than it was - back when you had to be the boss' son to make that leap. Actually, perhaps it works better. It inspires more people to aspire. That 2 million a year + 7.5 million parachute in case I fail? That could be mine, if I just work hard enough to enter the promised land... so think 600 mid-level execs who work their tails off, cross their fingers and pray. And the board hopes that this draft pick they are hiring works out and their stock goes up.
Is there a class divide? Yes - but the pool of people who can make the jump to the upper reaches of the filthy rich is pretty large, these days, compared to in the past. The aspiration is for the few highly educated professionals and middle management - to which the children of the blue collar and white collar can apsire. Ok, so it takes 2-3 generations to move from fairly poor to filthy rich. That's still pretty good, in historical perspective.
This takes quite a bit out of the moral sting of CEO salaries, which are certainly unfair and ridiculous as payment for services rendered during a tenure as a successful - or especially unsuccessful - CEO.
--BenK
(To reply, click here.)
We know that appearances matter; they affect valuation. We also know that in an exuberant market, valuation trumps dividends when it comes to stock owners. They're not worrying about a steady 5% return on investment. They're interested in the Big Cash-Out when stocks have gone from 15 bucks a share to 350. Hence there is an appetite in the market for feel-good CEOs. CEOs who are adept at painting a smiley on results. CEOs who are clever enough to hide risks off the books. CEOs who are not managers, they're manipulators.
Manipulators are cheesy, immoral, smart, ruthless risk-takers. Some of them, through pure statistical chance if nothing else, will have a track record of successful risk-taking. Those CEOs become the sought-after darlings, the object of a CEO-compensation bidding war, on the belief that if they succeeded in the past, they must know how to succeed again.
Those CEOs raking in hundreds of millions in compensation are invariably those who score highest in both image-making and deal-making. A CEO with a positive track record in both can name his price, and it will be paid. The fact that both image-making and deal-making are risky, and that past success might not always lead to future success where risks are concerned, is lost in greed's distorting lens.
Only a relatively small number of CEOs play the risk game and manage to look good doing it. But their stratospheric compensation exerts a positive pressure on compensations for the rest of industry - just like in the NBA, where even the lowliest performer is a millionaire, because he suits up next to superstars and passes them the ball.
--UrgeIt
(To reply, click here.)
The Eisenhower appeal is bogus. After World War 2, Asia and Europe were left in ruins. The colonial empires sinking. Their currencies tattered. Their industries, struggling to recover. Fortress America was not only untouched, but had the benefit of being the world's creditor, and rebuilder.
So, with the competition temporarily out of service, and US Goods and Services in high demand, are we to expect anything but good times for America? I'll note that Stalinist Russia had superior economic growth compared to every Western nation except the US, does that mean Stalinism is a great economic policy? Since Stalinism couldn't hurt Russia's economic during WW2 recovery, I doubt a 91% marginal rate could either.
Either way, Noah continually demonstrates the lengths to which he will go to justify his interventionist fantasies.
--Cromwellian
(To reply, click here.)
Evelyn Y. Davis has raised some important issues but she would not have persisted as long as she has if she was not so convenient for corporate executives. She makes it easy for them to marginalize all shareholder activists as colorful kooks.
But the journey begun by the Gilberts will be completed not by Evelyn Y. Davis but by the large institutional investors like the pension fund for the members of AFSCME and CalPERS. These investors are behind highly credible and effective shareholder initiatives on "say on pay" and withholding approval for directors who approve outrageous pay packages. Home Depot would not have gone from one of the worst pay packages in history to one of the best without the pressure of the significant, principled, persistent investors who are the best prospect for a genuine market response and the best guarantee of efficient markets.
There's a lot of pressure for "say on pay" and legislation passed the House with overwhelming support. But I think the more effective approach will come from majorty vote requirements, giving shareholders the ability to jettison negigent or corrupt directors.
--nellminow
(To reply, click here.)
(11/17)