Social Norms and Executive Pay
In response to various financial companies receiving public funds splurging on huge bonuses, corporate jets and multimillion dollar office renovations, the Obama administration has decided to limit executive pay in companies receiving bailout money to $500,000 (including bonuses). A princely sum to most, but some on Wall Street are calling it “draconian”. Boo hoo. Yes, this is a good decision. It is quite shocking that these financial firms, whose excessive risk-taking led to this very crisis, can feed at the public trough while carrying on with business as usual. While the bailout was and is necessary, there needs to be far more taxpayer protection built into the procedures. It’s a matter of basic fairness.
In this post, though, I want to get back to issue I have talked about a lot: changing social norms and rising inequality in the United States. As shown by MIT economists Frank Levy and Peter Temin, inequality has been affected greatly by economic institutions and social norms. Between the late 1940s and early 1970s, a set of institutions ensured that wages rose with productivity; these institutions began with the New Deal and the war, but they continued afterwards. As noted by Thomas Piketty and Emmanuel Saez (who have probed US inequality trends more than anybody), the fact that compression of wages survived after the war is powerful evidence that institutions and social norms were important. Levy and Temin dub this the “Treaty of Detroit” whereby strong unions ensured living wages as well as health and retirement benefits, companies got industrial peace and productive workers, and the government cemented this arrangement with progressive taxes and a high minimum wage. The result was a far amount of wage compression and a relatively equal society, but also strong economic growth and rising living standards across the board.
In the 1970s, in the wake of a series of major supply shocks and ensuing stagflation, these social norms broke down. A movement that would eventually come to power under Ronald Reagan argued that a return to laissez-faire liberalism, combined with de-unionization and a reduction in the role of government, would solve all economic problems. And, as a cyclical upturn brought the steep early-1980s recession to an end, people were ready to be convinced. Social norms changed accordingly. Instead of sharing and cooperating, the “greed is good” mantra became the new norm. Harking back to the liberal philosophy of the Gilded Age, personal self-interest was held to maximize efficiency and attain virtue and freedom.
And the result? Since the 1970s we have seen stalled productivity growth and stagnant or even declining real wages. At the same time, inequality spiked. Solidarity was cast aside. The top 1 percent grew a lot richer. The top 0.1 percent saw a fivefold increase in real income. The top 0.01 percent saw a sevenfold increase in real income. This is the world of gargantuan executive pay packages that the current titans of finance take as the norm. This is their natural right, their business as usual, bailout or no bailout. Back in the 1960s, these packages would be have been seen as greatly excessive and unfair. Now, finally, we may be returning to that world, and social norms may be changing again, just as the Great Depression gave the boot to the individualism of the gilded age. Once again, issues of fairness and solidarity are coming to the fore.
Comments are closed.
I agree. But I wish liberals would use this episode to realize that there is almost nothing you can do to pro-actively change the behavior of a corporation. These types of folks are going to get their splurges of bonuses in one way or another. Heck, the reason that someone like Tom Daschle got a car with a driver instead of straight cash is precisely for the reason he almost got away with not having to pay taxes to it: the hyper rich like to dole out favors or rewards that are under the radar, and will do so one way or another.
I think I’ve said this elsewhere, but I’ll repeat it here: the best way to deal a blow to the outrageous behavior of bad companies is to force them to face the brutal “self-regulation” of freedom, i.e. of the free market. Look at the CEO of Merrill Lynch, who was blasted in the media for redecorating his office for millions. No politically contrived, partially-applied regulation will deal the blow to this guy’s reputation that days in the media did.
Again, the way to force companies into accountability over CEO pay or any other obnoxious business behavior is to free up existing or potential businesses from the regulation and tax climate that stops them from competing with the larger, rent-seeking companies that have more leg-room to get away with bad behavior. I agree with liberals that bad business behavior is a problem. But there is a better way to combat it than more of the same incompetent bureaucratic regulation.
Limiting executive pay is sure to be a crowd pleaser. Me, I’m more concerned about the unintended consequences that this sort of move might have. I don’t think we have a good understanding of why executive pay is what it is. What we do know, however, is that attempts to impose wage and price controls typically don’t end well.
As for the effect this will have on inequality, I’d note that the wealth of U.S. millionaires has already fallen by 30% over the past few months. Compared to that, limits on executive pay are just a drop in the bucket. It would seem that a significant amount of the increased inequality seen in recent years was based on the illusion of inflated house and stock prices.
Some might rejoice in seeing inequality reduced in this way, but not me. Reducing inequality is good when it involves making the poor richer. When it is achieved by making the rich poorer I fail to see the value in it.
Does the term “executive” include the traders at Goldman, Morgan, etc who receive bonuses in the $5M to $25M range? He should have included all employees…not just executives.
“Reducing inequality is good when it involves making the poor richer. When it is achieved by making the rich poorer I fail to see the value in it.”
Exactly. Schadenfreude is not part of Catholic Social Teaching.
Exactly. Schadenfreude is not part of Catholic Social Teaching.
No, but Jesus did say, “It is easier for a camel to pass through the eye of a needle than for one who is rich to enter the kingdom of God.”
The sayings of Jesus on poverty and wealth came up in another thread, and I objected to using the words of Jesus to claim that poverty as we know it today is some kind of spiritual advantage. But does this statement of Jesus hold for all who are rich today? And aren’t almost all of us rich by the standards of those who would have heard the words of Jesus?
I am leaning toward agreeing with BA about limiting executive pay in general, but I do think when a company gets bailed out using my tax dollars, the government has a right to dictate reasonable terms, and I think it’s reasonable to limit compensation for people who have done or are doing a bad job.
P.S. There are no raises in my company this year for anyone making over $50,000, and that’s not the fault of the government. It’s the fault of all of these clowns who are getting bailed out with taxpayers’ money.
Jesus did say, “It is easier for a camel to pass through the eye of a needle than for one who is rich to enter the kingdom of God.”
I somehow suspect that, when Obama decided on this compensation limitation, concern about the eternal salvation of corporate executives was not chief on his mind.
Actually, having looking into the matter a little bit, this decision would seem to be a case of “less than meets the eye.” The limitations don’t apply to companies that have already received bailout money, and would only apply to companies that receive a “large” amount of bailout funds in the future. Not only that, but as detailed here, the limitation doesn’t apply to stock options, which means that many of these executives will be receiving the same high compensation, just delayed a few years. If I didn’t know better, I’d say that the plan was designed so that it would look like Obama was “holding Wall Street accountable” without actually risking the negative economic consequences that real limits on compensation could involve.
Maybe this will help the 500 million americans losing their jobs every week make it through this crisis
What’s the big deal?
Any shareholder who owns a massive portion of a company has rights, including that their voice be heard, that they be on the board if they so wish, etc. If a 20% shareholder spoke up and said, “I want executive pay capped at $500,000 per year” the pay changes would happen.
The US Government deserves to be treated as any standard shareholder. If the companies don’t like it, they can pay back their loans and purchase the stock back from the US Government… just like they would with any large bond holder who traded some bonds for preferred shares.
This ruling only affects a small number of people, and is temporary and limited. For me, what’s more important is that we are having a debate over the fairness and justice of these kinds of compensation packages– a debate which has been anathema in mainstream circles for a long time. That’s what is significant.
And by the way, saying things like making the wealthiest people poorer while keeping everybody at the same level kind of misses the point. If we restrain pay at the top, there’s a chance it might help those at the bottom, given that the funds available for compensation comes from underlying productivity growth (I’m speaking in general terms here. Obviously, in the current distressed circumstances, money that doesn’t go to executives in financial firms is more likely to be used to raise capital, or to boost lending– the latter is what policymakers want, after all).
MM:
I don’t know if I would say the mainstream has found these conversations anathema; it’s a very common news piece now.
The problem is of course that it is anathema in the boardroom, and I doubt that until it takes place there any government changes will fail, as corporations and their lawyers will easily find ways to circumvent the law if they desire.
MM,
If the shareholders of company X felt that executive compensation is too high, they are free to change that compensation.
If consumers feel that executive compensation is too high, they are free not to patronize company X.
If the board is unresponsive to shareholders, the shareholders can change the board.
What’s the problem here?
Payment should in proportion to actual true wealth produced, not in proportion to true wealth destroyed and the ill gotten gains from that destruction transferred.
Wall street has become a parasite living off the creature it killed by its corporate raiding greed to turn a fast buck by liquidation, downsizing and outsourcing.
It seems like a basic (and per Blackadder’s points above, largely symbolic) populist move. I would assume that it’s main point is that it appear as a headline today, which it duly did on my copy of the WSJ this morning.
What all this misses is why executive compensation has got so large, which is essentially that executives move between companies fairly often, and their decisions can have massive impacts on how well companies do. Thus, their pay tends to get very high because the difference between having a good executive and a bad executive can easily mean hundreds of millions or billions of dollars in difference to the company’s business.
In an environment where executives frequently change jobs in search of better pay, companies will be incented to pay them very highly in hopes of securing the best ones — and even executives who prove incompetent benefit because boards will generally convince themselves that they’re hiring one of the best, and thus shell out money as if the guy were going to do the company a lot of good. A board is seldom going to say, “We don’t really need a very good CEO [or other exec] right now, so we’ll just hire this guy for a bargain rate.”
I don’t necessarily have a problem with executives making a lot, though I do think it ill serves a company to set up compensation packages which pay a lot whether the executive does well or not. It seems to me there should be a fairly low base, with a lot of incentive pay based on specific goals. But obviously, people like to be protected from failure, so execs push for packages which pay out regardless.
The other thing that would change this would be a business culture shift which resulted in executives generally staying at companies much longer, and seeing themselves as servants of the company rather than guns for hire who deserve a significant portion of any improvements they create.
How one effects that change, however, I’m not really sure.
As a side note to this whole discussion:
The real problem is that our anti-trust laws haven’t been enforced since AT&T was broken up. No organization should be permitted to become “too large to fail.”
The obvious tangent here of a more distribuitist society is certainly worse pursuing.
Stick to one nick if you don’t want posts removed – your constant change in nicks to hide your id will not be accepted anymore. Especially when you said you would leave, IvyCatholic. –Ed.
LCB Says,
If the shareholders of company X felt that executive compensation is too high, they are free to change that compensation.
If consumers feel that executive compensation is too high, they are free not to patronize company X.
If the board is unresponsive to shareholders, the shareholders can change the board.
What’s the problem here?
There is a real problem in corporate governance that needs to be considered. The boards are controlled by the executives, not by the common shareholders. This is a result of the size of institutional investors who have no interest in actively overseeing the company. I’m not sure the solution, but some way of giving more power to the vast majority of shareholders would be a good thing.
The other problem is the cross-pollination of having executives of one company on the board of others, in sort of a daisy chain. By raising the salary of the executive of the other companies, the executive creates a better market for his own salary increase.
The socialist solution of wage controls will not have the desired affect.