1. What Greg Mankiw said
2. What Lew Frankfort said: "I don’t think it is
unreasonable…for the C.E.O. of a company to realize 3 to 5
percent of the wealth accumulation that shareholders realize.”
Background: "Mr. Frankfort, the 61-year-old Coach chief, took home $44.4 million
last year. His net worth is in the high nine figures. Yet his pay and
net worth, he notes, are small compared with the gain to shareholders
since Coach went public six years ago, with Mr. Frankfort at the helm.
The market capitalization, the value of all the shares, is nearly $18
billion, up from an initial $700 million."
3. What Matt Yglesias said: "The economy grew at a perfectly rapid clip in a broad-based manner in the 1950s and 60s."
4. What L. Ron Hubbard said: "…one of the greatest single moves which could be made to advance and vitalize a culture such as America would be to free, completely, the artist from all taxes and similar oppressions."
5. What Tyler said: "If you believe in the integrity of personal identity over time, the greatest unfairness is when people die young. Let’s start by taxing the lucky old. If you believe in the time-slice view of identity, the very old have a rough time of it. Let’s start by taxing hipsters."
Re L. Ron Hubbard: The reason there are so many “starving artists” is because most artists suck. And I see no reason to subsidize that which sucks.
P.S. I consider my blog, not to mention my YouTube videos, to be “art.” The fact that someone disagrees only proves their ignorance and lack of cultural sophistication. So where’s my tax exemption?
Dirk is correct, of course. If the stock declines, do the CEO’s reimburse 3 to 5% of the shareholders’ losses? Besides, a large amount of shareholder return has to do with overall economic conditions, not the alleged genius of the CEO.
Whether or not CEOs are worth 3 to 5% of the increase in value of a company, is beside the point- shareholders are still responsible for the agreements they make collectively. Personally, I think you should pay for performance, and shareholders should construct other compensation methods for CEOs that tie performance more directly to pay.
Person,
Are you suggesting the government subsidize the “good” artists? Who gets to choose which is which? By revealed preference more people would pick the folks at Aerosmith (or heaven forbid, Britney Spears) over any symphony.
The issue is not getting compensated for how good you objectively are. The issue is getting compensated for the value you bring to others. The best method for such consumer valuation is still the marketplace.
Oh, and re: CEOs, I agree with Yancey_Ward and add that if you don’t like the CEOs compensation formula, here’s a crazy idea: don’t invest there! You’re not obligated to pay for it any more than you’re obligated to watch sports.
I think with the increasing variety and sophistication of predictions markets and financial markets (which are in a sense a type of prediction market), we will soon get to the point where you will be able to hedge away the risk of anything you don’t control, at which point the profitability of a corporation will be solely a function of how well it’s managed, plus any other event they want to bet on (e.g. increased demand for what they sell).
happyjuggler0: Actually, no, I oppose federal subsidies for the same reason.
And I think these attempts to criticize the Joshual_Bell experiment are ultimately just goalpost-moving or otherwise concede the point. If his artwork is so mind-blowingly good, people would notice this “diamond in the rough” and gladly miss work to enjoy it.
To put it another, much shorter, way, the 50′s and 60′s economic boom was about convergence theory, even if there wasn’t a country higher up to converge with.
They converged with where they would’ve been if not for all kinds of horrible policies in the preceding decades.
Does anyone understand Mankiw’s chart?
The pdf source claims that it attributes both parts of FICA to the employee, yet that no quintile pays more than 10% FICA.
Douglas Knight,
That was discussed in the comments section of that thread. What it came down to is that these are government figures, and the government included both FICA and the EITC, with the latter being a negative tax of course.
If one believes the Social Security propagandists, then FICA isn’t a tax, it is a contribution (!) towards a savings program, and that notion of it being savings is the basis for the way benefits are calculated. If one takes this point of view, then it ought not even be included in taxes. If one doesn’t tkae this point of view then the Social security system ought to be scrapped.
richard,
Looks like the stock has gone up almost 25-fold since the IPO, which works out about right from his back of the envelope numbers.
happyjuggler0,
I saw the comments on that post. You summarize them well, but they are still non sequiturs. As I said, the pdf claims that no quintile pays more than 10% of income as FICA. Do you really believe that? There must be some subtlety in the definitions to make the 4th quintile pay 6% income taxes.
Health insurance and retirement benefits make a difference, but I simply don’t believe the numbers.
As someone who works in an investment company, I will tell you that the CEO can make a significant difference in the performance of a company and I have no problem paying them 3 to 5% of the pre-tax operating profit. Often-times we invest large stakes in micro-cap companies, and this question arises. As for their relative value compared to other employees, no other employee can have as much of an impact on performance as the CEO. For better or worse, they are the ones in control.
3 to 5% is in actuality pretty reasonable when you look at some of the options packages that they end up getting. Getting a cut of profit is nice, in that you are rewarded for true business performance rather than market volatility.
I.E how much dilution do Google’s shareholders see each year with those enormouse options grants.
It is true that all businesses perform better when the economy is good, but if you paid someone 3% of operating profits, then when times were bad they would essentially get nothing.
As for increasing market value by issuing more shares. That is just ridiculous. If it were possible to increase total shareholder value by issuing more shares, then everyone would do it. Why do you think people track Earnings Per Share so religiously (or fully diluted Earnings Per Share taking into account existing options grants). Because investors understand dilution.
Yancey Ward,
this pdf should explain what they do. I believe it’s the latter, but I can’t tell. Regardless of which, it shouldn’t make much of a difference outside the bottom quintile.
I think Frankfort’s comment suffers from the same subjectivism that critics of CEO pay often employ, an arbitrary sense of what one considers “reasonable.”
I used to work for a transportation company where I regularly negotiated contracts worth tens of millions of dollars. I didn’t think it was unreasonable for me to get 3 to 5 percent of the value of those contracts, especially when they represented new business to the company. Why shouldn’t a salesman get 3 to 5 percent of the margin on sales that they obtain? I think that’s reasonable. Shouldn’t the dean of my school get 3 to 5 percent of the tuition paid by the students enrolled in his program? Isn’t that reasonable?
Fact is, hired hands are only as productive as they are enabled to be by the institutions that hired them. If Mr, Frankfort created Coach, if he created and proved out its business model, then he would have benefited through his founders shares. Otherwise, he’s just a hired hand. He’s not entitle to any arbitrary share of the shareholder’s wealth, except that which the shareholders believe they must give him in order to maximize theirs. It has nothing to do with what he thinks is “reasonable.”
“a good chuck (sic) (though an indeterminate one) of their success is beta-like rather than alpha-like. Shareholders appear to be paying too much in relation to what they get.”
But the alpha and beta of a company are not unknown. They are very precisely known. There is no problem at all in giving a CEO options that pay off based on the alpha of the company, rather than the beta.
“the solution is for a public company to have to publish the compensation of ALL it’s employees, not just the C-levels.”
I agree with that 100%. Transparency would alleviate tensions within organizations and promote fairness. The problem with saying “it’s strictly private between individuals” is that other affected people don’t know what is going on. (And yes, it IS our business.) How many college graduates, upon joining an employer, know that executives are typically paid bonuses? I certainly didn’t. And when this information comes out, the managment is shocked, SHOCKED, that people are surprised. They pretend it is common knowledge. In my case, the retirement plan was exclusively ESOP (no 401k), so management of this privately held company was very much our business. (And it’s not a matter of uninvesting. The rules say I can’t get the money out until I reach retirment age, even though I quit the company 9 years ago.)
Publishing compensation data would help everyone. Employees would understand why parts of the company compete with each other and would be better equipped to make decision about how to direct their efforts. People would understand their relative values. There wouldn’t be so much outrage when high salaries are revealed.
“What about the historical ratio of CEO pay to that of an entry level worker? This was fairly constant until the late 70′s. ”
The point is, on what basis is this the right number today for all companies? I’m not saying that investors are always rational, but they do know about this sort of thing. If it doesn’t bother them, it shouldn’t bother anyone else. If it does bother them, the market cap will go down.
There is hubris in setting prices by fiat. Let the players decide.
Kat, only a handful of megawatt stars make more than $10 million per movie, and the funny thing is they’re not even the highest paid people in Hollywood. The real action is behind the scenes. David Geffen could buy Angelina, Brad & Tom Cruise all by himself. Ditto Jeffrey Katzenberg, Michael Eisner etc etc etc. In other words, the CEOs do even better in Hollywood.
Holland had a dole that basically let artists work for peanuts if they wanted to. It was an interesting nice system – people exploring religion, art, other interests if they didn’t need to hop in a money-making practice right away. Good for society. Eastern Europe subsidized the arts as well, but in a corrupt “what supports the system” or “what did you do for me”, but still, a lot of traditional arts have survived because of this rotten system.
Typically for a CEO you hope they’re worthwhile so you offer enough compensation to attract them, like any other employee, only more. While once a CEO it’s hard to completely destroy your cred, if you do a bad job it does take away from your value. CEO’s take chances in companies as much as companies take chances in CEO’s. While you can try to get a CEO to come in on a contingency contract – taking a pay cut with poor performance – this will be about as successful as trying to get Barry Bonds or Angelina Jolie or your good programmers to do the same thing. If it’s a seller’s market, and with good talent it usually is, then you tough it out. Perhaps there was arbitrage in the market for execs until the 70′s and the execs finally figured it out, upping their share. Guess the market will have to deal with this market change – that’s capitalism. Of course when OPEC and Putin and oil companies play fair with the price of oil, that will change the equation much more than the salary of executives, but we’d rather not argue about that issue.
lannychiu,
As “someone who works in an investment company” you should also find it nonsensical that anyone would be compensated the same on alpha generation and beta or not have some sort of high-water mark, yet for almost all senior executives this is clearly the case.
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