I think this falls under the category of really? Are you kidding me? But what has happened in the last week is that some of UC’s highest-paid employees – their executives – are now threatening to sue the UC system if the system does not boost their retirement pensions.
That is right, 36 employees making at least $245,000 per year have written a letter calling on UC to fulfill a promise to increase their pensions – this in the midst of the UC’s efforts to overhaul a system to make up for a $20-billion deficit caused by a 20-year hiatus in contributions to the fund.
“A health system spokesman says Pomeroy, Rice and McGowan have no comment, but stand behind the letter,” the Bee reports.
Needless to say, in times when everyone is being asked to sacrifice and people are either being laid off, furloughed, or are otherwise taking paycuts, when pension funds are on the verge of collapse, this threat by these executives is not going over well.
“It must be hard to see the real world from the penthouse suite atop the University of California’s ivory tower,” wrote San Jose Mercury News Columnist Patty Fisher late last week, “I assume that’s why 36 of the UC’s highest-paid executives are threatening to sue unless the regents sweeten their already-lucrative pensions.”
The UC promise was made back in 1999, when we lived in a very different world. In the letter, the 36 employees suggested that they had had a chance to take more lucrative jobs, but remained in their current positions because of the promises made to improve their already-lucrative pensions.
This promise was made during a time when housing prices were booming, when the UC Pension fund was booming to the point that no one had to pay into it. For twenty years the fund basically grew by itself with no contributions from employees, the university or the state.
However, reality has hit this fund and for the first time in two decades, the University and its employees will begin paying into it. And the task force had additionally recommended reducing benefits and raising the retirement age – you know, what everyone else in the state is going to be forced to do, from janitors at schools to teachers to municipal employees to state workers to prison guards – everyone apparently except executives at UC, at least in their world.
“In a letter to the regents, the executives demanded that the university let them accrue pensions based on their entire paycheck instead of capping the eligible salary at $245,000, which the IRS used to require. In 1999, UC promised to lift the cap if the IRS agreed. In 2007 the IRS did lift the cap, but the university never made the change,” Patty Fisher writes.
As a result, President Mark Yudof has essentially asked the regents to cancel the 1999 agreement rather than pay an additional $5.5 million a year to pad the pensions. How lucrative would this change be? According to the San Francisco Chronicle who first broke this story, “a person earning $400,000 at retirement would get an annual pension of $300,000 compared with $183,750 in the current system.”
She writes, “Of course the executives are upset. I was, too, when my company froze my pension. Yes, UC made a promise in 1999, but the world has changed. Millions of Americans have seen promises broken. Their pensions, health care and job security have evaporated. So has the promise of an affordable college education.”
The Sacramento Bee this morning has joined the criticism of these executives.
“We’re in a time in California when everyone has to share the pain, and leaders have to set the right example,” the Bee writes. “It is dumbfounding that some top officials at the University of California are doing the exact opposite.”
“What’s appalling is that people – who already earn far more than the vast majority of the Californians who pay their salaries – want even more in these tough times. These execs richly deserve the withering criticism they’re already getting from Gov.-elect Jerry Brown and legislators,” the Bee continues.
The Bee concludes, “Good people don’t threaten lawsuits against a cash-strapped state to enrich themselves.”
We have criticized UC executives a number of times on these pages for taking huge salaries and having increased salaries at times when the average worker is being asked to take pay cuts. There is always a defense that they accepted less, to work at UC.
But this is just appalling. If these executives really can make more money elsewhere, then perhaps they should leave and make sure the door hits them on the way out. We do not need these individuals that badly. They have hardly done such a great job to begin with.
In a time when the world is changing, these people are living by rules set in 1999. That world is gone and perhaps it will never come back.
These individuals should be grateful that they still have jobs, that put them in the top one percent of income earners, rather than complaining that they should get more upon retirement. To do that is nothing short of a gift of public funds, and is corruption at its worst.
—David M. Greenwald reporting
dmg: “But this is just appalling. If these executives really can make more money elsewhere, then perhaps they should leave and make sure the door hits them on the way out. We do not need these individuals that badly. They have hardly done such a great job to begin with….These individuals should be grateful that they still have jobs, that put them in the top one percent of income earners, rather than complaining that they should get more upon retirement. To do that is nothing short of a gift of public funds, and is corruption at its worst.”
There have been a lot of commenters on this blog who have insisted that the high salaries for upper management of whatever entity are entitled to their lush salaries bc otherwise citizens will not be getting the best of the best. Frankly, I have always argued that 1)more money does not always buy “the best”; 2) we don’t necessarily need “the best” (whatever that means) to keep competitive; 3) “keeping up with the Jones” by paying bigger salaries for public employees than other localities – w money we don’t have – will drive us into financial ruin as a nation, state, city.
I don’t want to single any particular position/person out, but I have noticed that taxpayers are footing the bill in CA to pay six figure salaries to people with positions that normally were considered low paying – and justifying the practice by giving the position a fancier title. Upper management salaries are completely out of hand, IMHO. Salaries have become overinflated much as the cost of housing did, and the salary/pension bubble was bound to burst at some point as a needed correction.
The bottom line is if everyone is not willing to sacrifice, to keep as many people employed as possible, we are going to see more and more people out of work. When that happens, the entire system begins to fail, and the top executives may find themselves unemployed as well, or without their fat pensions. The gravy train has come to a grinding halt, but sometimes one wonders if some people get it – especially those in positions of power who seem to think life can go on as usual. WE ARE STILL IN A BIG FAT RECESSION (ESPECIALLY IN CA), THE MISLEADING NEWS MEDIA HYPE (TO BOLSTER OBAMA’S RE-ELECTION CHANCES) NOTWITHSTANDING…
Just my opinion, FWIW…
Elaine: recession has a very specific definition, of which the current situation does not apply. The economy is not continuing to sink. What you are picking up on is the fact that the current economy is not improving very quickly. The forecast for this year calls for about a 3% growth, but no improvement in the job market, and record corporate profits. Not a recession but not good for the average person.
ERM: [b]”WE ARE STILL IN A BIG FAT RECESSION (ESPECIALLY IN CA), “[/b]
DAVE: [i]”Elaine: recession has a very specific definition, of which the current situation does not apply. The economy is not continuing to sink.”[/i]
I am not sure what the growth rate was in California in 2010. I looked but couldn’t find any hard numbers. In 2009, our state was clearly in recession. Here are the numbers for California from the Dept. of Finance ([url]http://www.dof.ca.gov/HTML/FS_DATA/LatestEconData/FS_Income.htm[/url]) for our nominal and real growth rates the last four years. As you can see, real household income from 2006-09 in California declined by about $2,500:
2006 –$62,005 — 3.3% — $60,348 — 0.6%
2007 –$63,932 — 3.1% — $60,562 — 0.4%
2008 — $66,600 — 4.2% — $61,067 — 0.8%
2009 — $63,145 — -5.2% — $57,794 — -5.4%
I also found projections for 2010 ([url]http://www.clucerf.org/forecasts/2009/09/CA_Highlights.pdf[/url]) from 2009 and they expected California to experience negative growth for 2010: [quote] CA -4.5% first qtr; -4.0% second qtr; -2.9% third qtr; -2.0% fourth qtr [/quote] I would be interested, David, if you can find a source which shows the California economy had real positive growth in 2010.
EDIT: I just found something from a story in the LA Times ([url]http://www.latimes.com/business/la-fi-1207-econ-forecast-20101207,0,226435.story[/url]) dated 12-7-2001: “… UCLA said personal income grew 2.7% this year, while Chapman said it rose 2.2%.” That suggests David’s claim that California is no longer in negative growth is correct.
These village idiots are running the UC system?? Hmmm. I wonder how those Soviet pensions are paying out these days? Oh well. At least we have a model to follow.
People need to understand the public sector gravy train relative to how it tends to work for the much left/media-demonized private sector for highly compensated executive. Specifically, UCD executives have much less of their pay at risk and based on the performance of the organization that they lead.
Let’s take Ann Madden Rice, CEO of UC Davis Medical Center in Sacramento for example (interestingly the only woman in the examples listed and the most highly compensated). Her compensation is $574,000 per year.
In an October 2009 paper entitled “FACTS about the university of California” http://www.universityofcalifornia.edu/news/compensation/total_comp_facts_nov2009.pdf the authors wrote:
[quote]” The largest compensation gap affects senior management group members (e.g., president, chancellors, deans, vice presidents, chief financial officers) whose cash compensation, on average, was 22 percent lower than their counterparts. Total compensation for top administrators, including university chancellors, was 14 percent below their counterparts at comparable institutions.”[/quote]
However, for UCD Medical Center Employees, senior management compensation was reported as a whopping 15% ABOVE market.
When compared to their private-sector counterparts, when considering the lack of compensation risk , UCD executives are not just overpaid, they are grossly overpaid.
According to the 2009 Compensation study (http://www.universityofcalifornia.edu/news/compensation/compensation_report_cy2009-0910.pdf)
[quote]”There are 79 incentive and bonus payments in this report, totaling $3,863,027 – approximately .04% of UC’s $9 billion annual payroll. Payments from the Clinical Enterprise Management Incentive Plan (CEMRP) and the other clinical incentive plans represent 53% ($2,051,458) of the total with the majority of the balance attributed to bonus and incentive awards earned by coaches.”[/quote]
From this it is clear that a very small fraction of UCD executive compensation is tied to at-risk performance bonus.
Comparing this to the private sector… for example, on http://www.salary.com , searching for Chief Financial Officer is Los Angeles, the Median Base Salary is $368,191; however, when including the bonus, the compensation is $524, 509. In San Francisco, the median base compensation is $402,302 and with bonus it is $573,102.
UCD receives about $2.8 billion in annual revenue. Compared to report by CFO.com (http://www.cfo.com/article.cfm/14509212?f=search) citing a 2010 study from the Financial Executives Research Foundation, the base salary for CFOs working for a $1B – $4.9B private and public company was $362,800 and $378,800 respectively. Adding performance bonus and other non-stock options brings the total to $692,405 and $647,006 respectively. Adding the value of stock options, the totals move to $806,254 and $1.1M respectively.
UCD executive would, of course, focus on the $692,405 and $1.1M figures to make the case for being under-compensated. However, given their dismal track record running a profitable enterprise, when compared to their private counter parts, they would not be earning much performance bonus or stock options. In fact, in the private sector, many would be fired and replaced for a lack of positive financial results.
Three questions:
1. Why are we taxpayers paying a half-million dollars (and generous other benefits) every year to [u]anyone[/u] for doing [u]anything[/u] in the public service arena?
2. Do people in these 200 positions tend to work longer for UC (thereby limiting their pension years) or “retire” as soon as they can find high-paying non-govt. positions (taking advantage of one the the many traditional non-pay, prestige benefits of public service)?
3. Can we legislate a requirement that UC employees/retirees start contributing to the system whatever they should have paid in during the last 20 years in order finance the present level of retirement benefits they (hope to) receive?
Maybe it’s possible that these executives are valuable enough to be earning those kinds of salaries in the private sector. But what’s disappointing is a lack of leadership in such actions. I would expect an administrator to be interested in doing what it takes to help balance the budget for the greater good and to be good stewards of the public interest. It looks like this isn’t happening. It looks like that greed is the only driving factor.
Several years from now, what will these executives say when asked, “what actions and sacrifices did you make to help get UC through the worst recession of our lifetimes?”
[i]”Maybe it’s possible that these executives are valuable enough to be earning those kinds of salaries in the private sector.”[/i]
Without any real facts to prove it, I highly doubt that. Some executives might be able to make as much in total comp per year in the private sector*, but I suspect they’d have to work twice the annual hours as these “public servants” are working.
*Again, lacking any real facts, my personal observation–after spending a summer in DC as a Senate intern a long time ago–is that people who leave the “public sector” for more money in the private sector, don’t usually go to work for companies that are competing in the private market. They either go to work for very lucrative non-profits, or they go to work as consultants or lobbyists or some other quasi-public position in which their knowledge of government or more commonly, their access to people in power in government, is what they are trading on. They are just not suited to be productive in the real private economy. (Though he was never an “executive,” Vic Fazio is a good example of this, where he has traded on his status in Congress to become one of the highest paid lobbyists in DC.)
These 36 are the ones threatening to sue but how many TOTAL UC people does this affect?
This is part of the continuing ballooning of executive salaries in both private and public sectors over the last 30-40 years, in which compensation of executives has gotton out of proportion to their contribution to their business or institution.
There are indeed many highly capable executives who contribute a lot, and have earned compensation at a high level; but in recent times these pay levels have been exaggerated relative to their contribution. Their high pay is really based on the importance of their connections to other powerbrokers, rather than to innate administrative or executive abilities. As our government becomes more corrupted, these connections become more important and trump innate executive and leadership abilities, and the overall competence and effectiveness of our institutions declines. It is happening before our eyes.
Futhermore, I would propose that there are not only diminishing returns as pay increases in attracting marginally more talented executives; but as compensation goes ever higher there are negative returns; in which at very high pay scales the contribution of executives to the performance of a private company or public institution actually decreases–because you tend to attract piratical personalities who have their eyes on the moneybags and the dynasty; and will claw or scramble any way they can to get it–the honest way is the most difficult way; there are many dishonest routes (short cuts, if you will) to the prize that are easier–witness the debacles in our financial sector and on wall street–does anyone seriously believe we have seen any more than the tip of the iceberg? Only the less astute or unlucky ones who didn’t cover their tracks well enough.
“This is part of the continuing ballooning of executive salaries in both private and public sectors over the last 30-40 years, in which compensation of executives has gotton out of proportion to their contribution to their business or institution.”
What about the compensation of actors, entertainers, and professional athletes?
dmg: “Elaine: recession has a very specific definition, of which the current situation does not apply.”
I would argue the definition of “recession” is faulty and misleading for political gain. Example: the unemployment rate hugely underestimates the actual number of unemployed by at least twofold. The only ones counted as unemployed are those collecting unemployment insurance. Those who run out of unemployment insurance and/or have stopped looking are not counted. The figures to determine politically charged terms are doctored for political reasons. MARK MY WORDS, WE ARE NOT OUT OF THE RECESSION YET BY A LONG SHOT BY ANY NORMAL MEANING OF THE WORD TO THE AVERAGE LAY PERSON – THE POLITICAL DEFINITION BE DAMNED!
Rifkin: “EDIT: I just found something from a story in the LA Times dated 12-7-2001: “… UCLA said personal income grew 2.7% this year, while Chapman said it rose 2.2%.” That suggests David’s claim that California is no longer in negative growth is correct.”
Consider the source…and I’m not buying it for a single second…just my opinion, FWIW…
Jeff Boone: “What about the compensation of actors, entertainers, and professional athletes?”
Business executives often raid corporate assets before the company is going under and leave the poor little stockholder holding the bag of losses; the head of the NYSE walked away w a $800 million dollar golden parachute – and there was a pro forma gov’t “investigation” that went nowhere. The head of the NYSE got away w it. The financial sector is reaping in large profits this year despite the economy, from what I read.
Actors and entertainers are grossly overpaid for their contributions to society; some professional athletes are also grossly overpaid – but at least they have talent, whereas much of Hollywood doesn’t. Look at the number of Hollywood actors who used to be athletes! Yet our quiet scientists and engineers are grossly underpaid, yet probably contribute the most to society. What does that say about society and its priorities?
Just as another example, public interest lawyers working on the front lines helping the poor are paid as little as $30,000 a year, while fat cat lawyers in big firms are making six figure salaries, and some seven figures. Salaries are completely out of whack in this country. People are not being paid what they are truly worth to society…
[i]”I would argue the definition of “recession” is faulty and misleading for political gain.”[/i]
That may be true. However, the definition our government uses for “a recession” has not changed since academic macroeconomists agreed upon it roughly 100 years ago. They simply say that if we have consecutive quarters of negative national income growth, our economy is in recession. If we have very slow, but positive growth, it does not suggest we are in the best of times, but we are not going backwards.
[i]”Example: the unemployment rate hugely underestimates the actual number of unemployed by at least twofold.”[/i]
You are right that the “unemployment rate ([url]http://www.bls.gov/cps/cps_htgm.htm#nilf[/url])” is a political number. However, as long as it is measured in the same way month after month, it is useful because we can see in a standardized way which direction unemployment is going.
Back when Bill Clinton left office, the U.S. unemployment rate was around 4%. (I won’t bother to look up the numbers.) Now the national unemployment rate is north of 10%; and in California, it is above 12%. All of those figures may grossly understate the number of people who would like to have jobs but don’t. Yet at the same time, we can get a pretty good idea from them the employment trend, whether the number of people who are unemployed is rising or falling.
[i]”The only ones counted as unemployed are those collecting unemployment insurance. Those who run out of unemployment insurance and/or have stopped looking are not counted.”[/i]
This is not exactly right, but your point is well taken. You can read here ([url]http://www.bls.gov/cps/cps_htgm.htm#unemployed[/url]) how the measure is taken.
You should also understand that the Obama Administration (as well as Congress) has recently added to the amount of time a person can collect unemployment insurance, so it is not the case that large numbers of people were on unemployment but now are off it but are still unemployed.
One other thing to consider: there are always a substantial number of workers in our black-market economy. That’s not just drug dealers and hookers and the like. It includes people who collect food stamps, public housing assistance, Medicaid and some other benefits, maybe unemployment insurance, but at the same time work in low-paid jobs for cash. Examples of this sort of black-market labor pool are in seasonal agricultural jobs, small-time construction and landscaping and roofing, domestic work and temporary labor jobs which pay cash. This income goes unreported.
[i]”The figures to determine politically charged terms are doctored for political reasons.”[/i]
Good evidence for your charge came in the Reagan Administration. Before Ronald Reagan was president, people who were receiving SSI checks were considered part of the workforce, but unemployed. Then at some point after Reagan took office–when unemployment was quite high–the Reagan Administration removed all of those people from the BLS measure of the workforce. That substantially reduced our unemployment rate.
“ERM: People are not being paid what they are truly worth to society… “
There was a reason for my question.
There are two choices for compensation governance: let the market determine price-value, or let some central control apparatus legislate economic fairness. Both are imperfect for optimizing compensation relative to social value… overpaid and underpaid public sector employees and overpaid private sector CEOs, actors and athletes being the examples. But, if we strip away envy and only deal with what is truly criminal, the market produces a better result… except and unless corrupted by government meddling.
Unless corrupted by government meddling, the free-market system pays for talent based on market value… but not specifically social value (although an argument can be made that a robust free-market system provides tremendous social value). The market pays for talent and experience. Highly compensated CEOs are uniquely talented and experienced no different than are highly-compensated actors or athletes. They are the top talent in their domain of expertise and extract a premium for the servicecs they perform. Sports teams only pay what they have to… they don’t pay more than they have to. Movie productions only pay actors what they have to, not more than they have to. Corporate Boards only pay CEOs what they have to, not more than they have to. But, government pays many people more than they have to and many others less than they should. That is the problem.
[i]”Corporate Boards only pay CEOs what they have to, not more than they have to.”[/i]
You surely know that in many cases this is untrue. Corporate boards are often filled with people who have no special skills or knowledge to serve on them and very often with people whose loyalty to the executive management is stronger than it is to the shareholders. Warren Buffet has for years said this is a structural weakness of a majority of publicly traded companies in the United States.
You might want to read this article ([url]http://www.philadelphiafed.org/research-and-data/publications/business-review/2010/q3/brq310_ceo-pay-and-corporate-governance.pdf[/url]) on the problems of weak corporate governance and how that leads to CEOs not being compensated so much for their own performance but for other factors which don’t make their companies more profitable in the long run. The author is a highly respected economist who served on the Fed. It’s his own opinion, but it was published when he worked for the Philadlephia Federal Reserve Bank.
Here is one excerpt from the piece, regarding the large pensions that CEOs tend to be given, no matter how bad they are at their jobs: [quote]… another important source of compensation for CEOs is their pensions. CEOs stay in their positions for six years, on average. According to Lucian Bebchuk and Robert Jackson, the executives’ pension plans had a median actuarial value of $15 million. The ratio of the executives’ pension value to the executives’ total compensation during their service as CEO had a median value of 34 percent. That is, more than a quarter of the money the CEO receives from the company comes after his or her retirement.
They also find that, in contrast to stock options, CEOs’ pensions do not
depend much on their performance on the job. Poorly performing CEOs do not get less pension money after retirement. After a CEO retires, he is seldom in the media spotlight, and few people bother to look into the paycheck of a retired CEO. Bebchuk and Jackson’s research, however, illustrates that the omission of pension plan values by researchers and the media leads to significant overestimation of the extent to which executive pay is linked to performance. [/quote]
“Rifkin: You surely know that in many cases this is untrue”
I agree that some boards may pay more than they have to, but I think it is a small percentage.
Boards hire the best talent matching their assessment of the requirements for the job. Usually there is an executive hiring committee made of a subset of the board of directors, with authority delegated from the board to make the hiring decision. The final hiring would likely need be ratified by the entire board of directors. Like all hiring decisions, there is always the risk of making a mistake; however, I would wager that all hiring committee members desire to hire the best candidate they can afford. The same is true for the professional sports franchise, or the blockbuster mover producer. Everyone wants to win. It is an American thing. There is a constant bidding war for top talent providing the perception of best odds for winning. If company A does not make a sweet enough offer, the candidate can always go to company B. Now consider that the bidding war has gone global.
HP hired Mark Hurd, and then ousted him. His contract will pay him $40 million in severance. He is now a co-president, director and board member of Oracle Corporation. You think maybe Chairman Larry Ellison hired him at a discount? Seems like Hurd is considered a talent?
“Warren Buffet has for years said this is a structural weakness of a majority of publicly traded companies in the United States.”
I wouldn’t call it a structural weakness of the individual companies. I think it is just another macro byproduct of the wild exuberance of the last 40 years of primarily bull markets combined with government’s socialist tendencies to bailout most large companies that get in trouble. Buffet’s comments are self-serving coming after his losses. Better to blame the company CEOs than his poor investment choices or the meddling central-control government policies he seems more inclined to laud as he ages.
“They also find that, in contrast to stock options, CEOs’ pensions do not depend much on their performance on the job”
That is a trend I would like to see changed. However, I think it is a trend that is changing. I cannot find the article I read recently (I think in CEO Magazine), but it was on this topic about how more boards where starting to tie pension payouts to the same metrics used for bonus calculation.
Again though, as long as there is bidding for CEO talent, these guys can negotiate their own terms. If any company is willing to give a new CEO a guaranteed pension and competitive compensation package, then all must compete for the same (all other things being equal). If the CEO then fails, and the company fails, then the consequences are felt and a lesson is learned. If the government bails the company out, then there is no lesson learned, no consequences felt, and the practice continues.
Jeff,
Doesn’t the CEO or other top executives also have a major role in determining compensation of the board members? A sort of tit-for-tat or mutual congratulation society.
Also; aren’t there numerous examples of interlocking corporate directorships?
Where an executive for company A is on the board for company B; and an executive for company B is on the board for company A? Or more distant cousin type relationships.
Would be interested in hearing more details about how the bidding actually works–how can the board and current executives justify their own exorbitant salaries; if they are hiring new talent at substantially lower salaries? So to buttress their own compensation; they make damn sure to pay the new guys coming in a comparably high amount.
Jeff,
Just to be clear, I’m not opposed to free market forces being a major (or the major) governing force in determining compensation; but just am suggesting that market forces alone might not always result in an optimum distribution of compensation; due to imperfections in the system as it is in the real world (not the business school textbook version) and policies that do not perfectly protect from conflicts-of-interest.
I.E. the principal of the free market in determining compensation is I think a sound one; but put into practice in the real world does not always work so well–so some type of modified free market approach, with more rigorous protections against conflict-of-interest, could work better for the business world as a whole.
How do you account for the remarkable energy and success of US businesses for the first ~25 years after WWII, when executive pay scales (relative to company average pay) was more than an order of magnitude smaller than today? The bottom line is that businesses and capitalism flourished under these more moderate conditions, and the average worker had a decent lifestyle.
With regard to actors and athletes, they are a different class of free agent than are business executives.
Whereas business executives are by definition intimately involved with the business operations of their company; actors and athletes for the most part have little or nothing to do with the business operations of the franchise/studio that employs them; so opportunities for conflict-of-interest are few and far between.
“jimt: With regard to actors and athletes, they are a different class of free agent than are business executives.”
There certainly are differences – and I get your points, although your point about executive pay scale after WWII needs to be leveled with the pay of everyone else during this same time (including athletes and actors). In fact, there are many monetary scales that you would need to level for this argument.
Regardless, I think there is a misconception out there – driven by the DNC template for growing government and regulation through the demonization of all things private-sector – that there is some cult of grossly high compensation perpetrated by public boards and executives. People enflamed about executive compensation rarely politicize the pay of athletes and actors. The roles may be different, but the forces that drive up the price are the same. It is simply supply and demand. As long as one business is willing to pay a certain price for executive talent, it then requires all others to compete at that level. That is the free market at work. The main corruptive agent in this case is the government meddling that makes winners and losers and props up failing companies.
“Doesn’t the CEO or other top executives also have a major role in determining compensation of the board members? A sort of tit-for-tat or mutual congratulation society.”
Board members are generally major stock holders and, other than having their expenses reimbursed, generally are not compensated by the corporaration (unless they have a functional role in addition to their role as a board member). Their consideration and incentive for good hiring decisions is provided by increased stockholder value. That is typically a byproduct of profitability, but not always as we saw during the tech stock bubble.
The company I work for is a 501(c)(4) (nonprofit) and our board members cannot be compensated other than expense reimbursement for services provided. I think the SEC rules prevent the type of public for profit “tit-for-tat” arrangements you suggest. The design of corporate governance has evolved over many years and there are plenty of controls to prevent conflicts of interest that could damage a company.
JB: “The main corruptive agent in this case is the government meddling that makes winners and losers and props up failing companies.”
To some extent I agree w this statement. However, I think your world view that the “free market system” should be free of gov’t intervention is naive. Have you ever read a book on the excesses of Wall Street brokerages, specifically Prudential Bache and its downfall? Businesses left unfettered are some of the worst offenders when it comes to illegal schemes, questionable ethics, etc. That is not to say gov’t meddling is always the answer either.
What we need is reasonable gov’t oversight of business – which to me means generally to leave businesses alone that are acting ethically and within bounds, but regulate businesses that are not. But too often, the businesses that are not acting ethically have political connections – a huge conflict of interest.
Let’s take BP for instance. It should have been regulated properly, and needed to be, bc left unfettered look what happened. But had gov’t regulators not been cozened by prostitutes hired by oil companies, and had gov’t regulators been doing their jobs and not watching porn, perhaps the Gulf oil spill would have never happened.
However, I would like your take on why the free market system left unfettered overpays actors and underpays scientists, which is what I think would still happen under a truly free market system. It seems those in the public eye who get the attention are taking in salaries that are obscene, while those that develop this country quietly behind the scenes (scientists and engineers) are paid very poorly in comparison. There is something very out of whack about how workers are compensated relative to their actual contributions to society… it offends my sense of fairness bc of the extreme degree of the disparities in compensation…
”What we need is reasonable gov’t oversight of business”
I agree. I am not advocating market anarchy. We have a need to balance the social need with the need to keep our economic engine healthy and robust. Free market capitalism is a system of creative destruction and development. Competition is what keeps things flowing smoothly. I want to see our government develop framework controls and regulations that foster competition and provide some social protections. But, I want them to stop trying to control the markets to advance their social agenda.
“it offends my sense of fairness bc of the extreme degree of the disparities in compensation”
I have a background in large company IT management. In one job, during the 90s and the tech stock boom, out of my team of 65 technical engineers, I had about dozen that made more than I did. Five of them made substantially more than I did. The reason… they happened to have specific skills in demand but in short supply.
I think the thing that burns the britches of a lot of people… they select a certain profession after developing a certain skill-set and it pays less than other professions they deem less important. That attitude sort of burns my britches for a couple of reasons: 1 – most smart people know what the profession/role tends to pay when they enter it; 2 – there is no way to correct natural market differences in compensation other than government control and that has market-distorting tendencies causing far more overall economic damage that does allowing the market to create some very highly compensated professions/roles.
Unions also distort the market. We pay our firefighters far more than we need to. We could cut the base comp by 1/3 and the benefits by 1/2 and there would be a long line of capable young men and women eager to take the job.
Jeff,
Thanks for filling in about (lack of) corporate Board compensation.
I had heard that they were typically compensated with large stock options; guess I was misinformed.
Re: “The design of corporate governance has evolved over many years and there are plenty of controls to prevent conflicts of interest that could damage a company.”
This is something about which admittedly I have little knowledge–I’ll have to learn more about this to comment about it intelligently. I do think there is a widespread public perception that there are substantial somewhat incestuous relationships between the top guys in the corporate business/government complex; such that they have been able to distort the system in their favor–there is still a ‘free market’ component to their compensation; but that other factors are involved as well. I suspect this perception is somewhat accurate in many cases, and that what happens in real life has a somewhat different character than textbook versions or even what is put down in corporate and federal rulebooks.
jimt: Note that there are always going to be a percentage of bad apples out there trying to game the system. One of the biggest problems is insider trading (where directors, officers or high-level employees in the company use their inside information to buy or sell their company stock for gains). Other conflicts of interest can develop when directors have a stake in a supplier or partner of a company they direct as a board member. However, again, for public companies, the SEC and other regulatory bodies help minimize the risks for these things. Also, certain types of business that carry grater financial power/risk – whether public or private – are required to have annual external audits of their finances and operational controls. The auditor generally reports to the board… helping the board keep an eye on the practices of the executives having the day-to-day operational responsibility. For example, if the CEO and CFO were embezzling or overstating the profit in order to be paid a bigger bonus, the financial audit would tend to discover this. For many companies, the auditor’s report becomes public knowledge. In other cases, depending on the regulatory requirements for the specific industry, the company may have to submit the auditor’s report to a government agency. In the case of Enron, the auditors did not do a good enough job… but that was a (big) exception.
The other thing that helps prevent the type of company-damaging collusion you mention is that board members are liable and can be sued for decisions that damage stockholders and other company-related parties. Board liability is a big deal. Even my small, private, non-profit company has to carry a large director and officer (D and O) liability insurance policy. It is expensive coverage, and it gets mega-expensive when the company develops a history of claims.
JB: “I think the thing that burns the britches of a lot of people… they select a certain profession after developing a certain skill-set and it pays less than other professions they deem less important. That attitude sort of burns my britches for a couple of reasons: 1 – most smart people know what the profession/role tends to pay when they enter it; 2 – there is no way to correct natural market differences in compensation other than government control and that has market-distorting tendencies causing far more overall economic damage that does allowing the market to create some very highly compensated professions/roles.”
I’m not talking about salaries w/n a certain profession. The kinds of obscene disparties I’m talking about are actors like Tom Cruise making $20 million a film, while some productive scientist is slaving away for $60,000 a year. Or the head of the NYSE getting an $800 million golden parachute package upon retirement. Supposedly this happens in a “free market system”, which does not seem to take into account the importance of the contribution made by each of these individuals to society as a whole.
Society could get along quite well w/o the actor, but the amazing advances in research and development have improved our quality of living enormously. Yet the compensation paid to scientists for these advances is not reflective of that. Do I advocate gov’t meddling to make things more equitable? Absolutely not – I am four square against social engineering of this type. But something is out of whack here, and it offends my sense of justice.
Hollywood and sports team franchises are self-promoting, have lots of political connections, and somehow manage to corner more than their fair share of money. How many cities have built sports arenas, even tho it is a losing fiscal drain on the city, just to be able to say they are home to some professional football or baseball team? And Hollywood literally has managed to somehow “own” the airwaves so to speak, has its own awards ceremonies to pat itself on the back, and the awards system itself is as corrupt as all get out. Then come to find out a lot of the movies that are complete duds/garbage over here, sell well outside the country. So we are making crappy movies for the foreign market…
I’m kind of rambling here, but it just seems to me salaries don’t truly reflect the actual social contribution individual employees make to society. I suspect much of it has to do with abject corruption, political connections, and the like. In other words, there really isn’t a truly “free market system” in the U.S., but some sort of hybrid, which lately has grown more and more corrupt, ungovernable, and is moving towards eliminating the middle class…
“I’m kind of rambling here, but it just seems to me salaries don’t truly reflect the actual social contribution individual employees make to society.”
Elaine: I agree with this. It is the shortcoming of free market capitalism… market value superseding social value.
However, when looking at the big picture and long-term in consideration of the alternatives, I think we still get a better result. For example, many more scientists and engineers are employed in the private sector with a robust private-sector economy, and many with specific skills in demand will see high compensation. For example, I know a scientist with skills in bio-fuel/ethanol enzymes area and he has his pick of job offers with pay and benefits matching what many CEOs make. If government held all these jobs, the likelihood is that he would be making a lot less as his pay would be leveled with his peers despite the market value of his talent. With this, we could all feel better about the lack of pay gaps, but at the expense of those that would otherwise be entitled to higher compensation for their market value. Keep in mind that in this country there is nothing preventing any person from pursuing a job or role paying high compensation other than their God-given capabilities, interest, drive and determination… and a little luck. In terms of their God-given capabilities… if they are blessed with some innate talent doing something that does not pay very well but provides great social value, even then, with a robust private economy, they have the potential to make something more out of it. An executive director of a non-profit can make a good living while generating tremendous social value. I have two sons… one wanted to be an elementary school teacher (he has changed his mind since) and the other is a musician and wants to work in the music industry. Neither of those two career paths translates into easy money, but with a robust private economy and an entrepreneur spirit, they have opportunity to make it into something that can provide high compensation.
Speaking of teachers… I think teachers would also be paid more were we to privatize more of public education… well, let me refine that point…. I think the best teachers would make a lot more, the better than average teachers a little more, and the average teachers maybe the same. The low performers would be sent to look for a career a better match for their God-given capabilities. The main difference would be fewer teachers and administrators as private business would do better creating efficiencies using technology and consolidation.