“Is your employer poorer by the amount of money he pays you? Probably not, or you would never have been hired. Why then should we assume that a corporation or its customers are poorer by the amount paid to its chief executive officer?” — Thomas Sowell
Damn I cant stand Sowell. He’s the type of you-know-what that if I were a cop, I’d go all Southern Sheriff on. Check out his entry in today’s REAL CLEAR POLITICS. Is he just jealous that black people no longer have a monopoly on being a burden to society?
I, on the other hand, LOVE Sowell. I try to read everything he has ever written.
“BASTARD!!!” was the first thing that came out of my mouth when i finished reading the quote of the day!!
So I suppose Sonrisa that you think CEO’s should be paid minimum wage?? I’m quite certain your answer would be no to that. So then If I am correct in my assumptions, then what should a CEO be paid?? Here’s a suggestion. How about we let the market determine that.
BASTARD!!! is all i have to say!!!…okay one more thing yes you are right but it still sucks!!
It is not the free market determining CEO’s pay. These CEO’s sit on each other Comp Committees of their Board of Director’s. It is not a free market, they each vote each other a pay raise with the implicit understanding that when there turn comes up, they will remember what their buddy did for him when he wanted a raise. This is collusin and shareholder’s should not stand for it.
Plus these guys like Nardulli at HD took home ridcicuouls sums of cash including obsence severance packages while their companyies stock prices floundered under their “leadership”
This is the free market, albeit imperfect. Remember, the shareholders collectively hold the ultimate power - more government, either indirectly or directly, is likely to make the matter worse. Competition will punish those companies that don’t follow merit…
Michael,
What kind of research have you done on Home Depot?? Stock prices alone are not an indication of how well a company is doing, particularly over a short period of time. Whether Mr. Nardelli was worth what he was paid is certainly debatable, but one ought to look at several factors besides stock performance. One baromoter to consider is revenue growth. Under Nardelli, Home Depots revenues grew by several BILLION!!! Earnings also grew substantially. Unfortunately for him, he came in during a difficult period for the stock market in general. He started in December of 2000, about 9 months after a historic market peak, and 9 months before 9/11. The stock market sucked pretty bad during that period nit to mention several years after that. Under his leadership, revenue more than doubled as well as profits.
I actually did a lot of research on HD. I am a (samll) shareholder. When analyzing a stock youu have to compare it to the performance in its industry and its competitors. There main competitor is of course Lowe’s.
While HD’s revenue and profits have doubled (approx). Lowe’s revenue in that same period have gone up 150% and its profits have gone up nearly 300%. Lowe’s has clearly had greater suceess than HD in Nardulli’s term.
Lowe’s was also a much smaller company in 2000, which means it was easier for them to grow than Home Depot. If owned 1 hardware store in the year 2000 and opened another one a year later, that means I have doubled my base. Get my drift?
BTW, I’m sure thenews didn’t escape you about Home Depots announcement to buy back up to $22 Billion in it’s own stock. That has to rank up there as one of the largest ever corporate buybacks.
Those executive salaries that are the result of collusion between CEOs and Boards are no more a representation of free-market economics than are the formulation of “closed-shop” union businesses. Both are examples of individuals “gaming” the free market system, and both need to be regulated. Yes, by the government.
The fact is that it has always been the case that the fringe excesses of the free market (monopolies, insider trading, excessive union practices, etc.) have needed to be reigned in. To me, the issue of CEO pay acquired under bad faith bargaining falls into that category.
I don’t think most of it is “collusion” as you say. Most CEO’s get to their place by proving themselves in a free market system. Do you think they made it up the corporate ladder by collusion?
My problem with the government regulating CEO pay is threefold:
1. The government is not likely to do it correctly. Price controls historically have caused ‘pay’ in other areas, thereby muting the supposed price control and reducing economic efficiency (thereby making the problem worse). For example, during WWII companies were prohibited from competing with each other over employees so the government set in price controls - prohibiting one company from offering a higher salary to an employee over another…so what did the companies do? They started offering ‘perks’, things like health insurance and so forth (this is what started our modern employee health insurance system). In the end the employees still got higher ‘pay’, they just got it in a different form. However, this distored the free market and made it less efficient, the effects of which we are still feeling today (with higher medical costs).
As long as the incentive is still there to attract better CEO’s, an incentive that will not go away, intelligent and creative people will always find a way to get around the laws…but in doing so the economy is less efficient - something that harms us all.
2. However, suppose for the sake of argument that the government does create an efficient price control on CEO pay…what is likely to be the scenario? The likely scenario is that potential CEO’s will flee to other more lucrative areas - like hedge fund managers. Do you think our best and brightest going to hedge funds instead of CEO positions is better for our economy? I certainly don’t.
A recent article titled, Why Do We Underpay Our Best CEO’s?, in the first issue of The American (yes, I subscribe) explained this point:
The full article goes into much more detail on this topic and directly addresses the collusion charge LaurenceB brings up above. I stronly recommend everybody interested in this topic read it in full. Click here to read it all.
3. CEO pay is not zero sum, by that I mean that the social costs of a company overpaying its CEO is near zero. Overpaying CEO’s may affect the companies competitive edge, it will affect the return shareholders receive, and it may affect the companies long term standing, but all of this has little to no affect on the general economy. So unless you have a deep psychological hatred of the rich, I see no pressing need for the government to regulate CEO pay.
In conclusion, as weak as the check the stock market and shareholders have on excessive CEO pay, it is enough in itself for they are the ones that primarily bear the costs - so the government, like in many other circumstances, is likely to make matters worse if it interferes.
HP and Calcon,
I’ve been very busy and I haven’t had time to respond to your comments. I’m sorry about that. I feel like I have the responsibility to add to the dialogue when someone takes the time to respond intelligently to something I’ve written - I just haven’t had the time.
CalCon,
We can certainly agree that those CEOs who have reached their positions “honestly” deserve our respect. I have no idea what percentage of CEOs falls into that category. For brevity, can’t we just assume that the discussion here concerns only those who fall under the other category?
HP,
Laws are in effect today that prohibit such things as discriminatory hiring practices and some closed union shops. These laws regulate wages indirectly. I would certainly hope that the government could pass similar rules against collusion without needing to directly regulate CEO salaries. As you say, if the government were to become involved in directly setting CEO salaries then bad things would happen. No doubt.
The problem is the collusion, not the salaries.
Collusion is different than salary caps - I am definitely open to collusion laws, but only those that are direct and clear.