.comment-link {margin-left:.6em;}

Mutualist Blog: Free Market Anti-Capitalism

To dissolve, submerge, and cause to disappear the political or governmental system in the economic system by reducing, simplifying, decentralizing and suppressing, one after another, all the wheels of this great machine, which is called the Government or the State. --Proudhon, General Idea of the Revolution

My Photo
Location: Northwest Arkansas, United States

Sunday, October 15, 2006

The Importance of Competitive CEO Salaries

Apologists for high executive salaries typically argue that they're necessary to "attract the best talent out there."

Indeed. Higher pay is absolutely necessary to attract the cream of the crop, those whose resumes have the longest and most impressive lists of organizations that they have mismanaged and run into the ground. If corporations paid lower CEO salaries, they might have to promote their senior management from below, maybe even from (gasp) the ranks of production workers, rather than trying to attract resume carpetbaggers with a history of milking one organization after another and then moving on. Instead of clueless pointy-haired bosses with MBA Disease, who rely on "industry trends" to identify "best practices" on which to base their policies (i.e., who base their understanding of "what works" mainly on the perspectives of equally clueless idiots at the tops of other organizations), they might start making policy based on feedback from below, from the productive workers of their own organizations--the people who actually know something about how to make things more efficient. But then you might have to make it worth their while to improve the process, by changing the downhill flow of the shit river and rewarding them for their contributions. You might have to seriously think about (gasp) higher pay for production workers instead of for desk-bound parasites.

Heaven forfend.

Addendum. In the comments, Presto links to a NYT article on executive compensation consultants. As Presto comments,

People defending these "consultants" as giving any kind of objective advice rearding executive pay... are deluding themselves. They are simply paid to give the people who hired them justification to pay the exorbitant compensation that they want.

In the comments to an earlier thread, Jon Husband of Wirearchy, a former compensation consultant, confirms that view.

I get the impression that the Famous Artists School would be more likely to turn you down for your poor skill at drawing that pirate on the matchbook, than an "executive compensation consultant" would be to recommend against higher CEO pay.


Blogger Presto said...


Are you reacting to this article in the NY Times? If not, you might want to check it out (registration or BugMeNot required).From the article:

YOU may not know Frederic W. Cook, but if you are a shareholder or employee who has watched executive pay rocket in recent years, you are likely to be acquainted with his work.

As the nation’s leading executive compensation consultant, Mr. Cook and his colleagues at Frederic W. Cook & Company are probably responsible for creating more wealth for executives over the last 20 years than any other pay advisers.

He and his associates have advised on the $1.1 billion option grant that Computer Associates gave its top three executives in 1998 and the $83 million pension benefit amassed by Hank McKinnell, Pfizer’s recently ousted chief executive. And in 2000, court documents show, Mr. Cook’s firm provided advice to Tyco International’s compensation committee, which heaped a $95 million pay package on L. Dennis Kozlowski, its chief executive at the time.

Mr. Cook also invented “reload stock options,” the financial equivalent of perpetual-motion machines, which helped bestow millions of lucrative shares on executives over more than a decade until an accounting change forced them into disfavor. This year, officials at the Business Roundtable, a corporate lobbying organization, hired Mr. Cook to counter critics of executive pay; his study tried to justify rapid increases in the packages.

So this clown is, as put by critics in the article, Corporate America's Pied Piper of exorbitant executive pay. People defending these "consultants" as giving any kind of objective advice rearding executive pay, they are deluding themselves. They are simply paid to give the people who hired them justification to pay the exorbitant compensation that they want. What's worse, according to the article, "they have been largely hidden from investors’ view because publicly traded companies have not had to identify them in their pay disclosure filings." That is supposed to change next year, but I don't see how it will make any difference.

It is pretty simple, they tell the executives what they want to hear, or the execs will find someone who will. The consultants are simply supplying the product that their customers want. Their customers are the executives who hired them, not the shareholders who don't know that these people exist most of the time.

People who defend the existing corporate system need to remember that the interests of the shareholders and the executives do not necessarily coincide. Where they differ, the executives will game the system in their favor, simply because they can. This is one of the reasons that I argued in my blog for the elimination of the divide between management, ownership, and labor.

October 15, 2006 3:08 PM  
Blogger Presto said...

Sorry about the "by Presto" thing. I was trying to work around a bug in my Blogger Beta template, and forgot to change it back. it should be fixed now.

October 15, 2006 3:16 PM  
Blogger Bbo Wallace said...

In every job I've had, not once has management asked the workers how to improve things. Had they done so, a lot of problems would have been avoided.

October 15, 2006 5:04 PM  
Anonymous Wild Pegasus said...

I find it hard to believe that you understand management so much better than the whole of American business and industrial research.

- Josh

October 15, 2006 6:17 PM  
Blogger Jeremy said...

I don't think Kevin has special insight, WP... I think he's starting from a different set of premises. The whole of American business and industrial research is incredibly lockstep when it comes to their base assumptions. When you change the vantage point things look different. It's just that not many researchers are looking from that vantage point.

October 16, 2006 6:55 AM  
Anonymous quasibill said...


I think you have it backwards. It's amazing that anyone believes that the vast mass of 9 to 5ers who pay no attention to what their assets are doing other than a quarterly report (and who believe that the Dow just hit a "record high") have any idea how to run a business that they have no experience with.

As usual, the problem is a disconnect in rights (albeit a majoritatively voluntary one) that lets some people spend other people's money with essentially no consequences. People are voluntarily entering the stock market, but that doesn't mean their decision is inherently rational. If you go back to before the Fed was instituted, the stock market was a minor player in finance, and stock prices were pretty tightly correlated to their dividend yields. That's rational.

Now, with the Fed, people believe (wrongly, as it turns out) that stock appreciation is where you make money. That's not rational. That's a pyramid scheme. And now you have people who have bought into a pyramid scheme as the nominal owners of these assets, and you're surprised that they might act like fools?

Directors hand out the money like crazy, because they can. The vast mass of shareholders are happy so long as the Dow keeps climbing in nominal terms, or even CPI adjusted terms. So as long as the Fed is printing more funny money, they'll all be happy. And their managers will be happy, because they get to take a cut of the funny money off the top (in essence, they get the inflated bills early in the process, before prices get to adjust). So everyone's happy, and the directors get to waste money.

October 16, 2006 7:32 AM  
Anonymous Wild Pegasus said...

The whole of American business and industrial research is incredibly lockstep when it comes to their base assumptions.

Indeed, because they work.

It's amazing that anyone believes that the vast mass of 9 to 5ers who pay no attention to what their assets are doing other than a quarterly report (and who believe that the Dow just hit a "record high") have any idea how to run a business that they have no experience with.

They don't. They elect people who do.

- Josh

October 16, 2006 11:00 AM  
Anonymous quasibill said...

"They don't. They elect people who do."

Just like they elect people who know how to run government. Funny that - it fails miserably in both scenarios.

The problem is the same - they have absolutely no way of knowing whether the people they elect have any idea what they are doing. So they just focus on the one thing they think they do know - the stock price.

And again, the problem there is that even the CPI adjusted price is a lie. GIGO - it's more than just a tech nerd's passing of the buck.

October 16, 2006 11:22 AM  
Blogger TaylorS said...

CEOs are too busy pleasing speculators who only care about next quarter then they do about the long-tern intersts of the business they are running

October 18, 2006 12:18 AM  
Blogger Kevin Carson said...


I wasn't thinking of that article, but it dovetails with a lot of other stuff I've come across lately (as indicated by the addendum to this post).


From my direct experience of the ass-brained decisions made by corporate management, I find it hard to believe they understand management better than (say) a trained chicken.

I think you have your causality reversed. It "works" for those at the top who game the system for their own interests, much as the Soviet planned economy "worked" for those with dachas and shopping privileges at GUM. And it "works" precisely because, as Jeremy says, of a lockstep culture geared to the basic assumptions of senior managers.

In every place I've ever worked, pressure to cut costs is translated by managers into cutting production workers while leaving middle management featherbedding intact. Cost-cutting is viewed as imposing some arbitrary percentage of reduction on productive assets, while the production process itself remains a black box internally--much like politicians who are flummoxed by the absence of a "waste, fraud, and abuse" line-item on the federal budget. So their general approach to cost cutting is systematic asset stripping and milking to inflate the short-term balance sheet, while they run the enterprise into the ground long-term.

And this does, indeed, "work"; they're gaming the system to their own maximum advantage given the perverse incentives they're given. So did Ottoman tax-farmers.

I probably don't go as far as quasibill in divorcing ownership from control of the corporation. The managerialists are clearly junior partners in an elite dominated (either through direct stock ownership or through investment banks) by billionaire owners like David Rockefeller. But the power of the plutocrats is tempered by the medium they have to work through--what C. Wright Mills called the corporate transformation of the capitalist class. And one of the limitations of the medium is that while the corporation is run to suit the interests of the plutocracy, it's also done in a way compatible with the interests of the managerial overseers at the same time. Which means that the interests of the absentee owners aren't necessarily maximized. The common interests of production workers and stockholders would probably be served by radically streamlining management, introducing genuinely self-managed production units, and giving workers a far higher share of productivity gains. But that's something that won't happen, absent violent pressure from below, given the fact that it would have to be implemented by the people whose interests would suffer most from it. And to the extent that the great billionaire plutocrats have been socialized into an elite defined by interlocking directorships and united organizationally mainly through the large corporation, they share many of the same basic operating assumptions as the managerialists.

October 19, 2006 12:37 PM  
Blogger Guy Barry said...

I just don't understand how they justify the salaries. They even rewarard failed CEO's.

November 04, 2006 3:19 AM  

Post a Comment

Links to this post:

Create a Link

<< Home