I still don’t get it.

I go out, offer my services to someone, tell them how much I want to get for that service and they either accept my offer or they don’t. If they don’t, I go to someone else until I find someone who is willing to compensate me in the way I want. If I am without a job, I take a lower offer than what I want while I continue to look. Along the way, I look at what I have to trade to an employer for the compensation I want and make sure I can offer what they want.  How is it that I am unable to do this based on what CEOs earn?

Th CEOs do the same thing, don’t they? The people on the BOD must be willing to pay the CEOs such high salaries for some reason. What could it be?

WattaQuestion,
Your view of the labor market strikes me as extremely naive, as are most models that assume a fair and equal balance of power between worker and employer. Employers can usually wait longer to fill a posiiton without starving than a worker can wait to take a position (variably, depending on unemployemnt and other factors). The ability to enhance one’s skills and marketability os contingent on education, a resource which is allocated often on the basis of pre-exisiting wealth and social position, so CEOs are a lot more likely to start rich and end that way than start poor and end rich, though one can always find exceptions. And ultimately, resources taken out of a company by a CEO, as salary or stock or whatever, are no longer available to improve wages or conditions for workers or add value to the company, which might then improve wages, pensions, stockholder value, etc. And none of these issues even touches on the question of what is fair and just, which I already suspect is not a question that moves you particularly. I’m not at all convinced that the playing field is close to level for a CEO and a entry-level worker, so they clearly do not “do the same thing.”

Standardly the way CEO and other executive pay has been determined is by a subset of board members called the Compensation Committee. Now, it is not the case that all such committees are corrupt. However, many board members are chosen to run for their position because they are friendly to management. This can happen particularly if the Chairman is also CEO, and if he has a number of other board positions filled by management. (CFO, CTO, etc.) When choosing other potential board members, they may opt for Joe because Joe is a good guy who’s likely to go along with them on such issues as executive pay. This is particularly problematic when board members are paid significant salaries for their work. They then feel beholden to management, and won’t want to do something that might make them persona non grata to the other board members, thus perhaps getting them kicked off.

Boards also tend to have interlocking membership, in the sense that a member of board X may be the CEO of company Y, and the board of company Y may have the CEO of company X on its board. These sorts of interlocking personal relationships tend to make corporate boards very clubby, and the inevitable result is, “I’ll scratch your back if you scratch mine.”:  I’ll raise your pay if you’ll reciprocate for me. (Reciprocal altruism in action!)

This is added to a sort of cultural hyper-competition between people in the executive suite; there is a culture where any given executive simply can’t stand being paid less than his peers in other companies, irrespective of whether or not he has been doing as good a job as them.

The result is spiralling executive pay, unconnected to any particular ability or success at management.

I stress that this isn’t the case everywhere. But it happens enough of the time to be of very real concern.

mckenzievmd - 06 September 2007 04:15 PM

WattaQuestion,
Your view of the labor market strikes me as extremely naive,

My view is based on how I approach and am successful in the labor market. I have worked minimum wage jobs when the most I could negotiate for was minimum wage and have since learned what to do to get much higher pay. Most of that learning came not from schools, but from library books, purchased books, seminars, internet and such. The most important thing I learned was how to present myself in the most attractive manner. What Color Is Your Parachute earned me at least an extra $15,000 a year between on job and the next.

mckenzievmd - 06 September 2007 04:15 PM

as are most models that assume a fair and equal balance of power between worker and employer.

This is not my model. I know that when I am an employee there are many things over which I have no control, but a few things over which I do. That is why I learned how to increase my own power with respect to employers. The easiest way to earn more money is to make the manager look good in the eyes of her managers and continue to remind that manager what you are doing for them (most people have short memories when you help them). Any person who wants to be successful in a particular system needs to learn that system inside and out. If you want to be a successful employee who gets rewarded, then you need to learn how to be an excellent employee who gets rewarded in that system - so long as it meets your code of ethics. If control matters to you, then you need to learn what it takes to become someone who is granted control - so long as it meets your code of ethics.

Expecting others to change just to make you happy is naive.

mckenzievmd - 06 September 2007 04:15 PM

Employers can usually wait longer to fill a position without starving than a worker can wait to take a position (variably, depending on unemployment and other factors).

This assumes a closed system where all employers are waiting out the potential pool of employees, and it assumes some form of right to maintain one’s geographical location. A manufacturer that relies on one source for a critical raw material is at great risk of going out of business. An employee that relies on one employer is at great risk of losing everything. A person who wants to be an employee needs to always keep their eyes and ears open for potential changes in their company and options of what to do to improve their life or at least protect their family when those changes occur. Also, an employee should have more than one source of income, such as a paying hobby, a rental property, some kind of side business, etc., because the employment market is volatile and it is naive to act otherwise.

The time to dig the second well is before the first one runs dry.

mckenzievmd - 06 September 2007 04:15 PM

The ability to enhance one’s skills and marketability is contingent on education, a resource which is allocated often on the basis of pre-exisiting wealth and social position, so CEOs are a lot more likely to start rich and end that way than start poor and end rich, though one can always find exceptions.

Continuing education can be negotiated for with one’s employment contract. People learn things from one employer that they can take to another employer for higher pay. Even a person who starts in a very low-paying position is learning things that either should merit them pay increases at that employer or that they can take to another employer and get more money for.

mckenzievmd - 06 September 2007 04:15 PM

And ultimately, resources taken out of a company by a CEO, as salary or stock or whatever, are no longer available to improve wages or conditions for workers or add value to the company, which might then improve wages, pensions, stockholder value, etc.

Don’t the stockholders, who own the company, recognize this? Wouldn’t they take action if they thought the company was being ripped off by the C-levels? There is some stockholder revolt going on, especially in companies where a large stockholder is the pension fund of the employees.

Sometimes the thing the stockholders want for a particular company is a quick profit in the form of breaking up the company to liquidate the stock at the highest rate. That kind of activity is never secret - any person with an internet connection can find out how stockholders feel about their company and what is going on in their current industry and take appropriate action.

mckenzievmd - 06 September 2007 04:15 PM

And none of these issues even touches on the question of what is fair and just, which I already suspect is not a question that moves you particularly.

Pointless ad hominem. Define the objective standards of fair and just.

mckenzievmd - 06 September 2007 04:15 PM

I’m not at all convinced that the playing field is close to level for a CEO and a entry-level worker,

It’s not. The playing field is not level for a Vet relative to a janitor either, is it, Doc? Are you ready to lower your rate so that you don’t earn more than the people who clean your office? How would your family feel about that?

mckenzievmd - 06 September 2007 04:15 PM

so they clearly do not “do the same thing.”

A CEO earns more by deomstrating his worth to the BOD and the stockholders (for whom the BOD works) and an employee earns more by demonstrating his worth to the employer. Each person needs to work out the details of their particular position and figure out the best way to get the highest compensation they can earn - so long as it meets their code of ethics. And always keep in mind that everyone has a different code.

Doug,

Stockholder revolts have been happening with continuing frequency.

The Enron hooligans did not go to jail just because of SEC action, but because the stockholders (finally) recognized that they were getting ripped off and took action.

WattaQuestion,

Your own experience is a single data point, not evidence of any strength for your position. We could begin to argue in detail about individuals who succeed and who fail in the labor market and why, but I don’t think that’s an effective way at getting at underlying principles. I, for example, come from a long line of poor people who, one generation at a time, improved their living standards and level of education not only through sacrifice and hard work, but also through deliberate efforts on the part of the larger society to improve the fairness of the system (GI Bill, college loans/grants, public education, etc). So I could make the argument that such programs promote fairness and success in the makret which imght be otherwise unachievable, and that this is relevant to the issue of CEO compensation. But again, I’m just a data point. You believe your fate is in your own hands, I don’t, and we’ll probably just have to disagree about that.

I also think you overestimate the ability of stockholders to hold executives acountable, and underestimate the importance of government and regulation in doing so. You also passed over the fact that stockholders were not the major stakeholder I was concerned with, though I did mention them. Workers are the focus of this thread, and what is good for the stockholders is not necessarily good for them unles the company is primarily employee owned. Stockholders can do well out of poor treatment of employees.

I certainly intended no ad hominem, and I apologize if my remarks suggested I did. What I meant was that your philosophical position, as I understand it from this thread, seems to be that individuals are responsible for looking out for their own interests, and that they succeed or fail on their merits. The general question TA raised of whether it is right or fair for a CEO to make so much more than a worker didn’t seem meaningful to you unless you could be convinced some direct harm to workers came from CEO compensation. That implies you do not consider the fairness or unfairness of the discrepancy to be the real issue, but whether the system works to reward effort and ability. That’s a comment on the principles of your point of view, not on you as an individual.

As for my own professional status, I certainly do get paid better than a janitor, and I think the appropriateness of this and how it comes to be this way is precisely the point of this discussion. I don’t think, nor have I said, that everyone should be paid exactly the same. Nor have I agreed with TA that the unpleasantness of a job is the primary factor that should determine compensation. What I did say was that your assertion that CEO compensation is determined by the same free and fair labor market that determines a janitor’s compensation is mistaken. I provided lots of examples for why I think so, which you ignored.

Likewise, did I get to where I am economically solely by my own virtue and effort in a competition in which all players have a reasonably fair chance to succeed, or did I get here as a result of a system that has fundamental unfairness built into it which can be remedied by changes to the system? Clearly, I believe the second is true. Is the answer to that problem giving up my salary or job? Clearly not. The answer is levelling the playing field, and we can talk about specifics as to how this might be done. But you seem to be starting with the presumption it is already level, or level enough, in which case we’re pretty far apart to begin with.

Doc,

I don’t think you read my post with an objective eye. I said that I know the “playing field” is not level, the system is not “fair” (whatever “fair” is). Now what do we do? In the long term, perhaps some good for some people would come from imposing wage restrictions. What about right now? A person still needs to live in the world the way it is while they are making it the way it “should” be.

Sure, I’m one data point, as are you, but I’m not subject to statistics the way a widget in a factory is. I have some control over my “destiny,” even while there are some parts over which I do not. Just because most people in the US earn less than $40,000 doesn’t mean I have to, does it? Just because most CEOs come from Ivy League families doesn’t stop other people from becoming CEOs, does it? It’s not like winning the lottery, it’s more like playing poker - some elements of chance, and some of strategy. But even poker is a limited analogy, because there is a much wider world of opportunity to take advantage of.

Look back at what I wrote. I said that people do benefit from this particular system, when they learn to benefit from this particular system. A person who took advantage of the GI bill when she was eligible for it benefitted more than someone who did not take advantage of it. Whatever programs the government offers, a person still has to sign up, go to the classes, study the material and go find a job with compensation in line with their new education.

Principles are important, that’s why I asked you to objectively define fair and just. I don’t want to make any assumptions about your principles the way you seem to be willing to make assumptions about mine.

We should pay close attention to what makes it possible for some people to “beat the odds” and increase their compensation levels, doing so would absolutely reveal underlying principles shared by those people. One of which is that they do not treat other people’s higher compensation levels as a hindrance to their own ability to improve their personal economic status. Rather than saying, “It’s not fair that So and So earns 300X what I do,” they usually say, “So and So earns more than me, which means it’s possible for me to earn more, too, if I learn what So and So has done.” How do I know that? Because I study what kind of thinking goes into real “rage to riches” stories. Perhaps those people are incorrect in their assessments of how they changed their economic lives. But in every case, the person says they took their fate into their own hands rather than just waiting for something to happen.

Speaking of which, it’s really hard for me to even formulate the nature of the apparent contradiction between this:

You believe your fate is in your own hands, I don’t

and this:

So I could make the argument that such programs promote fairness and success in the market which might be otherwise unachievable

The programs, whatever they turn out to be, have to be developed by some person or group of people who believe that the future can be changed through human effort. This is what I believe. The part of my fate in my hands is learning the system, whatever it is, and using it to my advantage, as I outlined above.

Maybe by saying “You believe your fate is in your own hands” you mean that I believe my fate is in my hands alone. I certainly do not. I rely on the efforts of others: My educators, my employers, the authors of “What Color…?” and the others who directly or indirectly moved foward the system we are in now. But now we’re in it, so what should I do: Winge on about how “it’s not fair” or take advantage of the tools available to me to build the kind of life I want?