Posted on 01/22/2007 9:16:03 PM PST by jazusamo
In an era when our media and even our education system exalt emotions, while ignoring facts and logic, perhaps we should not be surprised that so many people explain economics by "greed."
Today there are adults -- including educated adults -- who explain multimillion-dollar corporate executives' salaries as being due to "greed."
Think about it: I could become so greedy that I wanted a fortune twice the size of Bill Gates' -- but this greed would not increase my income by one cent.
If you want to explain why some people have astronomical incomes, it cannot be simply because of their own desires -- whether "greedy" or not -- but because of what other people are willing to pay them.
The real question, then, is: Why do other people choose to pay corporate executives so much?
One popular explanation is that executive salaries are set by boards of directors who are spending the stockholders' money and do not care that they are overpaying a CEO, who may be the one responsible for putting them on the board of directors in the first place.
It makes a neat picture and may even be true in some cases. What deals a body blow to this theory, however, is that CEO compensation is even higher in corporations owned by a few giant investment firms, as distinguished from corporations owned by thousands of individual stockholders.
In other words, it is precisely where people are spending their own money and have financial expertise that they bid highest for CEOs. It is precisely where people most fully understand the difference that the right CEO can make in a corporation's profitability that they are willing to bid what it takes to get the executive they want.
If people who are capable of being outstanding executives were a dime a dozen, nobody would pay eleven cents a dozen for them.
Many observers who say that they cannot understand how anyone can be worth $100 million a year do not realize that it is not necessary that they understand it, since it is not their money.
All of us have thousands of things happening around us that we do not understand. We use computers all the time but most of us could not build a computer if our life depended on it -- and those few individuals who could probably couldn't grow orchids or train horses.
In short, we all have grossly inadequate knowledge in other people's specialties.
The idea that everything must "justify itself before the bar of reason" goes back at least as far as the 18th century. But that just makes it a candidate for the longest-running fallacy in the world.
Given the high degree of specialization in a modern economy, demanding that everything "justify itself before the bar of reason" means demanding that people who know what they are doing must be subject to the veto of people who don't have a clue about the decisions that they are second-guessing.
It means demanding that ignorance override knowledge.
The ignorant are not just some separate group of people. As Will Rogers said, everybody is ignorant, but just about different things.
Should computer experts tell brain surgeons how to do their job? Or horse trainers tell either of them what to do?
One of the reasons why central planning sounds so good, but has failed so badly that even socialist and communist governments finally abandoned the idea by the end of the 20th century, is that nobody knows enough to second guess everybody else.
Every time oil prices shoot up, there are cries of "greed" and demands by politicians for an investigation of collusion by Big Oil. There have been more than a dozen investigations of oil companies over the years, and none of them has turned up the collusion that is supposed to be responsible for high gas prices.
Now that oil prices have dropped big time, does that mean that oil companies have lost their "greed"? Or could it all be supply and demand -- a cause and effect explanation that seems to be harder for some people to understand than emotions like "greed"?
Thomas Sowell is a senior fellow at the Hoover Institute and author of Basic Economics: A Citizen's Guide to the Economy.
You are correct and the most effective way of doing that is through their wallet. And in our capitalistic society, that is exactly what we are doing.
Actually no. That one dollar from those 500,000 people wasn't taken from them, they chose to spend it for a product or service.
There are many expenditures we make for which there is no better, or more desireable, alternate choice, therefore we have little, or no, leverage to influence management decisions.
And like Dr. Sowell says, what makes you think you should make management decisions about a company or field of expertise you know nothing about?
You'll have to explain that one.
If someone has the power to mandate which books/authors must be read by all students, then I wold call that "centralized planning".
Such a power might require all students to read the New York Times. How would you like that?
"A little leaven, leavens the whole lump".
Given the high degree of specialization in a modern economyor in any field of foreign affairs, demanding that everything "justify itself before the bar of reason" means demanding that people who know what they are doing must be subject to the veto of people who don't have a clue about the decisions that they are second-guessing.
The above does not make a transaction "wealth redistribution," since everyone is subject to the same lack of choice.
That might depend on your definition of "bar of reason".
For instance, one might ask: "give me a good reason why I should help pay for this...?".
Perpetuating the myth of the "genius" CEO. They're paid millions because they're extraordinarily talented and extraordinarily rare -- except, of course, when they're not, in which case they're paid millions to go away.
CEO compensation is the product of board cronyism and/or institutional group-think. It has no connection with actual performance, and no reasonable market basis.
Where did I say mandated? I guess I'll have to explain. I'd like to see Mr. Sowell's works omnipresent in all classrooms. I meant it like some people say a certain cd, dvd, or a certain great work of literature should be in everyones home. How's that? Happy?
LOL, great observation!
Good point! ;-)
Especially Martin Sheen.
Truth, good and sound economics and common sense mean nothing to our Senators. Only re-election counts. Re-election (or ME) first, America second.
With more than five million corporations in the U.S. I'd be interested to know how you arrived at this conclusion.
It has no connection with actual performance
Even though the majority of large company CEO compensation comes from performance bonuses and stock options? Or, are you just referring to a few specific, highly publicized instances where it wasn't?
...and no reasonable market basis.
Not so. The fact that CEO compensation for large companies has been rapidly increasing tells us that there is a supply problem. The demand for talented CEO's is very high. It must not be as easy a position as many here think it is. Otherwise, there would be an abundance of supply and compensation would decrease.
Not even close. The only voice consumers have is to vote with their dollars. They have no right to control how the company compensates their employees or how they price their products. That's up to the shareholders, the Board, management and, unfortunately, in some cases, government regulators.
There are, obviously, business entities that set executive compensation rates based upon reasonable assessments of profitability and performance.
With more than five million corporations in the U.S. I'd be interested to know how you arrived at this conclusion.
Actually, given the sheer number of corporate vehicles employed in the market, I'd say your number is low. But once you dip below the top 3000 or so revenue generators, you are into businesses where executive compensation tends to be capped by the practicality of business coffers (though disproportionality to profitability does not vanish as a problem).
As to how I arrived at my conclusions, my experience as counsel in mergers and acquisitions and in securities litigation, along with historical, statistical information that is freely available, leads me to them.
Even though the majority of large company CEO compensation comes from performance bonuses and stock options?
Performance bonuses are not as common as you suggest, and where they do exist, they are often nefarious critters tied to short term stock gains, revenue (as opposed to profit) enhancements, and cost/productivity-per-unit balance sheets, measures of "performance" that are not infrequently disconnected to company health. And these "performance" bonuses are all too frequently ancillary to so-called "target" bonuses (a rather Orwellian term employed in connection with "guaranteed" bonuses).
And if you believe that "performance" bonuses are triggered only by commonly held notions of business success, you need look no further than Pfizer Inc.'s former chief executive, Henry A. McKinnell.
As for stock options, approximately 150 public companies are under investigation by the SEC and/or the Justice Department in connection with option dating schemes, and more than $5 billion in profit has been erased in the past year by restatements (with 18 CEOs swept from office). And, rather obviously, these cases under direct investigation are not the sum total of stock option dating schemes that are in play. I tend to view this as a problem.
Where properly issued, disclosed, and accounted for on company books, stock options can certainly be valuable in start-up and rejuvenation situations. They can also be, however, pernicious vehicles in established companies, leading both to accounting manipulations and to short term decision making in order to manipulate stock values. They are, in short, a very mixed blessing.
Furthermore, any suggestion that executive base compensation has not increased on a commensurate scale with the these alternative compensation packages is belied by SEC disclosures.
The fact that CEO compensation for large companies has been rapidly increasing tells us that there is a supply problem. The demand for talented CEO's is very high. It must not be as easy a position as many here think it is. Otherwise, there would be an abundance of supply and compensation would decrease.
To which I say hogwash. As noted in a 2003 article in Fortune:
A headhunter "gets his gigantic search fees advancing the idea that there are only five or six people in the world who can do this job--and he knows all of them," says Joseph Daniel McCool, editor of Executive Recruiter News. "The shortage of CEOs is a myth." Graef Crystal puts it in Econ 101 terms: "If pay is rising, it's going to be due either to a change in supply or to a change in demand. Has there been a decrease in the supply of CEOs? No. And the business schools are churning out more people every year. Is there an increase in demand? For every company like ITT that splits into three, there are 100 that merge. So if anything, CEO pay should be sinking."Why, then, isn't it? Because for all CEOs' free-market rhetoric, their pay has less to do with the market's invisible hand than with the invisible handshake. Studies have shown a link between a CEOs' pay and how much the people on their compensation committee make in their day jobs--often as CEOs at other companies. Verizon's Ivan Seidenberg (2002 comp: $22.4 million), for instance, sits on the comp committee for Viacom CEO Sumner Redstone (2002 comp: $39.5 million). "Everybody is stroking everybody else," says Herb Sandler, co-CEO of Golden West Financial, whose comp last year was just $1.3 million. "It's sort of like the Golden Rule gone wrong," says Harvard Business School professor Rakesh Khurana. "CEOs do unto others as they would have them do unto them."
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