There are howls of protest over limits on pay and bonuses for companies receiving government bailout subsidies, with one version limiting guaranteed pay to $500,000 per year. The protest is that these top executives ought to receive whatever their talents command in the free market for labor, and if their pay were restricted at one company, they would simply move on to another, making the lower-paying company worse off. There is a free market for labor in the United States, but those who have been gaining a larger and larger share of national income and wealth over the past 25 years are precisely those who have used their power over institutions to exempt themselves from it.
In the case of the executives, what you have is a loosely operated cabal that works through a small number of pay consultants, hired by boards of directors precisely because they recommend higher pay. These boards of directors theoretically represent shareholders, but the elections for them are as rigged and undemocratic as those for the New York State Legislature. They are stuffed with cronies, executives sitting on each other’s boards and recommending increases in each other’s pay, knowing that the consultants will use the pay they approve as justification for more for themselves down the line. Not too many years ago it was argued that soaring executive pay, justified or not, was too small a share of overall company costs to materially affect shareholders, workers, and customers. Now, across a range of industries, that is no longer the case. As corrupt as government often is, there is a case for more intervention rather than less. Not just for corporations receiving bailouts. In fact, not just for corporations. What about unions and non-profit organizations?
I’m content to allow anyone to make any amount of money they can, provided that it is earned. That is, provided that those who pay for that money, people who are generally less well off, do so voluntarily and with full knowledge, because of the value they are receiving in return. Warren Buffet is perhaps the wealthiest person in the world, but few complain about that. No one was forced to give him money, and those who did so have thought it worth every cent he earned. When an organization is subsidized, however, the question of earnings is quite fuzzy. Can the superior deployment of lobbyists in the pursuit of money paid by taxpayers, who have no choice, be considered “earnings?”
Right now there are two systems of limits now on the table. The one passed by Congress “would bar top executives from receiving bonuses exceeding one-third of their annual pay. Any bonus would have to be in the form of long-term incentives, like restricted stock, which could not be cashed out until the TARP money was repaid in full,” according to the New York Times. “The revised rules do not impose a formal cap on executive compensation, unlike the Treasury proposal. Under that plan, banks were barred from paying more than $500,000 in salary until they repaid the TARP funds to the government. (Banks were permitted to offer bonuses in restricted stock.) Senator Dodd’s rules, however, go a step further, prohibiting banks from awarding restricted stock to 25 top executives equal to more than one-third of their annual cash compensation until the banks have repaid all the money owed.”
Of the two proposals, I prefer the U.S. Treasury version. You want executives to be willing to work for a company in need of a turnaround (or one just starting up and not yet profitable), and one way to attract them is with restricted stock. If the company turns around, the stock is worth a lot of money, and the executives share the wealth. But if it doesn’t, well $500,000 is plenty for someone who merely held a job. People should have to wait at least three years to collect those restricted stock bonuses, perhaps five, and the restricted stock should only be worth something if the company makes a significant positive return for investors.
Why, however, are the limits only proposed to apply only to the top executives? Why would other employees — say salespeople or traders — be able to receive large cash bonuses and then walk away from a company that went under soon after? The assumption seems to be that if the bosses were limited to $500,000 up front, and forced to wait for the rest pending the long term success of the company, everyone else would be too, because the bosses wouldn’t people earning more than they did. But companies could just shift titles around so the boss is no longer one of the “top 25” executives.
Moreover, why should the limitation just apply to companies receiving TARP money? How about companies that are merely unprofitable, but are also unsubsidized?
For the past 25 years companies have been paying out lower and lower dividends to investors, and higher and higher wages, bonuses, and pensions to executives. The excuse for this imbalance has been that the executives, who got their money up front, have been building “shareholder value,” and the investors would receive their return in the form of capital gains on higher stock prices — in the long run, someday.
Too often, more often than not, that long-term “shareholder value” has proved to have been ephemeral. The top executives walked off with buckets full of money while shareholders waited for capital gains that never came. Ever. And now, in many cases, the same companies that borrowed money to buy back shares, to offset shares and stock options the executives awarded to each other, are issuing more shares to pay off the resulting debts, diluting their original investors. And dividends are being cut.
In the end, what has happened is a massive transfer of the ownership of American companies, from large number of citizens who saved small amounts money that is now lost, to small number of insiders who granted each other large amounts of money. Something needs to be done to stop insiders from skimming money up front and off the top, in exchange for promises of benefits later from whatever money is left — in business as well as in government, my usual topic here.
Public companies, and private companies receiving financing from public investment vehicles such as pension funds, banks, mutual funds and insurers, should not be allowed to pay anyone more than $500,000 unless they were also making money for investors and the broader community. Pay should be restricted unless a company pays a dividend equal to the inflation rate, and report profits for purposes of corporate income taxes equal to the cost of the dividend plus the funds needed to pay the tax. Top workers at new companies that are not yet that profitable, or failing companies in need of a turnaround, could be given bonuses in the form of restricted stock, which could be collected upon when dividends were established or restored. If they succeeded, therefore, those executives could earn as much or more than those at stable, consistently profitable companies. But if shareholders and tax collectors have to wait for their return, the executives should be made to wait as well. They should share the risk as well as the return.
Is $500,000 in guaranteed salary, with the opportunity to get rich in the long run on restricted stock, not enough to motivate today’s executives? In reality, vastly higher pay is merely what is now required by those who have locked themselves into an expensive lifestyle the rest of us can no longer afford to support. I’ll be there are plenty of entrepreneurial types down in middle management willing to live off $500,000 per year in exchange for a chance to make their mark and cash in later if they succeed. This country has been sending its best and brightest to MBA school for 25 years. Are we to believe at the end of this, with so many companies in dire straights after questionable decisions, that those now occupying the top rungs of management are irreplaceable?
Why should these limits just apply to the for-profit corporate sector? What about non-profits and unions?
Here in New York, most of the largest and most powerful non-profit organizations are not only exempted from taxation, but also receive extensive government funds. The general public, in other words, has no choice but to pay the salaries of their top executives, because the money is collected from them up front in taxes. Despite statutory limitations on “reasonable compensation” in “charities,” many executives of these organizations are paid far more than $500,000 per year. Indeed, I even read reports during the 1990s stock market bubble that non-profit executives were asking for the type of stock options that were making Silicon Valley promoters rich at the time: since non-profits don’t have stocks, they asked to receive options in the stocks of unrelated companies. The excuse is that if one non-profit didn’t pay enough, another would. But that’s a problem that could be wiped out in one stroke by applying a more appropriate “reasonable compensation limit” to all of them at once.
You may have heard the commercials attacking the state government for not increasing health care spending as much as had been expected. The commercials say the rich aren’t taxed enough in New York, even if they are taxed here more than anywhere else in the U.S., and should be forced to pay more or leave, with the money used for more funding for the organizations paying for the commercials. That’s a debate one could have. What to me is not debatable is that no official in an organization represented by the Greater New York Hospital Association, or other non-profit organizations, should be making more than $500,000 per year. Perhaps not ever (if inflation is accounted for), but certainly not now, in a deflationary environment in which millions of people are either losing their jobs or having their pay cut.
Would such a limitation discourage the most innovative people from working in the non-profit sector? I in no way propose limitations on the royalties an educator could receive on a book they published, or a physician or scientist could receive on one of their discoveries. Those who do something exceptional that people are willing to pay for voluntarily could receive compensation accordingly. What I’m talking about is people who have a job, just as I have a job and millions of others forced to compete in an actual labor market have a job.
Finally, what about union leaders? Another organization pushing those commercials is Local 1199 of the Greater New York Hospital Association. How much do its top executives make? Do its members, most far worse off, willingly pay those salaries in exchange for services rendered?
Regardless of this particular case, the same cannot be said for most union leaders. Unions are increasingly concentrated in the public sector where, once again, money is forcibly taken from the general public up front, and then services either are or are not provided. The public does not get a choice as to whether or not what they are paying is worth it. And neither do union members. Most unions, far from bothering to organize those less well off, merely receive money forcibly collected from just about everyone working in the government, in accordance with closed shop rules. They receive the right to that money in exchange for political support for incumbent elected officials. The so-called union members, who are members whether they like it or not, may or many not get services in return. But like shareholders, they aren’t consulted on those pay packages, and don’t have much power.
The same arguments made about the bankers receiving TARP funds could be made about a wide range of people who have seized control of our deteriorating public, private and non-profit institutions, reduced or eliminated competition and choice, and used their power to enrich themselves. The meritocracy, to the extent that we still have one, seems not to have reached the top. There one finds skill in office politics, connections and chutzpah. With some exceptions, the rewards have been greater for gaining control of organizations in ongoing decline than for building new ones or rebuilding old ones. And the consequences are there for all to see. And now, with the equal opportunity, entrepreneurial and contested election eras in our country passing way, we may be ruled by those who have grabbed dynastic wealth, and their offspring, for decades.
We’re not talking about living in poverty here: $500,000 is a lot of money by itself, and for a married couple, that could be just one of two incomes. For one salary, given what the average person makes in this city, in this country, and certainly in this world, $80,000 is in a lot of money, let alone $500,000, and nothing to complain about. The mean earnings for full-time year-round workers in the United States was $53,114 in 2007 according to the American Community survey. Only 9.4% of such workers earned more than $100,000 — the Census Bureau does not bother providing rows in the frequency distribution for the small number of people earning more than $500,000. For all those with graduate degrees, the highest level of educational attainment, the median earnings was $61,287, meaning half earned more and half earned less. To those who have locked themselves into a situation in which they “need” more than $500,000 I ask — exactly whose problem is that in a country where, after five years, a poor, unemployed single mother can be told enough is enough even if they are working for their benefits, benefits that haven’t been increased in more than a decade?
Well, enough is enough. Companies can either pay reasonable dividends, or else limit up front pay to $500,000, with additional rewards coming only when there is absolute certainty that has been earned. Pay at charities should limit pay to $500,000, or else come clean and declare themselves for-profit companies rather than charities. And $500,000 is plenty for unions that are not organizing successfully on a large scale, but are merely collecting money from workers who are forced to pay in exchange for being allowed to hold a job. Will the executives then leave for other countries? Show me the countries where executives who merely hold jobs in unprofitable companies, charities, and stagnant unions earn more.