dotCommonweal » Blog Archive » “$500K is Not a Lot of Money”

Cathleen Kaveny 02/04/2009 - 1:51 pm contributor

I just assumed he was looking at real estate prices in New York!
(Move to South Bend–you could buy a whole town for the price of an apartment in Manhattan!)

Mollie Wilson O’Reilly 02/04/2009 - 2:14 pm contributor

I’m moved to make reference to the world’s tiniest violin.

Joseph Jaglowicz 02/04/2009 - 2:15 pm subscriber

“I don’t think this will work,” says an observer suggesting that folks won’t work for this meager remuneration.

I say: Let me sit for just one week — one week, mind ya’ — in one of those positions with a $500,000 pay cap. I promise to do nothing of major consequence. Pay me for just the one week, at the end of which time I’ll tender my resignation.

He’s wrong. It will work :)

Joseph Jaglowicz 02/04/2009 - 2:17 pm subscriber

“My heart bleeds for you, bleeds for you, bleeds for you……”

Mollie, it’s an old favorite of mine :)

(But people do have to strain to see my violin :)

unagidon 02/04/2009 - 2:20 pm

The cries of gored animals seeing their pay capped reveals some of the secrets of the jungle.

1. The top executives don’t really see their pay as tied to performance. Rather, it’s tied to the “market”. The “market” in this case is what the CEO and Chairmen (taken together in the largest companies) decide it is to be. But the seller’s market is now declining.

2. Some will argue that this is government intruding into the market. But in this case, the market is the government, which is saying that it wants services to be performed and it is willing to pay up to $500K a year for them. And this is the real reason that the Right hates the government being involved in the market. Government is a real big customer and is hard to deal with (unless you are a Republican Congress and Administration giving the drug companies fixed rates that the drug companies set). Government isn’t inefficient. But it does have the power to tell the private companies that it hires “take it or leave it” at the price and standards that it dictates. Interestingly, the market always takes it.

3. If pay has not been linked to performance at the levels of the people that control the corporation, then the whole classical market theories of the Right are wrong, since these theories require both tangible risks and tangible rewards. As those of us who work in large corporations know, there are plenty of serious risks and rewards. It’s just that not very many of them are linked to the market, as we can now see.

Adeodatus 02/04/2009 - 2:29 pm

To paraphrase Six Degrees of Separation, they’re living hand-to-mouth on a higher plateau.

Anyway, I agree with the point the man is making. If you can leave a company that is receiving TARP money and receive over a million dollars somewhere else, 500k is not much incentive to stay where you are. Of course it would probably be the right thing to do to stay with a TARP company and see it through these tough times. But does anyone really think these people are going to do that?

Barbara 02/04/2009 - 2:30 pm

You need to understand more about executive compensation, how it is determined, how search firms are compensated, and so on, to critique this article. But the bottom line is that, when it comes to executives, BoDs and shareholders rarely say to executives what executives say to those on down the line: what is some other guy going to pay you for doing what you do here? Instead, they construct an elaborate “FMV” determination process that takes place mostly in the imagination of fortune tellers d/b/a consultants.

It is true, however, that executive compensation has become so bloated that there are probably more than a few people who would rather go sit on a beach and live off their personal fortune than work for something with five rather than six or seven zeros. I guess time will tell.

Nicholas Clifford 02/04/2009 - 2:50 pm subscriber

For those of you whose hearts are bleeding at the specter of CEO poverty, cheer up. Even though you may only get $500K for running your company, if you run it into ruin like Wachovia or WaMu or some other such banks, you might still be able to collect tens of millions when they ask you to leave.

unagidon 02/04/2009 - 2:58 pm

“It is true, however, that executive compensation has become so bloated that there are probably more than a few people who would rather go sit on a beach and live off their personal fortune than work for something with five rather than six or seven zeros. I guess time will tell.”

Yeah, but the whole game is one CEO looking at what the others are doing. After all, they all claim that they are in it for love of calling, not the money (so much). I predict that if some high profile guys take the $500K, most will.

If there is mass attrition of these over paid prima donnas, then I am sure that there are many subordinates that will stide over their fallen bosses’ corpses and carry the flag themselves for $500K (for a couple of years).

william collier 02/04/2009 - 3:03 pm subscriber

Don’t forget all the stock options many of the CEOs have. For most of them, it will be substantial $$$ in the bank when the stock market rises again.

If Obama was looking for an issue that will resonate with most Americans, I think he’s found it.

Besides, if CEOs in Japan can survive with much less in their not inexpensive country, I think American CEOs will learn to adjust:

“Pay packages at U.S. automakers don’t stand out compared with those at other U.S. companies. The median 2006 compensation for CEOs at 50 of the largest U.S. companies was $17.8 million, according to a USA TODAY analysis of data from Salary.com’s CompAnalyst Executive database. Packages included salary, bonus, perks and stock and options awards.

But U.S. executive pay outpaces that of Asian companies, including Asian automakers.
Detroit automakers have focused on the gap between their hourly workers and those of the non-union foreign automakers in the USA. Union workers say the executive pay gap should be examined, as well.

‘There is a huge difference between Asia and here when it comes to the top executive compensation,’ says Han Kim, a professor of business administration at the University of Michigan. ‘Rarely in Asia, especially Japan and Korea, do the CEOs get paid more than a million dollars.’

Japanese companies are not required to break out salaries and bonuses for top executives. Instead, they lump them together. Last year, Toyota’s top 37 executives earned a combined $21.6 million in salary and bonuses, according to filings with the Securities and Exchange Commission. U.K. firm Manifest Information Services, which analyzes proxy information, estimates Toyota’s top executive, Hiroshi Okuda, earned $903,000 in 2006.”

http://abcnews.go.com/Business/Story?id=3710270&page=2

Sean Hannaway 02/04/2009 - 3:04 pm

And so it begins.

What planet does he live on? A planet where he can make $500K by working half as hard at a much less risky job.

Why is a university president worth as much a $1.5 million? Manny Ramirez – one year offered more than $20 million?

Where does the $500K come from anyway?

You want to see a boondogle, look at the first lady’s salary history. The year before her husband is elected to the senate she makes under $200K and the year after nearly $400K. What did she do to deserve that pay hike? It doesn’t matter what I think, beacuse the hospital she worked for – that gets a boatload of government money – decided to pay her that.

Believe me, I don’t understand why people do what they do to chase the almighty dollar, but I also know from working around people who make this kind of money and more that I would not be willing to do what they do. Deal with the pressures and time constraints.

Arbitrary caps like this don’t work. Believe it or not, there are people who can be worth more economically than $500K. If I am investor and there is someone who can take the company out of bankruptcy and make it profitable long term, it might be worth it to pay him millions of dollars.

unagidon 02/04/2009 - 3:25 pm

“Believe me, I don’t understand why people do what they do to chase the almighty dollar, but I also know from working around people who make this kind of money and more that I would not be willing to do what they do. Deal with the pressures and time constraints.”

I know what you mean. That’s why “executive” and “executive class” have become bywords in our society for poor accomodations. I don’t see a lot of these guys working much harder than a Mexican busboy does and unlike them, the busboy can get burned in the kitchen. I don’t know what risks you are talking about. When these guys fail, they somehow don’t seem to end up driving cabs.

“Arbitrary caps like this don’t work. Believe it or not, there are people who can be worth more economically than $500K. If I am investor and there is someone who can take the company out of bankruptcy and make it profitable long term, it might be worth it to pay him millions of dollars.”

What you call “arbitrary caps” is what I call “market price”. No one has to take the cap; they just also have to pass on the bail out. The government in this case is acting as the customer. The real entrepreneurs will take the $500K, THEN turn the company around, THEN ask for the big bucks. The people whining are the ones who are going to have to take pay cuts after they screwed the pooch.

You can’t have it both ways. You can’t talk about how risky it is for CEOs and then when the chickens come home to roost cry fowl (so to speak).

Jim Pauwels 02/04/2009 - 3:30 pm subscriber

I’m with Sean Hannaway.

My recommendation to the Obama administration is, lower the ceiling to $10,000. Then we’ll see how many of these companies line up for bailouts.

Bob Nunz 02/04/2009 - 3:36 pm

I see Sean didn’t mention TARP. I don’t think University Prexies/Football coaches, Manny etc get TARP money.

Stuart Buck 02/04/2009 - 4:05 pm

Believe it or not, I’m inclined to say that there should be a $500,000 cap (give or take) on anyone’s income from any source.

Jimmy Mac 02/04/2009 - 4:35 pm subscriber

I worked in Executive Comp for a few years … it was a game of making the greedy feel that they were not needy.

Watch out for this: TARP recipient companies will set up off-the-books deferred comp accounts with a nice rate of interest. These will pay off in the not-too-distant future once the finance gods are back in their heavens and the the rest of use have devoted our 15 minutes of outrage to this matter and then have moved on. And don’t kid yourself: these deferred balances will not be paid out in company stock, either. Cash is King/Queen and Comp Committees of the BOD are composed of like-pampered individuals who are stroked and cosseted by outside “consultants” who know where their bread is being buttered. Hard choices will not be recommended nor adopted.

Barbara 02/04/2009 - 4:56 pm

If someone is interested in trimming runaway executive pay, it would be done approximately as follows:

Any salary over $___ would (a) not be decutible as a business expense and (b) taxable at a marginal rate of (70, 80, 90 percent) unless it is part of a qualifying bonus payment, which would be defined by reference to things like, whether the company was profitable, whether it could claw back income that was based on financial instruments that blew up or accounting that turned out to be fraudulent, whether shareholders had a meaningful say in setting executive compensation policies, etc.

When a company is receiving taxpayer money, it might be legitimate to set a maximum income level, but there are probably much more sophisticated ways to align the incentives of executives with those of their shareholders that allows people who truly create value to profit.

unagidon 02/04/2009 - 5:03 pm

“When a company is receiving taxpayer money, it might be legitimate to set a maximum income level, but there are probably much more sophisticated ways to align the incentives of executives with those of their shareholders that allows people who truly create value to profit.”

True. But I don’t think this alignment existed even when the companies were profitable. The Right talks as though incentives are always aligned unless the government involves itself. One might even think of this as one of their religious tenets.

Sean Hannaway 02/04/2009 - 5:43 pm

U,

If having the taxpayer hook in is enough justification for setting salaries, then as a taxpayer I want university professors capped at $80,000 and administrators at $100,000. That’s “a lot” of money considering what most other people earn.

They may not get TARP money, but they get billions every year from the government – even when you don’t include tax breaks ans subsidized student loans. Let’s stop the flow of that money and see what it does the their compensation.

Also, the cap is arbitrary – that’s why it is a cap. The words “salary cap” and “free market” are mutually exclusive. Admittedly, the free market will now kick in and we will have a practical demonstration of how foolish arbitrary caps are. One result might just be, as pointed out, that these companies that absolutely had to have help according to both the former and current presidents might be thinking – not so much.

As for not wanting their jobs – spend a couple of days with the CEO of a major corporation – and I mean all day and night – and I bet most people if they are even able to manage the work would think twice about doing it for just about any salary.

I am not saying some of these guys weren’t overpaid. Heck, I have been a busboy myself (an Irish one) and some of the other busboy’s were overpaid at $2.50 an hour based on how much work they did. The point is, lots of people are overpaid, but how do we deal with it? Two executives of two similar companies can be paid $1 million each and one may be overpaid and another underpaid based on what they produce. Who decides? The President? If the problem is the market didn’t work, look at why that was, don’t just conclude that a command economy approach will fix the problem. It never does.

Please, someone, point out to me one time, just one time, in human history where price controls (and this is a price control) worked. Do that and I’ll feel comfortable that the all-knowing O can accurately establish executive salaries.

Barbara 02/04/2009 - 5:58 pm

Unagidon, I agree. I meant that it was more appropriate to set general guidelines that focus on the issue of alignment even when a company is profitable. But specific limits might be still be appropriate when the government has to come in and save the company.

Jim Pauwels 02/04/2009 - 6:07 pm subscriber

“Two executives of two similar companies can be paid $1 million each and one may be overpaid and another underpaid based on what they produce. Who decides? The President?”

The board of directors decides. They’re the ones who pay these guys $18 million annually for running the firm into the ground.

Every instance of the bailout seems to be a little different, but in the case of Fannie, Freddie and AIG where the government has become the de facto majority stockholder or outright owner of the enterprise, they can control the composition of the boards and thereby set the executive wages. For TARP, which in its first $350 billion iteration involved bald government transfers of funds to banks (contrary to how the plan was explained to the public, and perhaps to what the bill specifies) without receiving an ownership stake in the banks, the government doesn’t have any ownership leverage to control board composition.

To my mind, the root of the executive pay problem is pusillanimous or dysfunctional boards of directors. The recourse to date seems to be shareholder lawsuits. Isn’t there a better way?

Jim Pauwels 02/04/2009 - 6:18 pm subscriber

“Heck, I have been a busboy myself (an Irish one) and some of the other busboy’s were overpaid at $2.50 an hour based on how much work they did. ”

I was a busboy too, (part Irish, no Mexican that I’m aware of), although in my day it was $2.65 an hour.

David Nickol 02/04/2009 - 6:50 pm subscriber

You mean none of you folks makes over $500,000 a year? What a bunch of losers!

I personally would hate having to scrimp and save to pay $6000 for a new shower curtain.

How do you get by?

Jim Pauwels 02/04/2009 - 7:03 pm subscriber

“How do you get by?”

Personally, I live way beyond my means, accumulate reams of personal debt, borrow from everyone I know, and hope that the government bails me out.

David Nickol 02/04/2009 - 7:13 pm subscriber

Jim,

I have given up dieting in the hopes of becoming too big to fail.

Ann Olivier 02/04/2009 - 9:37 pm subscriber

Barbara is right. The BODs do not act in the ingtsrests of the shareholders, as they are required to do by law. Why don’t they? I think it is ecause we shareholders do not know whom to vote for when positions on the board members are voted on by us individuals. Or, if our money is invested by a retittement institution we do not know enough about proposed board members of the retireme t funds boards to vote for them. I haven’tt the slightest notion what the solution is.

Another fundamental problem is that BODs have no legal obligations to either the company’s workers or to the public.

Patrick Molloy 02/04/2009 - 11:49 pm subscriber

If the caps are effective, a big if, don’t be surprised if local jurisdictions such as New York City and State either cut services or lobby for compensatory subsidies to make up for lost tax revenues from the former masters of the universe.

unagidon 02/05/2009 - 11:15 am

Sean said: “If having the taxpayer hook in is enough justification for setting salaries, then as a taxpayer I want university professors capped at $80,000 and administrators at $100,000. That’s “a lot” of money considering what most other people earn.”

Sean, it’s really refreshing to see you advocate socialism for a change.

Sean said: “Also, the cap is arbitrary – that’s why it is a cap. The words “salary cap” and “free market” are mutually exclusive. Admittedly, the free market will now kick in and we will have a practical demonstration of how foolish arbitrary caps are. One result might just be, as pointed out, that these companies that absolutely had to have help according to both the former and current presidents might be thinking – not so much….

…Please, someone, point out to me one time, just one time, in human history where price controls (and this is a price control) worked. Do that and I’ll feel comfortable that the all-knowing O can accurately establish executive salaries.”

You can see it in chapter one of any introduction to economics textbook. The government is the customer here and is offering up to $500K for a service. The market will either take it or not take it. You seem to think that the market will bear more. I think that in fact, it won’t. One of us will be correct. We will see if people work for this amount or not; that will be the proof.

Sean said: “As for not wanting their jobs – spend a couple of days with the CEO of a major corporation – and I mean all day and night – and I bet most people if they are even able to manage the work would think twice about doing it for just about any salary.”

Been there and done that. It’s part of the enduring fairy tale that people who get paid more must be getting paid more because they work harder. So a guy making $10 million is working ten times harder than someone making $1 million? Or taking on ten times as much risk? Or what?

Or if the million dollar exec’s salary is cut to $500K, he will only work half as hard or be half as productive?

If you spent these days (and nights? whatever for?) with these guys then you would also know that it is considered extremely rude to ever suggest to them that there is a correlation between their performance and how hard they work on one hand and what they are being paid on the other.

It’s unfortunate that Obama is calling this $500K a wage cap. What it is is the investor (Uncle Sam) setting a price for a service, just like you do. Since the government is supplying all of the capital and since the execs in question have not been fired as they should have been for putting their companys into this postion to begin with.

Jimmy Mac 02/05/2009 - 5:29 pm subscriber

Ann: “we shareholders” is another delusion.

The majority of shares in any publicly-traded company are owned by institutional investors, not “we shareholders”. So long as they got their return on investment, they didn’t vote against management on anything.

The times, they are a-changin’ …. but is the attitude of institutional investors? Stay tuned for further news as it breaks.

Sean Hannaway 02/06/2009 - 12:48 pm

Unagidon,

As for the government being the “customer”

It is still an arbitrary cap. It bears no relation to any market considerations. The bank with 1500 employees will be treated the same as the one with 15,000. The bank that takes $1 million the same as the one that takes $1 billion. It is, ipso facto, an arbitrary price cap no matter who set it.

The whole Ben & Jerry’s experiment with salary caps is a practical demonstration of why they fail. The company had a cap of – I believe – top salary 8 times lowest salary. First, the initial cap was a fraud anyway since it applied to the owner of the company who still got profits in addition to the salary. But more importantly they couldn’t get a qualified executive until they abondoned the cap. Even more than that, after they started paying the CEO north of a million bucks the company started becoming much more profitable – hiring more employees and bringing in many times the increased salary in profits for the owners.

No one said that “hard work” and compensation track one for one, it’s about free markets and value. Now, it has been my experience that people in business, the military, and the government, generally do have to work harder, and certainly have more responsibility and stress the higher they go in an organization. My point in recognizing this is that when you make arbitrary caps like this, it is likely that some, and maybe most, people subject to the cap will select to do something less difficult or risky for the same or even more money where the cap doesn’t apply. Think about it even as it applies to these banks. Suppose you have the 1.5 million national level exec who suddenly takes a 2/3 pay cut. Suppose he and others behave as I have suggested and do something else. Why would a lower level exec who might already be making near $500,000 without the cap take on the extra responsibility?

No one gets paid what they’re “worth” in any real sense – they get paid what people are willing to spend to get the talent. Do I think Snoop Dog should be paid as much as an ambulance driver? No. But someone does. Sometimes people spend unwisely, as with the executives in some of these companies, but does that mean the government will do a better job? My gosh, look at some of the people who ran things into the ground – former government officials. And look at many of the new government officials – people who were running the companies into the ground.

unagidon 02/06/2009 - 1:01 pm

“Suppose you have the 1.5 million national level exec who suddenly takes a 2/3 pay cut. Suppose he and others behave as I have suggested and do something else. Why would a lower level exec who might already be making near $500,000 without the cap take on the extra responsibility?”

Just as is the case for the poor hourly workers, this depends upon the economy. All sorts of companies have been doing across the board pay freezes. Do all of them need to? I doubt it. But many of these pay freezes are being done because the market (which is always in great part about beliefs) allows it to occur. There’s no jobs, in other words, and corporations know that people won’t leave over this, this year.

You speak as though it was a year or two ago. We have already seen that banks will give their top execs whatever they feel like and blame “the market”. I think that the going price for a CEO of a billion dollar bank that would have failed without a bailout is at most, $500K. If an executive wants to go out and hawk his or her resume based on their performance in this job market, fair play to them.

But the government, which is going to provide the capital, does get to set the price just as it does for any service it contracts. If the executives don’t like it, then, as you point out, they don’t have to play. If you are worried about an exodus of talented people, well, that’s already happening in the job market as a whole.

Jim Pauwels 02/06/2009 - 3:45 pm subscriber

The article that Margaret posted in a subsequent post noted that, even though unemployment is skyrocketing, wages for the employed haven’t fallen. Wages are “sticky downward”. In theory, a company that slashes 10% of its workforce could realize the same savings by reducing everyone’s wages by 10%, and then nobody would lose their jobs. But companies don’t do this. Instead, they fire 1 out of 10 workers and keep the other 9 out of 10 at the same wages, and even continue to give them raises and pay bonuses.

My hypothesis is that wages are “sticky downward” for top executives. Once a pay range is set, it doesn’t go back down, even when the company is going down in flames.

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