Market Failure

Sort of quietly, the NYT has picked up and stayed on the issue of CEO pay.  Usually it's Gretchen Morgenson who tackles the story.   On Friday, the editorial page commented on one of her stories announcing that "[r]unaway pay matters because top executives are snatching more than their fair share of corporate proceeds."

On April 9, they ran Executive Pay: A Special Report, by Eric Dash.   Its webpage has links to recent articles on the topic,  multimedia graphics, and a chart comparing the compensation of a ConAgra CEO to a ConAgra meat grinder, which isn't as ridiculous as it sounds.   There are two themes that have been running through the coverage.  The first one is that over the last twenty years CEO's have been pulling in astronomical salaries that do not always reflect the quality of their work.  Suddenly comparing a CEO, who is underperforming and outearning, to a floor worker, who does his job well but makes a tiny fraction of what that CEO does starts to make sense.   Here's the opening to the story by Eric Dash that ran April 9:

IN 1977, James P. Smith, a shaggy-haired 21-year-old known as Skinny, took a job as a meat grinder at what is now a  ConAgra Foods pepperoni plant. At $6.40 an hour, it was among the best-paying jobs in town for a high school graduate.

Nearly three decades later, Mr. Smith still arrives at the same factory, shortly before his 3:30 a.m. shift. His hair has thinned; he has put on weight. Today, his union job pays him $13.25 an hour to operate the giant blenders that crush 3,600-pound blocks of pork and beef.

His earnings, which total about $28,000 a year, have not kept pace even with Omaha's low cost of living.  The company eliminated bonuses about a decade ago.  And now, almost 50, Mr. Smith is concerned that his $80,000 retirement nest egg will not be enough — especially since his plant is on a list of ones ConAgra wants to sell.

"I will probably have to work until I die," Mr. Smith said in his Nebraskan baritone.

Not so for Bruce C. Rohde, ConAgra's former chairman and chief executive, who stepped down last September amid investor pressure. He is set for life.

All told, Mr. Rohde, 57, received more than $45 million during his eight years at the helm, and was given an estimated $20 million retirement package as he walked out the door.

Each year from 1997 to 2005, when Mr. Rohde led ConAgra, he was awarded either a large cash bonus, a generous grant of stock or options, or valuable benefits, such as extra years' credit toward his guaranteed pension.

But the company, a food giant with more than 100 brands, struggled under his watch. ConAgra routinely missed earnings targets and underperformed its peers. Its share price fell 28 percent. The company cut more than 9,000 jobs. Accounting problems surfaced in every one of Mr. Rohde's eight years.

Even when ConAgra restated its financial results, which lowered earnings in 2003 and 2004, Mr. Rohde's $16.4 million in bonuses for those two years stayed the same.

It goes on with details and numbers that are actually painful to read if you've ever read the Bible or a story about  people who work fulltime and can't afford dental care.   But even if you've read the Bible and you know that millions of your fellow citizens - maybe you yourself - can't afford basic health care, you're also American and so you figure that these CEOs get the big bucks because they are worth more than those people without healthcare, worth more than you are.  That's the way our glorious free market economy works, isn't it?  If these guys didn't do their jobs well, if they weren't somehow exceptionally gifted and turning in exceptional results, if they didn't make all of the wonders of the American economy happen for all us slobs, then they wouldn't be getting the tens of millions of dollars in compensation.  They know things we don't know.  They are things we can never hope to be and so they deserve to be made kings.  They're just better than we are.  To answer that, Dash has this bit of number crunching:

But starting in the 1980's, executive compensation began to accelerate. In 1980, the average chief executive made about $1.6 million in today's dollars. By 1990, the figure had risen to $2.7 million; by 2004, it was about $7.6 million, after peaking at almost twice that amount in 2000. In other words, executive pay rose an average of 6.8 percent a year.

At the same time, the growth rate slowed for the average worker's pay. That figure rose to about $43,000 in 2004 from about $36,000 in 1980, an increase of 0.8 percent a year in inflation-adjusted terms.

CORPORATIONS, meanwhile, projected that their own earnings would grow by an average of 11.5 percent a year during that 24-year stretch, by Mr. Bogle's calculations. In reality, he said, they delivered growth of 6 percent a year, slightly less than the growth rate of the entire economy, as measured by gross domestic product.

Chief executives "aren't creating any exceptional value, so you would think that the average compensation of the C.E.O. would grow at the rate of the average worker," Mr. Bogle said. "When you look at it in that way, it is a real problem."

It's not only a real problem;  it's a class war.  The second point that's whispered throughout the bulk of the reporting the NYT does on this topic is that this class war may turn out to be bad for everyone, not only the traditional victims.  That message was crystallized in a column in this Sunday's Magazine called Way Upstairs, Downstairs.  The writer, Walter Kirn, says that he doesn't need to read studies that prove there is a growing disparity in our economy.  He knows that.  What he didn't know is that he shouldn't be bothered by it.  From the story:

Not according to John Snow, still, at this writing, secretary of the U.S. Treasury, who nonchalantly told a journalist recently, "What's been happening in the United States for about 20 years is" a "long-term trend to differentiate compensation." "Long-term," when used this way by this sort of official, tends to mean "fundamentally unstoppable." And, in this case, inexplicable, like a sort of financial global-warming process that may be man-made or (who knows?) a natural cycle that we would welcome if only we knew its function. Snow, a trained economist and former corporate C.E.O., doesn't pretend to be able to explain what's causing this whole compensation differential. Nor does he seem tortured by his ignorance. "We've moved into a star system for some reason," he said, "which is not fully understood."

A star system that isn't fully understood?   How poetic of Sec. Snow.  I thought we were moving into a global economy that operates on the same economic and social theories that dominated during the dawning of the industrial age:  Human beings are disposable.  Wealth must be consolidated and rewarded.  Workers must be isolated.  Is that hard to fathom?

A few paragraphs later, Kirn quotes Snow again:

"Since the early 1980's on," Secretary Snow said, "we've seen a rise in inequality, but we've also seen parallel to that a continuous rise in living standards." To know what he means, you would have to read the studies, but to know how he feels, you just have to hear his diction.

To my ear, the man sounds satisfied. And convinced that his listeners should be satisfied too.

Lucky for Snow and the people he works for, so far we are.

Related: Exxon Chairman Gets $400 Million Retirement Package

UPDATE: Today on NPR - Marketwatch?  Day to Day?  Here and Now? - I heard the inevitable defense of outrageously disproportionate CEO pay.  It was the standard "But these people are so special.  They are creative.  They are risk-takers" defense.  Bull. Shit.  Anybody who's getting paid tens of millions of dollars and has a severence package set up for millions more is not a risk-taker.  These people are probably smart.  They are all lucky.  They aren't all good at what they do.  They take risks with other people's lives and money.  They are not better than you.  They don't deserve to be paid 500 times as much as you do.  They aren't adding value to the economy any more than anyone else who works for a living.  Don't believe the bullshit.

Comments

[Helga Fremlin]

It's a class war alright - waged against those at the bottom from those at the top.

[KathyF]

If people would just learn to choose their parents better, they too could make 400 million a year.

[DavidByron]

Makes you wonder what the real mechanism for determining CEO pay is. Who decides how the money will be divided up between the handfull of American aristocratric families from the 19th century. Who decides how much financial reward will go to the various servants of these great houses for supporting the system and protecting against we, the people.

$400 million is some serious cash but it's still more the level of an employee than of the aristocrats themselves. Also how does that sort of money amount get transfered to Bush and Cheney? Presumably this mostly happens after leaving office, or is handled through other family members. My impression is that the Bush crime family while wealthy is not a top tier aristocratic family.

[Tom]

I think a big part of the change came about with the growth of the capital markets business in the 1980s, specfically the merger/takeover and mega-billion dollar financing deals that emerged at that time. CEOs of long established corporations were suddenly dealing with investment bankers and Wall Street lawyers (many of them relative "kids") making multiples of what the CEOs were making. You also had your Bill Gateses, Steve Jobses, Michael Dells, and whatnot creating enormous wealth for themselves (and their shareholders). Eventually even mediocre CEOs of relatively mediocre companies began getting rewarded like entrepreneurs rather than so-so managers.

The bad thing for the system is that it creates a risk free class. Once you get in the club, no matter how bad you fuck up, the risk is between being enormously
wealthy and just being regular wealthy, not between being wealthy or living under an overpass.

Smart guys likle Bogle realize that this sort of situation usually doesn't end well...e.g., some brand of socialism...and thus screws up the system for all of us for generations.

[eRobin]

Tom: I think that's exactly right. There's a story in the WSJ from yesterday that I want to get to but can't find the time. It traces the United Healthcare CEO's path to insane riches. It mirrors what you said.