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Home Publications Blogs Beat the Press Outlandish CEO Pay Is a Matter Between Friends

Outlandish CEO Pay Is a Matter Between Friends

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Saturday, 26 April 2014 07:51

Joe Nocera documents what many of us already knew, the multi-million dollar pay packages of corporate CEOs are a matter between friends, not a market relationship. The specific context is the pay of the CEO and other top executives at Coca Cola.

The company has recently been in the news since an activist investor calculated it had set aside $24 billion for management bonuses over a two-year period. An amount that came to $2 million for each person in the pool. Nocera focused on the reaction of Warren Buffett to this news. As a result of his control over Berkshire Hathaway, Buffet is effectively one of the company's largest shareholders. Buffett has repeatedly complained publicly about outlandish CEO pay packages.

For this reason it seemed reasonable to expect that Buffett would use his shares to vote no when the pay package for Coke's top executive was put to a vote. However Nocera reports that he chose to abstain. Buffett's rationale, as relayed through third parties, is that it would have been too confrontational to vote down the package. Essentially Buffett said that he thought the pay was too high, but that he didn't want to make waves. He also acknowledged supporting other pay packages as a director that he felt were too high in order not to make waves.

This beautifully illustrates the dynamics of CEO pay. This is not a market relationship, it is a deal between friends.

When it comes to the pay of ordinary workers, whether clerks in a Walmart or factory workers in the auto industry, the question is always whether the company can get away with paying less. If lower pay means lobbying against minimum wage hikes or shipping work overseas, it will be done in a second, no apologies made. The story is that the goal is to maximize profits.

Yet, the same corporate board members who tell us about representing shareholders' when it comes to the pay of ordinary workers, somehow get all touchy feely when it comes to the pay of CEOs and other top management. This was the reason that CEPR started Director Watch and worked with Huffington Post on its Pay Pals site.

The corporate directors are the ones who most immediately need to be harassed. These are mostly prominent public figures (our list of directors profiled to date includes Erskine Bowles, Richard M. Daley, Elaine Chou, and Judith Rodin). They are paid six figure salaries to go to a small number of meetings a year. Their main responsibility is to ensure that management is acting on behalf of the shareholders.

When directors approve exorbitant pay packages even for mediocre CEOs, they cannot claim they are doing their jobs. They are essentially getting paid off to look the other way.  

 

Note: Typos corrected.  

Comments (11)Add Comment
typo
written by Steve Consilvio, April 26, 2014 8:46
Buffett has two t's
...
written by skeptonomist, April 26, 2014 9:09
Buffett does some good by speaking out but it is futile to expect insiders to change the system - it will have to be done by government regulation. Like other reforms, this will probably not happen until after the next big crash.
The Real Value of CEO and Board Pay: Leverage to Destroy the Economy with Oligarchy
written by Last Mover, April 26, 2014 10:10
... the multi-million dollar pay packages of corporate CEOs are a matter between friends, not a market relationship.


Actually it is a market relationship. Monopolies and oligopolies are markets too, just not competitive markets. More accurately the march of "free markets" has resulted in markets based in oligarchy.

One reason economic predators get away with obscene incestuous pay packages between CEOs and board members is their sock puppets were trained from day one to emphasize the absolute amount of money involved is neglible on a per customer or per employee basis, which is technically correct.

For example even if a CEO makes 400 times as much as the average employee, dividing up that pay among all employees as a gift is an insult in terms of amount received.

The real damage arises from what CEOs and boards do for their pay, which is far above that necessary to employ them, where the true opportunity cost is zero for what they "give up" for seeking monopoly rent profit. (Note that giving up other jobs loaded with the same thing does not count as opportunity cost.)

In ratio terms, the economic damage imposed by CEOs and their boards relative to the pay they get for doing this is astronomical, for example tens of trillions of lost output in the last decade. An analogy would be how the Iraq war was conducted off budget to hide the cost.

When Warren Buffet says it's too confrontational to challenge the obscene levels of pay, he's not even the ball park. He's still talking at the level of sock puppets about the actual pay level involved - not the astronomical political and economic leverage that pay has over the economy itself.
Why can they overcharge?
written by Joe T., April 26, 2014 10:35
Answering that question is the formula for any one of us becoming a Dean-lite.

In my youth, I used to posit that most rich people get that way from overcharging. My obvious answer to how they could get away with overcharging was "patents!". But eventually (probably because I read Dean Baker), I came to see there were several other reasons the market didn't quickly eliminate the overcharging. Here's a list from the top of my head (thanks, Dean, for supplying "deals with friends" in today's post, which we see also in cases of successful salespeople who do little work because they're friends with a powerful buyer).

- obfuscation (think outlandish investment fees),
- collusion,
- bribery or coercion of the regulators (this includes your direct regulator, and the regulators of any competing technologies)
- patents,
- deals with friends
- economic rents (needs to be broken down into specific types).
Some of the CEO compensation seems predicated on "you get what you pay for"
written by John Wright, April 26, 2014 12:54
This is a remarkable story of how Buffett, one of the wealthiest people in the world, could not vote his conscience on a matter that would, apparently, diminish his wealth because of his friendly insider status in a company.

Perhaps an egregious, but in some ways similar, situation to insider approved excessive pay in government was the compensation scandal in the small city of Bell in Southern California (pop 38k) in which the city council officials approved high salaries.

The city manager collected a salary of 787K a year and
a benefit package of paid vacation, sick and personal time of 28 weeks off per year.

One of the highly paid recipients argued "you get what you pay for".

And this "you get what you pay for" rationale seems to be heard whenever private industry executives are mentioning their pay plans.

http://en.wikipedia.org/wiki/City_of_Bell_scandal

But the Bell officials were charged with misappropriation of public funds.

The private company executives do not have similar legal liability, as they have done nothing illegal.
...
written by ltr, April 26, 2014 1:37
A fine comment, but the word harassed should be stricken and changed. We should never call for people to be harassed.
Loss for words
written by John Parks, April 26, 2014 8:26
ltr
What word or words would you prefer? Seriously, "pressured" may sound better, "continually pressured" may be more closer to the desired intent, but I am not sure what you desire or how you would like it phrased.

Jus' curious
...
written by watermelonpunch, April 27, 2014 7:44

Hm, yeah I think the use of the word harassed was used to point out how low wage workers really ARE harassed about their pay. When anyone suggests ordinary people should be paid a fair wage, a living wage, or even to raise the minimum wage, out come the hurling of insults and nasty characterization of those workers as lazy, or worthless, or somehow undeserving of any more pay.
If it's okay to harass low wage workers & poor people in such a way, why isn't there such nasty pressure on outlandish executives who are paid far more than what they do could possibly be worth to civilization?
...
written by Kat, April 27, 2014 8:32
Watermelonpunch-- true enough! But also, we don't get a discussion of how outsize executive compensation raises costs for the consumer.
These guys harass us on a daily basis through their messenger boys and girls in the press telling us we're lazy, shiftless, and barely able to tie our shoes.
Liberals need to get over their idea of "good" and "bad" billionaires. The fact is, as so well documented at BTP, is that nobody should have this sort of fortune if we really had a free market with true competition.

Wage-theft
written by Robert Hammond, April 27, 2014 11:59
Any chance you could tie this in with the recent antitrust settlement with the tech giants on wage-theft-hiring practices, and the flat or negative relationship between worker wage growth and productivity gains?
so right about directors pay....
written by pete, April 27, 2014 3:27
And they are defended by the company if they screw up and don't catch some wrong doing, as in Enron. Essentially a no risk game. Think about other 6 figure folks, aka congress. These 535 folks are paid 6 figures and have access to tons of corporate and union lobbying money and what do we get? Bills that they don't even bother to read, voting for wars and surges for political reasons, etc. Amazing. So it seems corporate directors follow the national lead (and many are not surprisingly former congressmen or regulators).

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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