Cutting CEO Pay and Benefits

Hilzoy has a longish post arguing that, in return for the UAW agreeing to cut pay and benefits to levels commensurate with what their non-union counterparts working in American plants in the South make, auto CEOs should do the same. She notes that the ratio of CEO pay to worker pay has skyrocketed over the years.

My general argument to that line of reasoning is that assembly line workers are much more easily replaced than executives. In this particular case, though, it’s hard to argue that some random person off the street couldn’t run a company just as poorly.

Her coda, however, is still problematic:

Only one addition: this has to include not just salary but benefits, and benefits should be equal to (not greater than) those enjoyed by the average American worker. Until the average worker’s employer pays for his or her home security system or chauffeur, those multimillionaires on Wall Street can pay for those things out of their salaries.

Is it really hard to see why it makes sense for the company to pay to chauffeur its CEOs around and not its low-level employees? Ditto security?

The taxpayers have spent significant sums of money over the past year plus safeguarding Barack Obama’s well-being with highly trained professionals from the United States Secret Service. During this same period, so far as I’m aware, they’ve done zip to ensure that GS-5 clerks at Fort Belvoir don’t get shot. Does anyone have any problem with that?

Similarly, once he takes office, Obama will be provided with 1) a free house to live in, 2) a large staff of cooks, planners, and cleaning people, 3) a vacation home, and 4) a personal jet, helicopter, and motorcade. Does anyone not understand why he gets that and low level executive branch employees do not?

Photo:  Peter Kaminski under Creative Commons.

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James Joyner
About James Joyner
James Joyner is a Security Studies professor at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. anjin-san says:

    Tell you what James, lets cut the CEO’s pay to 400k a year. Then they can have all the limo rides they want.

  2. steve says:

    She is off base on her particulars. However, a case can be made, and has, that CEO pay is a factor in our mess. I recommend thie following by William Black. Actually, all four lead essays should be mandatory reading by anyone wanting to comment on our current economy.

    http://www.cato-unbound.org/2008/12/04/william-k-black/adam-smith-was-right-about-corporate-ceo’s-incentives-absent-effective-regulation/

    Steve

  3. Dave Schuler says:

    I’ve long held the position that the managers of any company that takes money from the federal government should have compensation plans no higher than that of a GS-14.

    However, let’s not kid ourselves into believing that excessive executive compensation is the entirety of our problem. It’s only part of the problem. Whatever people think they’re worth, compensation schemes need to be adjusted to the new economic reality. Companies can’t afford to pay their employees more than the company can generate in the form of revenue and while there are mechanisms for adjusting compensation up we don’t have similar mechanisms for adjusting it down.

    That’s not just true among the automobile makers. It’s true in many sectors of the economy including finance and the government itself.

  4. SavageView says:

    Lord knows that Bush was overpaid given the results.

  5. Bithead says:

    Tell you what James, lets cut the CEO’s pay to 400k a year. Then they can have all the limo rides they want.

    Why?
    What practical result will this give us?

  6. PD Shaw says:

    But should forklift operators earn a GS-14 salary ($103,000)?

    The populist argument isn’t working here because the “little guy” here is making two to three times what the average hard working guy or gal makes.

  7. I’m basically in Dave’s camp on this one, although I am not sure I would institute exactly that policy.

    I have never been one to worry about CEO compensation, even though it often made little economic sense to me. However, once these guys start taking taxpayer funds to bail out their companies, massive compensation packages are rather hard to stomach.

  8. Two comments, first of all, time is the most important resource senior managers have and everything that can be done to maximize it makes economic sense for the company. Second of all, it all comes back to that pesky freedom thing, doesn’t it? Let free people make free decisions on what their time is worth, even if it is just so much more fulfilling to be able to tell people what to do according to your particular, and rather limited, perspective.

  9. Rick DeMent says:

    how about the cut CEO pay and benefits to equal the pay and benefits of CEO’s for other nations like Japan? I could like with that after all with their Japanese counterparts making about 25% of US CEO pay it’s a wonder why a rush to outsource executives hasn’t begun in earnest.

  10. Bithead says:

    My question of Anjin is a question to you all;
    What practical benefit is there to government limiting anyone’s pay?

    Even assuming uunions were not in the mix at GM, can we say that anyone’s job will be saved by such limits, on, say Wagoner’s pay? Would the workers be paid appreciably better? If not, what we have here is naught but ‘feelgood’ legislation, that has distatsefully socialistic overtones to it.

    There’s this, also… assuming government managed to invoke such control…What incentive would people have to excel to attain such positions? Doesn’t sound like a a way to improve the company, in the long term, does it, really?

  11. Dantheman says:

    “can we say that anyone’s job will be saved by such limits, on, say Wagoner’s pay?”

    Quite probably — with a few tens of millions extra from reducing Wagoner and other executives compensation in the company’s coffers, various research and design teams could stay in the budget, rather than being axed.

    “Would the workers be paid appreciably better?”

    Probably not, as the wages are set by negotiations (union and individual), and the company has no incentive to pay more than necessary.

    “What incentive would people have to excel to attain such positions?”

    Highly paid executives had decades of low incentives when the marginal tax rates was in the 70-90% range. It didn’t lead to a shortage in persons willing to become highly paid executives. And the economy did far better in that period than after the marginal tax rate was reduced to the 30% range.

  12. raoul says:

    What an embarassing post.

  13. Our Paul says:

    Once again we boldly go into la la land, where ideology trumps examination of problems. Consider the question:

    Should we limit CEO pay?

    The question will immediately engender reasons for or against, as the query is not ideologically neutral. If on the other hand, the question posed is:

    ”What adverse and ill effects will occur with unregulated CEO pay?”

    Now you are focusing on potential problems, and not a questions. I suspect that the many folks, on different sides of the fence, would be willing to discuss what Enron did to their utility bills, and/or their retirement funds.

    Let us keep in mind that before Ronald Reagan, income was taxed on a steep gradient, preventing the inordinate pay and bonuses at the higher pay scale that exist today. In my view, it is not greed, but what our cousins across the pond recognize by the phrase I am all right, Jack.

    In its crudest manifestation in America, it is these same ultra rich that hide their gains in Swiss and off shore banks rather than pay taxes. Let us keep I mind the Bush Administrations decreased the number of IRS Agents, and shifting the audits away from the rich, and on the middle class.

    So let us pose the next question:

    ”Does unregulated CEO pay foster criminality, and contempt for government and common citizens?”

    Ah yes, there is the rub…

  14. Bithead says:

    ”What adverse and ill effects will occur with unregulated CEO pay?”

    That’s hardly neutral, either, since it assumes that regulation is beneficial.

    Quite probably — with a few tens of millions extra from reducing Wagoner and other executives compensation in the company’s coffers, various research and design teams could stay in the budget, rather than being axed.

    Methinks you to under-estimate the costs involved with Unionized workers.

    Highly paid executives had decades of low incentives when the marginal tax rates was in the 70-90% range. It didn’t lead to a shortage in persons willing to become highly paid executives

    Really? How do you think dynsaties were born?
    And I’m going to ask for proof regarding marginal tax rates.

  15. Dantheman says:

    “Methinks you to under-estimate the costs involved with Unionized workers.”

    Methinks you don’t have a clue which workers at GM are unionized. Hint, the R&D teams are not.

    “Really? How do you think dynsaties were born?”

    Please translate. Which dynasties (assuming that was what you meant instead of “dynsaties”) were created in the period 1946-1980?

    “And I’m going to ask for proof regarding marginal tax rates.”

    Do your own calculations on this website. Requesting change in Real GDP during the period 1946-81 gets 3.50% average annual growth. Requesting change in Read GDP from 1981-2007 gets 3.04%.

  16. M1EK says:

    Rick DeMent has the right idea – here it is, hopefully expressed better:

    If it’s a tragedy that US auto workers make more than Japanese auto workers (or US workers for Japanese auto companies)(*), then isn’t it also a tragedy how much more GM’s CEO makes than does Toyota’s or Honda’s?

    You can tell a lot about somebody’s real motivation for various arguments when they focus on those union workers but never mention the boss.

    (* – inflated by including retiree compensation with current worker pay to make it look like today’s assembly line workers make a lot more than they really do, of course).

    The comeback would doubtlessly be something about how the CEO pay was negotiated on the free market, which is, of course, a load of crap – CEOs and board members at large companies are basically an inbred group of oligarchs scratching each others’ backs far beyond what performance would actually dictate.

  17. tom p says:

    Similarly, once he takes office, Obama will be provided with 1) a free house to live in, 2) a large staff of cooks, planners, and cleaning people, 3) a vacation home, and 4) a personal jet, helicopter, and motorcade. Does anyone not understand why he gets that and low level executive branch employees do not?

    I think that is a bit of a strawman James. To conflate the “benefits” of the POTUS with the benefits of the CEOs of Goldman Sachs, Citigroup, or GM… For starters, Obama (or Bush) is the leader of the United States, as such he does not get paid near as much as the CEO’s, they could easily pay for some of these benefits on their own. 2nd of all, do you really want the President of the United States commuting to work from his modest suburban Virginia homein an unarmored KIA? Do you really want him ordering out for pizza when various world leaders come for dinner? etc etc

    None of which has anything to do with Hilzoy’s point, which was that when so many were arguing that UAW workers had to take paycuts to Japanese (in US) workers wage levels in order for GM & Chrysler to get the bailouts, where was the call for management (especially upper) on Wall Street to take similar paycuts? It is the hypocrisy she finds objectionable. It can be argued that these guys willingly drove their companies into a financial black hole in search of short term profit… and are taking us down too.

    As to the larger point of

    My general argument to that line of reasoning is that assembly line workers are much more easily replaced than executives.

    Is true, and they should get more, but 350 times as much as the avg worker? especially in light of

    In this particular case, though, it’s hard to argue that some random person off the street couldn’t run a company just as poorly.

    Which is why I wonder, where are the shareholders?

  18. Bithead says:

    Methinks you don’t have a clue which workers at GM are unionized. Hint, the R&D teams are not.

    And that affects the discussion, how? Be specific.

    Do your own calculations on this website. Requesting change in Real GDP during the period 1946-81 gets 3.50% average annual growth. Requesting change in Read GDP from 1981-2007 gets 3.04%.

    I suspect that there are some differences in how that gets’ measured on that site.

  19. James Joyner says:

    For starters, Obama (or Bush) is the leader of the United States, as such he does not get paid near as much as the CEO’s, they could easily pay for some of these benefits on their own. 2nd of all, do you really want the President of the United States commuting to work from his modest suburban Virginia homein an unarmored KIA? Do you really want him ordering out for pizza when various world leaders come for dinner?

    Were I a shareholder in, say, CocaCola or Microsoft, I’d say the same of their CEOs. I want them spending their time doing their jobs, not fighting traffic. Is it worth, say, $150,000 a year to pay a chauffeur and related expenses so that he can spend hundreds of hours a year getting work done rather than driving? If it isn’t, you’ve got the wrong CEO.

  20. Bithead says:

    You can tell a lot about somebody’s real motivation for various arguments when they focus on those union workers but never mention the boss.

    OK, tell you what. Take all the money the CEO makes. I mean, go ahead. Take it all. Spread it out among the union workers. What kind of difference, on avergae, does this make for the workers’ pay?

  21. Dantheman says:

    “And that affects the discussion, how? Be specific.”

    You tell me — the relevant exchange is:

    B: “can we say that anyone’s job will be saved by such limits, on, say Wagoner’s pay?”

    D: “Quite probably — with a few tens of millions extra from reducing Wagoner and other executives compensation in the company’s coffers, various research and design teams could stay in the budget, rather than being axed.”

    B: “Methinks you to under-estimate the costs involved with Unionized workers.”

    D: “Methinks you don’t have a clue which workers at GM are unionized. Hint, the R&D teams are not.”

    “I suspect that there are some differences in how that gets’ measured on that site.”

    I suspect not, but if so, it should not be difficult for you to find countervaling statistics. Have at it.

  22. anjin-san says:

    Why?
    What practical result will this give us?

    I am not making a practical argument, just extending Jame’s position a bit. If a CEO somehow merits the same perks as the President, perhaps he merits the same pay.

    I don’t favor regulating executive compensation outside of bailout situations, but boards really need to get back to the business of oversight and due diligence.

    A C level position at a major corporation should not be a slot machine that hits “777” every time. Compensation should be tied to performance. It should be capped at some multiple of the average company salary TBD by the board. You can make legitimate arguments that a CEO should have a limo and access to a jet, but not I think a company bought vacation home and and endless supply of flowers for his wife on the company nickel.

    And I’m going to ask for proof regarding marginal tax rates.

    This has to be a joke. Do your own research Skippy.

  23. tom p says:

    Is it worth, say, $150,000 a year to pay a chauffeur and related expenses so that he can spend hundreds of hours a year getting work done rather than driving?

    Well James, you picked the one point I agreed with you on (and disagreed with hilzoy on)(I should have said as much). But in the case of these guys, if they had had to drive themselves to work, maybe a billion or 2 could have been saved?

    If it isn’t, you’ve got the wrong CEO.

    Which they definitely did… and still do. So, we are giving billions to companies with a leadership that has only shown an ability to excell at losing money at a pace that has not been seen in decades, and “nobody” (in quotes, because some do) seems to think they should be standing in an unemployment line or at least take a paycut?

    And I repeat, why aren’t the share holders screaming bloody murder? After all, aren’t they the ones who get to vote?

  24. James Joyner says:

    And I repeat, why aren’t the share holders screaming bloody murder? After all, aren’t they the ones who get to vote?

    We’re in agreement there. That’s how it’s supposed to work, not some government dictat.

    Unfortunately, the process by which executive salaries are determined is often murky and there’s a dubious process wherein overlapping boards survey pay levels, creating a conflict of interest. (There was a great article a couple years back but I don’t recall where offhand.)

  25. charles johnson says:

    Hilzoy has a longish post arguing that, in return for the UAW agreeing to cut pay and benefits to levels commensurate with what their non-union counterparts working in American plants in the South make, auto CEOs should do the same. She notes that the ratio of CEO pay to worker pay has skyrocketed over the years.

    My general argument to that line of reasoning is that assembly line workers are much more easily replaced than executives. In this particular case, though, it’s hard to argue that some random person off the street couldn’t run a company just as poorly.

    The CEO of Honda, a successful car company, makes about $2 million a year. The CEO of GM, an unsuccessful car company, makes about $20 million a year. Executives are basically raiding their companies for all the money they can get. I understand why they do it, I don’t understand how the shareholders let them get away with it.

  26. tom p says:

    We’re in agreement there. That’s how it’s supposed to work, not some government dictat.

    I know you are James (it was a rhetorical question)

    Unfortunately, the process by which executive salaries are determined is often murky and there’s a dubious process wherein overlapping boards survey pay levels, creating a conflict of interest. (There was a great article a couple years back but I don’t recall where offhand.)

    Bill McClellan of the STL Post-Disgrace has had a # of very good columns about this (with a St Louis tilt) about this aspect over the years. One of his most biting columns was for the CEO of Boatmens Bank (this is only one of his columns about the whole affair, not the one I would like to link to, and not even making the point I am trying to make, but if one reads it, you will get my jist)who got a multi-million dollar bonus for selling out the Bank to who ever bought it.

    A dubious process indeed…

    On the gov’t dictat side of the equation… Aren’t they asking us for money? Why do we not get to set conditions? This is the part that gripes hilzoy: It is ok as long as the conditions pertain to the UAW… Upper management? No comment from Sen Shelby…

  27. James Joyner says:

    On the gov’t dictat side of the equation… Aren’t they asking us for money? Why do we not get to set conditions?

    I oppose giving them the money. In principle, I don’t have an issue with conditions in the event they get the money. The caveat is that, if they have existing contractual obligations owed, they’re entitled to them.

  28. Bithead says:

    I am not making a practical argument

    No, you’re not.
    My very point.
    You’re making an emotionally late and, populist argument. One that in reality if implemented will have exactly the opposite of the desired effect. Unless, of course, that is your desired effect is simply to screw the successful .

  29. anjin-san says:

    No, you’re not.
    My very point.

    Well, you have a reasonably firm grasp of the obvious, no one can take that from you.

    Unless, of course, that is your desired effect is simply to screw the successful .

    Bitsy, when I got to work, I report to the CEO, so please, try harder. I have nothing against success or the successful. Do you actually enjoy sounding like a fool?

    When the CEO of a company like GM that is a train wreck makes 20 million a year, and the CEO of a fine company like Honda makes 2 million, there is something going on other than Rick Wagoner being “a success”. It is not a distinction I expect you to be able to understand.

  30. tom p says:

    Been away all day but,

    The caveat is that, if they have existing contractual obligations owed, they’re entitled to them.

    So, may I assume you feel the same about the UAW members/big 3 contractual obligations?

  31. tom p says:

    And yes James, I am backing you into a corner. But only because I do not recall you complaining much about congress’s attempts at modifying the UAW contracts.

    Maybe you did, and I missed it, but as I recall, all of your complaints about the Auto bailouts had nothing to do with that particular aspect of them.

    “What is sauce for the goose, is sauce for the gander…”

  32. James Joyner says:

    But only because I do not recall you complaining much about congress’s attempts at modifying the UAW contracts.

    Maybe you did, and I missed it, but as I recall, all of your complaints about the Auto bailouts had nothing to do with that particular aspect of them.

    I’m opposed to the bailout, period.

    I don’t think GM and Chrysler can sustain themselves in today’s competitive market paying assembly line workers as if they were highly trained, skilled labor. But it’s not Congress’ job to set worker salaries, whether we’re talking about line workers or CEOs.