Speaking of corporate statism, there’s a kernel of truth in Mark Perry and Michael Saltsman’s Wall Street Journal op-ed in opposition to the claim that executive pay is too high:
Consider Yum Brands , the parent company of well-known fast-food brands like Pizza Hut, Taco Bell, and KFC. The compensation of the company’s five-member executive team has been a point of contention for the Service Employees International Union-backed fast food protests that have occurred periodically over the past two years. Filings with the Securities and Exchange Commission put the total pay package for the company’s executive team at $30.7 million.
That might seem like a lot of wealth the company could “share.†But like many service-industry employers, Yum Brands has a lot of people to share it with. The company’s 2013 annual report indicates that it employs 539,000 people, 86% of whom work part-time. If the executive team were able to redistribute 25% of their salaries, incentive pay and stock options to these part-timers, the net impact on hourly pay would be just over a penny-per-hour raise before taxes.
Even if the executive team took a 100% pay cut and distributed the money equally to the company’s 463,000 part-timers, hourly wages would only rise by five cents.
The point is not that CEOs deserve more money, or less. If an executive is underperforming, the corporation’s board can and should adjust his pay appropriately or terminate his employment. And if the CEO is making the shareholders rich, the board might increase his compensation. But neither voters nor policy makers should make poorly informed decisions about redistributive public policies based on a faulty understanding of how much executives are paid and why entry-level employees aren’t paid more.
Rather than looking at Yum Foods I wish they’d considered Ford and GM where executive pay has risen even as hourly employees’ wages have stagnated, the number of hourly employees has plummeted, and sales, earnings, and market share have declined. Harnessing executive pay to stock value is questionable in a bull market and it’s even more so when price to earnings ratios are as out of whack as they are today.
The basic question is what sort of reform will result in Dr. Perry’s desired outcome? It won’t be top managers who sit on each other’s boards of directors voting to trim their own pay. And it won’t be the representatives of funds that hold so much of the outstanding stock today voting against valuing a rising stock price above all else. That may be what Carl Icahn is complaining about when he kvetches to Apple’s top management that Apple should be buying back its stock.
This kind of discussion always leads me to believe that the size of corporations is the area where policy should focus. I don’t know enough about mergers and acquisitions to know what the policies should be but conceptually this seems like the key.
Visualize corporations as pyramids, and it becomes obvious that an economy with more small to mid size pyramids would be more equitable and have greater opportunity for growth.
I’m generally sympathetic to discussions of income inequality (even if I think that there is a larger divide between ‘income inequality’ and ‘wage inequality’ than we generally talk about). However, some part of me also thinks that good CEOs can often be underpaid.
How many CEOs have been credited with ‘turning around’ a struggling business? Steve Jobs managed to make Apple turn its first profit in years in 1998, of $108m. In 2010, the last full year he was alive, Apple had a net income of over $10bn (which would soon increase due largely to product lines that were introduced in his life). I think without Jobs returning it would be entirely possible Apple would have gone bankrupt, or been sold off for its IP portfolio for cheap. So without him, Apple’s shareholders would have lost out on tens of billions of dollars of profits.
The converse is that many CEOs are overpaid, since they aren’t creating much value (and may not be doing that great of a job preserving it).
“Harnessing executive pay to stock value is questionable in a bull market and it’s even more so when price to earnings ratios are as out of whack as they are today.”
Indeed, but it’s a tough problem. In our business it’s much easier as all equity driven incentives are realized by those rare liquidity events. Close alignment.
As for the Carl Icahn s of the world, the market for corporate control is made difficult by Democrats demagogic branding of ” corporate raiders.”
And stock buy backs? With the Fed rendering debt so cheap you get into fiduciary discussions if you don’t do it.
@Drew
As for the Carl Icahn s of the world, the market for corporate control is made difficult by Democrats demagogic branding of †corporate raiders.â€
This is a salient point, but I doubt that most people understand what you are saying. More importantly, few of them will spend a few hours learning what the hell you mean. If they did, they could no longer just jump up and down shouting “corporate raiders”, “no doc loans”, or “Wall Street vultures” over and over.