Why Wealth Inequality Matters – Plus CEO Pay Again

inequalityLast week I wrote about the sharp rise in super-manager pay throughout the 1990s, and specifically a funny (to me) quirk of stock option awards and bad math by corporate boards. The good news is I have a bunch more thoughts on the rise of super-manager pay and – but wait – Wait — WAIT! Listen. You Guys! Before you turn the page. This is important.

The rise of CEO pay is part of a larger topic.

You might have read last week’s post and thought, on the one hand, who cares what top executives get paid, that’s their business. And, on the other hand, it doesn’t apply to you.

I somewhat agree. I wish the rise of CEO pay applied to you and me, obviously, but jealousy can only get us so far.

Wealth Inequality

We – I don’t mean you as readers of a blog and me – but rather we as a society, need to have a serious discussion about “wealth inequality.”

I know I can’t make you think it’s important. Personally, I see rising wealth inequality as one of the top three most important political, moral, and economic issues of our time.

Believe me, I understand, even putting those two words – wealth inequality – together feels political. It feels ‘socialist.’ Also, it bears repeating that I consider myself a pretty hard-core capitalist. But I feel like – just as democracy depends on outspoken critics to make it stronger – capitalism too needs its critics in order to make it stronger.

Wealth inequality in this country seems like such a taboo topic – somewhere on the scale between sex and the surprising likeability of songs by the band Nickelback – that I feel the need to make the case for even talking about it.

Nickelback_is_good
Shhh…nobody mention that they actually LIKE Nickelback

So I say the sharp rise in CEO pay matters, specifically, right now, because wealth inequality matters.

Political insurgencies

Do you know what these bizarrely contentious Presidential elections of 2016 are actually about? I think I do. It’s about anger from people who resent the concentration of wealth and power in the hands of elites.

The surprising insurgency successes of the Presidential campaigns of Bernie Sanders, Ted Cruz, and Donald Trump each in their own way are “anti-Establishment.” A year ago, few would have given any of those three a serious shot at making it so far into primary season.

All three – Cruz, Trump and Sanders – tap into anger at how elites (regardless of whether you label them “Washington Insiders” as Cruz does or “Wall Street Fat Cats” as Sanders does, or “Sad-Pathetic-Loser-Fraud-Establishment” as I imagine Trump might) seem to have benefitted disproportionally at the expense of ‘regular people’ over the last thirty years.

What the anti-establishment insurgencies indicate to me is that old labels of “Left” and “Right” matter less right now than whether you identify as an “Insider” or an “Outsider,” or simply part of the “Powerful” or the “Vulnerable.” We know many people in the New Hampshire primary were torn between voting for Trump or Sanders.

The collective id senses some unfair proportion of wealth and power has concentrated at the top, at the expense of the bottom.

Meanwhile, folks at the top are surprised at this resentment. Folks at the top have embraced a narrative of meritocratic success. “We earned it. We worked hard. These rewards came to us through highly moral means, such as education, savings, delayed gratification, professional advancement, and investment. What are these Cruz/Sanders/Trump supporters even complaining about?”

In that context of inequality and resentment, properly explaining executive compensation matters tremendously. Depending on your explanation, you would favor a whole series of different political choices.

Back to CEO pay

So that’s why explaining the rise of super managers in my lifetime matters, at least to me. (Also, why the heck am I not a super manager?)

The market

One logical thing to say is that in a market system, supply and demand sets compensation to the “correct” market level. Executives get paid so much because their skills are in high demand and top managerial talent is in short supply, hence the ‘price’ of executive talent rises to a market-clearing level. If that happens to be over $10 million dollars per year, so be it, that’s just the labor market for top executives.

This tautology – the market pays $10 million because that’s where supply meets demand and where the market clears – has some elegance.

sanders_anti_market
Sanders sets his jaw against the problems of the market

And if that’s the explanation, and you don’t like inequality, then you might see ‘the market’ as something worth fighting, as I think Sanders and his supporters tend to do.

Increased corporate scale

The global scale at which corporations now operate creates tremendous efficiencies. Our organizations are profitable through combining technology with the cheapest global talent, both in the country (via immigrants) and out of the country (via offshoring). But if you believe CEOs are paid the big bucks on the backs of cheap labor, and domestic workers feel their wages undercut, then Trump’s plan to build a wall against that cheap labor starts to sound less insane than it really is, right?

trump_wall

Interlocking board members

Anybody who watches public companies knows that while corporate boards theoretically represent shareholders, in practice they represent the insider interests of corporate management and themselves. Board members – themselves often highly paid executives typically invited to join the board by the CEO – would not be so gauche as to limit top executive pay. It’s like a private club, and when you’re on the inside, you get paid quite well.

ted_cruz_not_likeable
Why is he always left out of the club?

I see this “club” explanation as the sort of “us vs. them” mentality which seems to fuel Cruz’ fire. The guy never gets invited to the club, like, ever. As his Senate colleague Lindsey Graham noted, “If you killed Ted Cruz on the floor of the Senate, and the trial was in the Senate, nobody would convict you.”

Lower taxes

Personally I think taxes explain everything in life. So, outside of the math errors of corporate compensation committee boards I described earlier, I believe the drop in marginal income tax rates leads directly to wealth inequality.

And I request of our leaders: please don’t raise taxes until after I’ve gotten paid for a few years like a super manager.

 

Please see related posts:

CEO Pay and the Options Math Error

Inequality in America – Video and Graphic

Inequality in America – The WSJ Video

Inequality in America – The Interactive Map

Yahoo Executive Compensation – It’s all about the stock awards

Executive Pay with Equity Awards – It takes a Buffett to push this agenda

 

 

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Now, Alanis, For Something Really Ironic

There’s comedy, there’s high comedy, and then there’s Wall Street Journal Op-Eds.  Phil Purcell writes this morning about the opportunity to cure “Too Big To Fail.”  He urges shareholders to split our mega-banks into smaller, more manageable entities.

Since I happen to agree strongly with that goal, I naturally sat up straighter at the breakfast table, ignored the screaming two-year-old[1] and gripped my cereal spoon a little tighter, all the better to pay attention to Purcell’s piece.

But Purcell crusades Wall Street Journal style, so I should have been prepared for his giant helping of unreflective Jell-O.  He served up a plate of 1950s thoughts, masquerading as a new idea.[2]

Ah, where to begin?  Let’s start with the fact that Purcell himself created one of the Too Big To Fail behemoths, leading Dean Witter’s acquisition of Morgan Stanley in 1997.  He then headed the combined firm before being pushed out in 2005.  All the ‘synergies,’ all the ‘costs savings,’ all the ‘shareholder value’ he made happen with that exciting merger?  He’s awfully quiet about that now.  I’m not saying he’s apologetic, as he mostly certainly is not.  Just quiet.

At the point in his Op-Ed where he notes that Morgan Stanley Dean Witter had to be bailed out by taxpayers in 2008, Purcell ought to contritely note his part in the creation of a massive Too Big To Fail bank.[3]  But he’s not about to apologize for the unholy mess that he engineered, to his personal benefit, capped off at the end by a $113.7 million[4] exit package.[5]  The fact that he brought a perfectly nice retail brokerage (Dean Witter) under the same roof as an M&A and trading powerhouse (Morgan Stanley) resulted in an opportunity for private gain for him by the time he left in 2005, and public liabilities for us taxpayers in 2008, just three years later.  But that’s not his concern, and that obviously goes unmentioned.

What he is very concerned with, however, is shareholder value.  Purcell rightly points out that investors discount the share prices of firms that could not survive the 2008 crisis without a taxpayer bailout.  Shareholder value, I agree, is a worthwhile concern.  Not the primary concern when it comes to TBTF, but still, a valid concern.

Purcell proposes that shareholders advocate a break-up of the giant banks.  Nevermind the fact that shareholders have close to zero effectiveness [6] [7] when it comes to managing big governance issues of publicly owned corporations.  The only folks who have the power to choose to break up their own big public firms are the ones in the CEO seat.  Few CEOs willingly shrink their own kingdoms.  It just doesn’t happen that way.[8]

Purcell’s main recommendation is to split the TBTF banks into smaller entities, so that client-oriented firms “should be spun off to give the value to shareholders,” while high growth financial-service companies should be owned privately.  You know, by private equity companies.  And here’s the weird thing you’ll be shocked by:  Purcell, strangely enough, runs a private equity firm that purchases high growth financial service companies!  What a happy coincidence!  He’s just here to help.

So, to sum up:  We should combine financial firms into Too Big To Fail banks from 1998 to 2008, as it will greatly enhance the probability of extraordinary CEO pay from a shareholder-owned company, and never mind the taxpayer bailout to follow.  In 2012, we should break up these same banks to sell them to your private equity business?  Again, you don’t even mention the taxpayer bailout or the policy implications of the government welfare underlying your fortune?

Thanks for your thought leadership through the years, Mr. Purcell.  My two year-old is more selfless than you.  Now why is she crying again?



[1] My wife made me include that detail.  Not sure why.  Wives work in mysterious ways.

[2] “Mr. Romney!  Mr. Romney!    A Telex just came in for you, and I had the secretary make you a carbon copy!  Mr. Purcell accepts your offer of Treasury Secretary in the new administration!”

[3] Is it too much to ask that we get a little Japanese-style begging of forgiveness from guys like Purcell?  Just a deep bow and a contrite apology – I really think it would go a long way.

[4] Read about it here.  There’s a great passage at the end of the NY Times coverage, in which Purcell’s departure and golden parachute kicks off a competitive feeding frenzy of private enrichment at the top of Morgan Stanley, headed then by John Mack.  A compensation consultant calls it “an ‘ice cream war’ between children, where one wants as much as the other. ‘Except that, in this case,’ he said, ‘somebody seems to have got the whole ice cream factory.’”  Oh, the good old days.

[5] If you have a strong appetite for self-serving crap, can I interest you in Phil Purcell’s Wikipedia entry?  Which he clearly wrote himself?  He’s not well-known enough to have anybody come in and edit his entry and add a dose of realism, although Wikipedia notes that the page probably needs some editing.  (Meaning, there’s only been one author of the post, Purcell himself.)

[6] The “Shareholder Democracy” aka “Say on Pay” Movements exist in the minds of a few business school professors.  But they’ve had no noticeable effect on the business world.

[7] The exception to the rule being a few well-known hedge fund agitators like Daniel Loeb, Bill Ackman, or the wily veteran Carl Icahn.

[8] Mubarak, Saleh, Gaddafi, and Assad used to get together at pool parties and laugh at the relative accountability and haplessness of American financial CEOs Pandit, Moynahan, Dimon, and Blankfein.  Now Blankfein’s all like, “Shoe’s on the other foot now, bitch!  They can’t make me leave!”

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