About CEO pay vs average Joe
freindlyfired
Posts: 297
It's pretty hard these days to justify astronomical executive pay. In 2007, the average CEO's pay of $10.5 million was 344 times higher on average than the average worker's wage, according to Executive Excess 2008, a joint report from the Washington, D.C.-based Institute for Policy Studies and Boston-based United for a Fair Economy. The top 50 private investment fund managers each took home more than 19,000 times the average worker's earnings.
But never fear, Jack and Suzy Welch -- the former high-flying CEO of General Electric and his wife, the former editor of the Harvard Business Review -- are willing to defend high executive pay by return to first principles and invocation of "the market economy." In a recent issue of Business Week, they write, "Yes, most CEOs make a ton of money, and sometimes they make too much, but in a market economy salaries are set by supply and demand. We also live in a market economy where companies that field the best teams win, and, because of global competition, the best teams tend to be expensive."
There are several decisive rebuttals to this claptrap.
First, there is no plausible market-based story why executive pay should have been bid up so much over the past quarter century. Are executives working harder now? Making better decisions? Has the CEO supply and demand equation changed?
Second, executive pay is not set by the market, but by boards of directors, who frequently are CEO cronies and excuse their behavior by relying on conflicted compensation consultants.
Third, the most super-high compensation packages are typically based on performance standards, with executives cashing in on stock options as share values rise. But this is a system easily gamed, with those same shares sold before short-term thinking leads to medium-term losses. By way of example, consider the massive pay packages obtained by the ousted CEOs of the now-floundering Wall Street firms.
And now comes a new analysis that further debunks the market-based rationalization for ridiculous CEO compensation levels. Executive Excess 2008 shows how taxpayers are helping foot the bill for these outrageous compensation packages.
Executive Excess 2008 highlights five distinct U.S. tax subsidies for executive pay. These are actually market distorting, in that they let top executives and investment fund managers take home more than they would if they played by the same tax rules as regular people. Altogether, Executive Excess 2008 reports, the five tax loopholes heap $20 billion in subsidies on the corporate and hedge fund honchos.
* The hedge fund manager loophole, involving what is called "carried interest," enables investment fund managers to treat most of their salaries as capital gains, and to pay taxes at the capital gains rate, rather than the ordinary income tax rate. Annual cost to taxpayers: $2.6 billion.
* The pensions for the rich loophole. While regular people can place a maximum of $15,500 in 401(k) plans -- deferring taxes until they withdraw the money -- CEOs can place unlimited amounts in deferred pay plans. Annual cost to taxpayers: $80 million.
* The offshoring loophole. Although companies cannot deduct the expense of executive compensation in deferred accounts, this is no problem for businesses registered in offshore tax havens. Set up an offshore subsidiary, and you can deduct the deferred income from revenue. Annual cost to taxpayers: $2 billion.
* The greed loophole. Money spent on wages and salaries are deducted from corporate revenues, and is not taxable. For top executives, however, U.S. tax rules impose a limit: corporations cannot deduct salaries and compensation that is more than "reasonable." An effort to define reasonable as $1 million has been entirely circumvented -- and corporations can, in effect, deduct whatever they pay CEOs. Annual cost to taxpayers: $5.2 billion.
* The double-standard loophole. Stock options -- the right to buy stock at a preset value, at a later date -- are now a huge component of executive pay. For their internal accounting, corporations value stock options using the value of the stock on the date of the option grant. For tax purposes, however, they can deduct the generally much higher value of the stock on the date the options are exercised. In other words, they can deduct more than they list as their expense. Annual cost to taxpayers: $10 billion.
Not long ago, it was possible to argue that executive pay was an important but symbolic issue. But then it became clear that ever-escalating executive pay is creating a culture of greed that is fueling income and wealth inequality. And now it has become clear that executive pay schemes are contributing to corporate practices harmful not only to workers, consumers, communities and the environment, but to corporations themselves, and even to the functioning of the economy.
The foolish and inexcusable housing-related investments by Wall Street firms, Fannie Mae and Freddie Mac resulted in no small part from executive compensation-driven efforts to drive up short-term stock values. These decisions were so bad, and of such enormous scale, that they have endangered the functioning of the financial system itself, thereby necessitating government intervention and massive taxpayer expenses -- an indirect but even more expensive taxpayer subsidy for executive compensation.
A "market economy" indeed.
Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor, and director of Essential Action.
But never fear, Jack and Suzy Welch -- the former high-flying CEO of General Electric and his wife, the former editor of the Harvard Business Review -- are willing to defend high executive pay by return to first principles and invocation of "the market economy." In a recent issue of Business Week, they write, "Yes, most CEOs make a ton of money, and sometimes they make too much, but in a market economy salaries are set by supply and demand. We also live in a market economy where companies that field the best teams win, and, because of global competition, the best teams tend to be expensive."
There are several decisive rebuttals to this claptrap.
First, there is no plausible market-based story why executive pay should have been bid up so much over the past quarter century. Are executives working harder now? Making better decisions? Has the CEO supply and demand equation changed?
Second, executive pay is not set by the market, but by boards of directors, who frequently are CEO cronies and excuse their behavior by relying on conflicted compensation consultants.
Third, the most super-high compensation packages are typically based on performance standards, with executives cashing in on stock options as share values rise. But this is a system easily gamed, with those same shares sold before short-term thinking leads to medium-term losses. By way of example, consider the massive pay packages obtained by the ousted CEOs of the now-floundering Wall Street firms.
And now comes a new analysis that further debunks the market-based rationalization for ridiculous CEO compensation levels. Executive Excess 2008 shows how taxpayers are helping foot the bill for these outrageous compensation packages.
Executive Excess 2008 highlights five distinct U.S. tax subsidies for executive pay. These are actually market distorting, in that they let top executives and investment fund managers take home more than they would if they played by the same tax rules as regular people. Altogether, Executive Excess 2008 reports, the five tax loopholes heap $20 billion in subsidies on the corporate and hedge fund honchos.
* The hedge fund manager loophole, involving what is called "carried interest," enables investment fund managers to treat most of their salaries as capital gains, and to pay taxes at the capital gains rate, rather than the ordinary income tax rate. Annual cost to taxpayers: $2.6 billion.
* The pensions for the rich loophole. While regular people can place a maximum of $15,500 in 401(k) plans -- deferring taxes until they withdraw the money -- CEOs can place unlimited amounts in deferred pay plans. Annual cost to taxpayers: $80 million.
* The offshoring loophole. Although companies cannot deduct the expense of executive compensation in deferred accounts, this is no problem for businesses registered in offshore tax havens. Set up an offshore subsidiary, and you can deduct the deferred income from revenue. Annual cost to taxpayers: $2 billion.
* The greed loophole. Money spent on wages and salaries are deducted from corporate revenues, and is not taxable. For top executives, however, U.S. tax rules impose a limit: corporations cannot deduct salaries and compensation that is more than "reasonable." An effort to define reasonable as $1 million has been entirely circumvented -- and corporations can, in effect, deduct whatever they pay CEOs. Annual cost to taxpayers: $5.2 billion.
* The double-standard loophole. Stock options -- the right to buy stock at a preset value, at a later date -- are now a huge component of executive pay. For their internal accounting, corporations value stock options using the value of the stock on the date of the option grant. For tax purposes, however, they can deduct the generally much higher value of the stock on the date the options are exercised. In other words, they can deduct more than they list as their expense. Annual cost to taxpayers: $10 billion.
Not long ago, it was possible to argue that executive pay was an important but symbolic issue. But then it became clear that ever-escalating executive pay is creating a culture of greed that is fueling income and wealth inequality. And now it has become clear that executive pay schemes are contributing to corporate practices harmful not only to workers, consumers, communities and the environment, but to corporations themselves, and even to the functioning of the economy.
The foolish and inexcusable housing-related investments by Wall Street firms, Fannie Mae and Freddie Mac resulted in no small part from executive compensation-driven efforts to drive up short-term stock values. These decisions were so bad, and of such enormous scale, that they have endangered the functioning of the financial system itself, thereby necessitating government intervention and massive taxpayer expenses -- an indirect but even more expensive taxpayer subsidy for executive compensation.
A "market economy" indeed.
Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor, and director of Essential Action.
Post edited by Unknown User on
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Comments
Have the government create a pay schedule?
Progressive taxation and close the loopholes.
that's the best idea you've ever had
I'll agree that "loopholes" should be closed. But some of the above are accounting rules that are part of the overly complex tax code. So how about we get rid of all of the loopholes, and simplify the tax code with a flat tax?
I figured the socialists on here would like that!
bite your tail mouseketeer:)
i'm not a socialist
that would mean I'd only imprison those in power after the revolution....
I'm for firing squads
can you explain it?
It doens't really bother me. I mean if you are an average Joe working for a big company and you fuck up on something it is probably not going to have a huge effect, at worst you might lose your job. If you are the CEO of a big company and you fuck up at worst every average joe in the company could lose their job.
Not to mention the average joe gets to go home at night and chill with a beer, while the CEO is essentially on the job 24/7, when you take that into account, and the fact that it is the type of job only a small portion of the population is skilled enough to handle, then yes I think they should be paid accordingly. I mean you don't want some unskilled joker running a Fortune 500 company, you want someone with the skills, but getting somone with the skills costs money. If you posted a job listing for a CEO job for 40 grand a year for a big company no one with any skills would take it because they would know they could get more somewhere else.
BINGO!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
There are many, many, jobs that no unskilled joker could do, but they don't get paid that much for their special knowledge.
Yep. Supply and Demand set markets. Including the labor market. When government intervenes it creates wage ceilings or floors. These are inefficient. Moreover, taxation in order to accomplish the same result is also inefficient. It's very simple.
Someone said it right though...average Joe has who depending on him? Some co-workers...family at home...
CEO has all the "average joes" and their families and the Stockholders...
It's certainly a huge responsibility and deserves a MUCH higher salary then Mr & Mrs. Average Joe and Jane. Is it too wide a gap? Personally I think so, but should the government get involved in setting a limit on CEO pay? Hell no.
simplification helps the problem
a flat tax worsens the problem
it is not necessary to institute a flat tax in order to simplify the tax code
far from it ... but you and I know our differences here.
A flat tax would be fine if this country's infrastructure was in great shape, if the public school system was fantastic, our government didn't want to fight wars with no end, etc.
But if the top 5% want to keep making exorbitant amounts of money from this country, they can pitch in a little more.
I'm not talking about socialism ... I'm not talking about a complete redistribution of wealth ... I'm not talking about everyone making the same amount, I'm talking about million and billionaires paying a little more tax, pitching in a bit more ... lord knows they can afford it.
"I don't believe in damn curses. Wake up the damn Bambino and have me face him. Maybe I'll drill him in the ass." --- Pedro Martinez
Yes, but they are both good ideas that should be done.
I don't think the responsibility should even be an excuse, because there are much less well compensated jobs that have responsibilty attached and it's ignored come salary time...
The pilot of a plane has a lot of people depending on him.
Hell, the driver of a bus has people depending on him.
Air traffic controllers are responsible for many lives.
An anesthesiologist could kill every patient if he's not doing his job right!!
I don't think the two things you mention are really good enough justification for the glorification of this type of person. It's just GREED.
Hahahaha...here we go again!!!!
Spin me right round baby right round....round round...
Anyhow, you are right you are only talking partial socialism and partial redistribution of wealth...that's very different.
Frankly, I don't think it's anyone's business but the owners of the company what they pay people to run their businesses.
...are those who've helped us.
Right 'round the corner could be bigger than ourselves.
...are those who've helped us.
Right 'round the corner could be bigger than ourselves.
agian, work for welfare ... make peole that need help WORK for it ... again, this country has a ton of issues ... put people that need money to work to improve the country.
"I don't believe in damn curses. Wake up the damn Bambino and have me face him. Maybe I'll drill him in the ass." --- Pedro Martinez
My plant manager has 4 times as many people depending on them then any pilot. And it's that's just 1 small plant out of many that the CEO has to worry about.
Lemme ask you this, who does the pilot depend on? That's right...the mechanics, the company to provide $ for maintenance and training...who does that buck stop with?????
It's certainly not all about Greed, but it certainly has an element of greed.
I guess we can agree to disagree as I think the responsibilty of a CEO certainly entitles them to higher pay...not really entitles though since they EARN it.
Yep, put them to work giving vasectomies to deadbeat dads.
Did I spell Vasectomy correctly?
you have said nothing
all you say is "inefficient" but no explanation....
why is it inefficient?
Actually, I said something.... not nothing. You just don't agree with it; fair enough. But, please, do yourself a favor and try to get it taken out of every intro to microeconomics text book that exists and then let me know when you are finished.
A wage floor means that the quantity of labor supplied does not equal the quantity of labor demanded. Since there is no equilibrium, markets don't clear and therefore there's an inefficiency. The same goes for the wage ceiling except the opposite direction.
A lot of the time I think the reverse is true. If you are some guy who bolts a tire onto a car, or sweeps the floor in a mill, and you are getting 25+ bucks an hour, then you are overpaid. When I was in University I did a coop work term in the engineering department of a pulp mill. The summer students they hired to sweep the floor and hand out safety gear (who were usually the kids of senior people who worked in the mill) actually made more than me and I was an engieering student with a few credits shy of having an actual degree.
So if you pay your labor more, then there are fewer people to do the job? or are there less? or is this just some hoodoo bs?
And if you pay your workers more and your CEO less then that makes your company inefficient? or is that just more hoodoo bs?
Well the problem that I see is that when the average joe fucks up he get;s fired and that's that. When the CEO fucks up he gets fired but get's a huge lucrative multi-million dollar package for basically running a company into the ground.
Take the latest CEO fired. Kerry Killinger from WaMu. It was his policy that switch WaMu's focus from A-paper, fixed rate mortgage loans to B-paper, adjustable, sub-prime loans. This one decision has basically run WaMu into the ground. In 2002 over 70% of WaMu's mortgages where A-paper. By 2007 less that 30% where A-paper. What does he get for his royal fucked, a package estimated at over 15 million dollars. What do the WaMu employees who where laid off because of his fuck up get, a few weeks severance.
yeah, but, $15M is probably a few week's severance for Killinger. How will he live?
"I don't believe in damn curses. Wake up the damn Bambino and have me face him. Maybe I'll drill him in the ass." --- Pedro Martinez
If you pay your labor more there's always going to more people wanting to do the job (that's why the labor supply curve slopes up). What I'm talking about was the market (not just a supply curve). I was talking about the market. Where you have wages on the verticle axis and quantity of labor on the horizontal axis. Then you have a demand for labor (the employers) and supply of labor (the potential employees). If there's floors (or ceilings) set in, the market is not efficient because S can not equal D.
Who is "you" in this quote above? The board?
Anyway, I'm sure there's a number of firms that have some staff making more than the CEO. Regardless, that has nothing to do with what I was saying. I was talking about markets and jobs and how government involvement makes things inefficient.
But, getting to your point.... CEO's salaries are most likely set by a board or approved by shareholders. Hence, this body representing some firm is the demand for labor. The CEO's contending for the job are the supply. The market meets at an equilibrium. That's what the CEO is paid. Some CEO's make more because they are more talented. Some make less. God decides those factors. The market sets up the link or match of job and person.