Why I Read Cafe Hayek
May 28th, 2004 | by Craig |The first sentence of this article hits the nail pretty squarely on the head.
Executive compensation has long been a favorite topic of the economically illiterate.
When your’re finished with that one, read on over to Part II.
6 Responses to “Why I Read Cafe Hayek”
By Randy on May 28, 2004 | Reply
Maybe I don’t fully understand the issue but I am from the school that CEO pay should be tied to the performance of your company.
If the company makes money the CEO should be compensated appropriately.
If the company loses money the CEO should recieve a base salary but not be paid any bonuses, options or other compensation.
Extending this policy to other top executives might not be such a bad policy either.
By Ed Kemmick on May 28, 2004 | Reply
I may be economically illiterate, but the argument advanced works better in a perfect world than the real world. It seems to be more often the case that boards of directors are stacked with people who care more for feathering their own beds than watching out for the shareholders, and rewarding CEOs is how they advance their own interests. Pray tell, what “market values” were involved in giving Bob Gannon millions in bonuses while he drove Montana Power into the ground?
By Craig on May 28, 2004 | Reply
Ed, it seems to me that you are equating market forces with corporate malfeasance; apples and oranges.
I find the idea of “golden parachutes” as reprehensible as the next guy. I know people who literally lost millions from their retirement as a result of what happened to Montana Power. Bob Gannon is a cretin, and the fact that he isn’t in jail is an insult. Let’s not forget, either, that Goldman Sachs had a pretty big hand in the fall of MPC, too.
The point that Boudreaux makes is simply that market forces dictate what companies are willing to pay for good CEO’s.
Part of the problem, as I see it, came about in the ’90’s when higher taxes were imposed on executive compensation over $1M. It was a disincentive to pay market value, and who’s going to want to work below the market value for their skills? So, instead of direct compensation, CEO’s and other officers were compensated in the form of stock options (among other things). The incentive for these guys was to get the value of their stock high enough so that their options would make up the shortfall. Short sighted? Absolutely. But it’s pretty typical of the unintended consequences of market intervention.
I think it’s a bit disingenuous to hold up Bob Gannon as an example and say, “I refute it thus!” There are literally thousands of companies who are paying their CEO’s big bucks, and doing just fine by their shareholders.
It would be like me holding up Jayson Blair as a norm for reporters.
By david on May 28, 2004 | Reply
Very interesting site, that Cafe Hayek — thanks, Craig.
Grrr..but he doesn’t have comments!
By david on May 28, 2004 | Reply
Oh - and it is hardly fair to consider ANY utility company a true “market-player” — the entire utility industry is so full of regulation, monopolization, and bureacracy that it’s a wonder anyone ever gets power, lights, or water. That we do is a testament to human genius, NOT to the way the industry is managed as a whole.
By Ed Kemmick on May 30, 2004 | Reply
Sorry, Craig, but I still don’t agree. If market forces were the only thing involved, I wouldn’t think the pay given to CEOs would be so many times here what it is elsewhere in the world. Our general wages are comparable to other countries, but our executive pay is through the roof. A few thousand people have jiggered the system to reward themselves immoderately and then pretend they are simply being rewarded by the “market.” I still think it would be better for their companies, the economy and the general welfare of the country to spread the money around, to give more money to the workers, who could then spend their money on building the economy. But, no. Instead they are given raises that barely match the rate of inflation, or are laid off, for which the executives are rewarded handsomely. And the Jayson Blair analogy doesn’t quite fit. Blair got where he did by lying and cheating. Gannon followed all the rules, did nothing technically “wrong” and certainly has never apologized.