Are CEO's Overpaid?

[Huckleburry]

Read MacAvoy and Millstien's The Reccurent Crisis in Corporate Governance.

 

[BaronVonBigmeat]

Not really. Read some Upton Sinclair. The Jungle is what happens when corporations are unchecked. Again, we don't have a purely capitalist system.

The Jungle is actually a load of socialist bunk, and Upton Sinclair later admitted that he stretched the truth a good bit. I'll have to find a source, but I'm fairly sure I've read that his investigative work was paid for by a larger meatpacker who wanted to be regulated. Why would they want to be regulated? To stop competition from small startups and create a quasi-cartel.

This isn't quite the article I had in mind, but close enough:

During the Spanish-American War, meat packers shipped dressed meats to Cuba for distribution to the inland troops. After the meats were unloaded at the ports, the meat packers warned army quartermasters to keep the meat on ice, or else it would spoil. As one would expect, the arrogant quartermasters refused to listen, and sent the meat wagons into the fields. And, as one would also expect, by the time the meat reached the troops, most of the time it was spoiled.

The meat companies were accused of profiteering on rotten meat and attempting to poison the troops. Roosevelt carried this resentment to the presidency and when Upton Sinclair published The Jungle in 1906, TR had his excuse to act.

Sinclair wrote his book in hopes of converting Americans to socialism, and he found a willing ally in Roosevelt. Although The Jungle was pure fiction, it resonated with the public, which was ready to believe the worst about American companies. Roosevelt, acting in the name of the public interest, ordered an investigation of the meat industry, which was delivered to him in secret later that year. However, the president refused to release the report, saying only that the contents were "devastating," and he bullied Congress into passing the Pure Food and Drug Act, which created the FDA, an agency which bedevils the country to this day.

It turned out, however, that Roosevelt had other reasons for refusing to release the report. When Sinclair visited the White House in 1906, the president remarked to him that the study contained nothing incriminating. The myth endures, unfortunately, that Roosevelt somehow "reformed" the meat industry.

http://www.mises.org/freemarket_detail.asp?control=96&sortorder=title

Most of the "muckrakers" were also socialists. For example Upton Sinclair is famous for his 1906 book, The Jungle, which, among other things, described what were supposedly horrific conditions in the meat packing industry in Chicago. While most history books treat his depiction of rats and even humans being processed into meat sold to consumers as gospel truth, his book was simply untrue and represented a crude attempt to convince Americans that socialism was their only hope. (Investigation after investigation of the meat packing industry showed Sinclair’s claims to be false.)

Sinclair admitted afterward that his book was an attempt to change the "American heart," but instead managed only to affect "its stomach." Historians often say that The Jungle led directly to the passage of the Pure Food and Drug Act of 1906. As usual, the truth is more complicated.

As Milton Friedman has pointed out, American meat processors were anxious to show Europeans that their products were not poisonous and the FDA became the mechanism to do that.

http://www.mises.org/story/364

Ahh, here's the article I was thinking of. Too bad government schools still teach the popular myth instead of what really happened.

http://www.mackinac.org/print.asp?ID=4084

 

[5stringJeff]

The Jungle is actually a load of socialist bunk, and Upton Sinclair later admitted that he stretched the truth a good bit. I'll have to find a source, but I'm fairly sure I've read that his investigative work was paid for by a larger meatpacker who wanted to be regulated. Why would they want to be regulated? To stop competition from small startups and create a quasi-cartel.

This isn't quite the article I had in mind, but close enough:



http://www.mises.org/freemarket_detail.asp?control=96&sortorder=title



http://www.mises.org/story/364

Ahh, here's the article I was thinking of. Too bad government schools still teach the popular myth instead of what really happened.

http://www.mackinac.org/print.asp?ID=4084

The fact that you quoted from mises.org speaks volumes. Hear, hear!

 

[BaronVonBigmeat]

Of course, that's where I got my avatar.

 

[sealybobo]

Mar 2, 2005
by Walter E. Williams

In the wake of the Enron and WorldCom corporate scandals, the purveyors of envy have found another opportunity to preach about what they consider the evils of high CEO salaries, retirements and bonuses. After all, according to them, evil must be afoot when a corporate executive earns more in a week that the average worker earns in an entire year. Let's look at it.

Dishonest Enron and WorldCom CEOs are rare among corporate executives. As such, all CEOs shouldn't be tarnished for the misdeeds of a few any more than we'd tarnish all newspaper reporters because a few among their ranks were liars like the Boston Globe's Patricia Smith and Mike Barnicle, Jayson Blair of The New York Times, and The Washington Post's Janet Cooke.

Is a CEO worth millions of dollars to a corporation? When Jack Welch became General Electric's CEO in 1981, the stock market judged the company to be worth about $14 billion. Through hiring and firing, buying and selling, Welch turned the company around before he retired in 2001. Today, GE is worth nearly $500 billion, making it one of the most valuable companies in the world. What's a CEO worth for providing the brains and leadership to turn a $14 billion corporation into one worth $500 billion? How about paying just a measly one-half of a percent of the increase in value? If that were the case, Welch's total compensation would have come to nearly $2.5 billion, instead of the few hundred million that he actually received.

The Gillette Co. was in the early stages of corporate death in 2001 when Jim Kilts took over as CEO. The company's stock had lost almost half of its value in two years, and sales volume and market shares of its major brands had plummeted. Between the time Kilts took over at Gillette and this year's Jan. 28 announcement of Procter & Gamble's purchase of Gillette, Gillette's market value increased by $11.3 billion, a 34 percent improvement, and since the announcement, Gillette's value has risen by another $5.7 billion.

Kilts' salary and bonuses over the past four years, totaling about $17.5 million, haven't been especially large by CEO standards. Predictably, however, Kilts' pay and particularly the size of his compensation package from the merger -- $153 million -- have been the subject of media carping, particularly in Boston, where Gillette is headquartered. This figure is indeed large, but it, added to what Gillette has paid him since 2001, makes Kilts' total compensation a mere 1.5 percent of his contribution to Gillette's value.

Here are a couple of questions to you: If you were the owner of GE, and a CEO could turn your $14 billion corporation into a $500 billion one, how much would you be willing to pay that man in salary and bonuses? Or, in the case of Jim Kilts, turning Gillette from a corporation in steep decline into one Procter & Gamble was willing to buy for $57 billion, how much would you be willing to pay?

Then, you might ask yourself: If a corporate board of directors could buy a $300 computer that could do what a CEO could do, would it pay CEOs millions of dollars? By the same token, if an NFL owner could hire a computer to make the decisions that star quarterbacks make, why would he pay some of these guys yearly compensation packages worth more than $10 million?

There's another important issue. If one company has an effective CEO, it is not the only company that would like to have him on the payroll. In order to keep him, the company must pay him enough so that he can't be lured elsewhere.

If you ask me, I know of only one class of workers who are overpaid and underworked -- college professors.

Link

Yet another fine analysis by Professor Williams

The average CEO pay is 271 times the nearly $58,000 annual average pay of the typical American worker.
Compare that to 1978, when CEO earnings wereroughly 30 times the typical worker’s salary.

Why did the pattern of vigorous, virtually continuous growth change abruptly to one of overall stagnation in the late 1970s?

The American economy did not stop growing in the late 1970. The productivity of the American worker continued to increase. Yet, suddenly American workers stopped sharing in the fruits of economic growth – the gains went elsewhere.

The post-1978 stagnation of real wages for both less skilled and for typical workers is a big part of the explanation of why economic inequality has been growing in the United States since the 1970s.

Why did the pattern of vigorous, virtually continuous growth change abruptly to one of overall stagnation in the late 1970s?

The American economy did not stop growing in the late 1970. The productivity of the American worker continued to increase. Yet, suddenly American workers stopped sharing in the fruits of economic growth – the gains went elsewhere.

The post-1978 stagnation of real wages for both less skilled and for typical workers is a big part of the explanation of why economic inequality has been growing in the United States since the 1970s.

How can you count yourself as part of middle class if you cannot afford to buy your own house? To put your kids through college? To afford medical insurance? Yet the costs of all three of these items have been increasing faster than inflation.

The middle class has been sinking ever since the late 1970s, but it became glaringly obvious only since 2000, when household incomes (that is, the summed earnings of the husband, the wife, and, in some cases, their adult children who haven’t moved away) started plunging, even when adjusted with the official inflation.