UAW agrees to $1 per year; automakers still need cash
That’s a headline you could actually read.
The UAW workers’ wages aren’t that important, in the whole scheme of things. Really. That’s not the big issue, at least not for Chrysler.
Take a look at Chrysler’s estimated expenses for Quarter 1, 2009. Out of $11.6 billion, wages account for $900 million. That’s much less than 10%. Even with NO wages, Chrysler would have to bring in more money to survive.
Now, let’s be reasonable. There’s no reason to expect autoworkers to work for free when millionaires elected to Congress pay themselves handsome (though appropriate) salaries and give themselves lavish (and inappropriate) perks including the world’s second best health care system (the best goes to the President).
Mitch Albom wrote an interesting Freep column in which he noted that nobody in Congress seems to have asked AIG for a business plan before giving them $150 billion, points out that Senator Shelby’s state gave hundreds of millions of dollars to foreign automakers without his complaint, and that Shelby didn’t seem to object when investigators told Congress that $13 billion had been lost in the Iraq war due to “fraud, embezzlement, theft and waste”). But in this column, like so many others, he came to the wrong conclusion. He wrote:
“The car companies may be losing money, but they can explain it: They’re paying workers too much and selling cars for too little.”
That’s not quite true. The car companies never said that. They said one of their problems was legacy costs; many have pointed out that every other car-making country seems to have socialized medicine, so employers don’t have to worry about health care for current or past employees, until they’ve been making cars in the United States for, say, 30 years. (Even then, it really requires job losses for the problem to come to a head. Chrysler was doing fine with legacy costs in the mid-1990s, when they were expanding rather than shrinking.)
Most commentators seem to be happy to blame the problems either on the executives – and in one of three cases, that’s valid – or on the unions. But if you do the math, paying Toyota wages ($15 per hour plus some bennies) or even paying minimum wage would still leave Chrysler with terrible problems. That’s why I zeroed out salaries to see what would happen – and what would happen is that with NO wages AT ALL, nothing for engineers, lawyers, ad men, executives, UAW workers, janitors, or HR people, you’d still have a loss. Admittedly, a very, very small loss that they could deal with for many months to come.
But people don’t work for free. So let’s say we paid ‘em minimum wage. Then we’re back into big-losses again.
Blaming the executives is not very helpful in two out of three cases, either. Bob Nardelli has done a fine job of working on Chrysler’s shortfalls, as far as I can tell. So has Ford’s CEO, despite how hard it is to remember where there are two Ls and where there is only one. More to the point, neither was on the job long enough to have had an impact when matters got messy.
Rick Wagoner is the only real chump on the block. He’s been around forever, it seems, and has reacted more slowly than the others. In my opinion, he should go as a condition of any loans to GM. So should the board members who consistently decided that doing nothing was the best course of action.
But the union employees… should stop getting blamed for financial problems that can’t possibly be their fault.
Is nardelli driving an ENVI vehicle to washington? I just read that wagoner is going to drive a volt mule there. It’s pretty cool that nardelli is already working for $1, seems like he wants to be the Lee of this generation. I don’t blame him either, his rep isn’t good after home depot.
When did the pay change go into effect, is the question… was it Monday or January?
I agree that he’s probably working as much to erase Home Depot as he is for any money.
PS> I’d want Campi at $1 too! The EVPs should be targets as well. — and that includes the bankers and insurance men.
Dave,
I agree. Nardelli is thinking of his reputation as much as anything and he should. I had not heard of the pay change until just now. I think Wagoner should bail but GM should cut Pontiac and Saturn loose unless they want to loose what’s left and unless the board gets a whole different cast of characters it isn’t going to happen.
Nardelli making $1 per year, wasn’t that a condition when he took over in August 2007? If I recall correctly that at the time he agreed to $1 per year until the company posted a profit.
We need to have Iacocca helping out too.
Since our Government is farther in the hole than all the American Vehicle Manufacturers combined, shouldn’t the Congress be compelled to back up their pontification with deeds? How about forgoing your upcoming raises Jan. 1st? or better yet, a 5 year moritorium on even bringing to the floor any Congressional perk/pay increases?
Thanu you so much for tis article. It’s the first I’ve read that points in the right direction. First Mr shelby should be deported. Japan and China love him like they did Judas. It’s about time for our gov to represent America. They have allowed everything to be bought and moved overseas. That’s why China can afford to build 1 city per monthand Japan shines. We paid for it with the profits they recieve from their products. Our economy would straighten up in a hurry If people would make sure what they buy is made In America and owned by Americans. A foreign auto generates abour $600 while A US auto ( GM< Ford, Chrysler ) regardless where it’s built generates over $6000 in taxe’s that stay here. Unemployed do generate taxe’s, they consume reasources that could go towards keeping the economy running and employing workers that generate taxe’s. When was the last time you heard anyone complain about all the taxe’s the uaw workers paid? There are city’s that weer built on those taxe’s. Put the Japanese and the Chines on unemployment and get our people back to work. Thank you again.
Wagoner is going to be the sacrificial lamb. But he hasn’t been around forever.
Only since 2005.
BTW that was when the UAW labor costs and legacy problems were finally faced. Guess who negotiated the 2005 and 2007 UAW labor contracts, that equalizes labor and legacy costs after a transition period of 3-5 years. Right Rick Wagoner.
Who hired Bob Lutz to renovate the automobile models that GM manufactured domestically, based on the assumption that they could finally put the same number of features that cost money, into their cars as the equivalent foreign car. Up to then ALL the domestic makers, Chrysler included, couldn’t afford to put the same money in features into the domestic equivalent because then it would be unprofitable, due to labor and legacy costs. So they tried to cheat, and short change features, trim, features and fit and finish.
American consumers aren’t dumb. They could see and know the difference.
That he was sucessessful resulted in three Car of Year selections: for thee new Hybrid trucks and the dual mode, for the the Vue, and the Malibu. Car reviwers think the Malibu fully matches the Camry and Accord, finally. JD Powers and Consumer Reports both recognize the improvements in the models. Plunging warranty costs affirm the differences in quality too.
So all in all Rick Wagoner faced the problems and found the corrections only apropriate to the job of CEO. I think the first GM CEO since Al Sloan, IMO.
But the sacrificial altar is being prepared.
The King is Dead! Long Live the (new) King!
How can that $900M figure be correct? Chrysler employed about 66,000 people as of 2008. According to your figures, that means Chrysler pays only $13,000 per employee.
That was for one quarter as I recall.
… which means the figure is around $52,000 per year. Remember that includes everyone from janitors to LaSorda. They also expect to employ many fewer people in 2009, so the real average salary is higher than that. For one thing, Newark, Delaware will be off the list, along with any “job bank” people. St. Louis will be off the list. There are probably more people off the list due to shift cuts, distribution center cuts, etc.
You’re correct, I should have multiplied by 4, which gets us to $52,000.
That seems more likely if still a bit low, considering that you have to include all the executives’ salaries, the engineers, etc.
Dave,
Of the 66,000 there were 18,000 salaried Non Bargaining Unit guys before Thanksgiving. I now believe there are 13,000 (5,000 were bought out). In theory then 13,000 of 61,000 are what you are talking about. The average of that group is probably around $80,000. If you run the math this will leave you with the UAW guys averaging about $46K/year. Sounds about right as base pay. This equals about $23/hr. Sounds about right if a little bit low (I think the real figure is more like $27/hr).
I wish when people throw numbers around for employment costs, they would make it crystal clear whether they are just talking about wages or whether they are also including the costs of the benefits workers receive. In terms of a company’s bottom line, it doesn’t matter whether a dollar an hour goes to a higher salary or for a more expensive benefits package. From some of the things I’ve heard, I get the impression that a majority of the difference between the compensation UAW members receive and what workers in “transplant” factories receive is on the benefits part of the ledger, not the salary part.
So when I see a figure like “wages account for $900 million,” I have to wonder whether the original source behind the figure might have been careless in ignoring the cost of benefits, or perhaps even have deliberately left out benefit costs in order to make employment costs seem like a significantly smaller issue than they actually are. Maybe I’m just being paranoid, but I’ve seen enough cases of statistics being manipulated to paint misleading pictures to know that at least some people actually are out to trick me. And once someone with an agenda puts a figure into circulation, it’s dangerously easy for people to spread the figure around without realizing that it isn’t telling the entire story.
No, they, and we, were not ignoring the cost of benefits.
PS> When we talk about executives, someone always says, “Well, if it takes $20 million to get the right CEO, that’s all that matters.”
But autoworkers and skilled trades are apparently commodities, where you’re supposed to pay as little as possible, with no accounting for, say, cost of living.
And of course all the people who whine about how biofuels are taking away food crops ignore the fact that each transplant factory takes away square miles of arable farmland instead of re-using already industrialized space.
Just to be clear, are you saying the 900 million dollar figure definitely does include benefits as well as salaries?
Neither side is suggesting that we should set things up for the Big Three to hire workers at the lowest pay possible. If they were, the proposal would be to abolish the UAW, take away autoworkers’ power to strike, and allow the Big Three to replace its existing work force with whoever is willing to work cheapest.
All we actually have is pressure for the UAW to accept the same compensation that workers in “transplant” factories already accept as fair. I have yet to see a rational explanation for why UAW members should expect to receive higher compensation than other people who do the exact same work receive when the UAW members’ employers are in danger of bankruptcy.
As for “transplant” factories eating up farmland, doesn’t it seem a bit hypocritical for you to talk about how small a percentage of auto industry expenses salaries are, and then turn around and try to make it sound as if a few square miles of farmland will have a meaningful impact? Not counting Alaska, the land area of the U.S. is slightly over three million square miles (according to figures from Wikipedia). Compared with that, the land area an auto factory takes up is microscopic – literally, in the sense that you’d need a microscope to find an auto factory on a satellite map of the country. Large-scale biofuel production requires enough farmland to have a serious impact on food prices. Building a few new auto factories does not.
Further, the idea that factories should only be built on previously industrialized sites would be grossly unfair to states that have not historically been highly industrialized. In effect, you seem to be suggesting that since Alabama didn’t have any auto factories two decades ago, we shouldn’t have any now. As an Alabamian, I view that idea as completely outrageous.
Dave,
I agree that union wages are not the primary issue, although the figures I’ve seen published in the newspaper and heard on TV indicate that the UAW compensation is roughly $78 while non-union labor at the transplants in the South are at $45.
The more important problem is the legacy costs associated with retired workers, something Toyota, Honda, Nissan, etc do not have. This is a significant burden on the native US auto makers that forced them to concentrate on SUVs and pick-ups while not finding it cost effective to build small cars. In fact, I’ve been led to believe that the last small car to make a profit for any of the “big three” was the now defunct Neon.
Dusty, that’s apples to oranges. The figure is $78 INCLUDING the pensions, which is hardly fair. The $45… not sure where that comes from. Every factory has its own figures.
AFAIK the ONLY small car to make a profit for the big three, since the Omni and Reliant went away, was the Neon. I might have missed something though.
To be fair, the UAW make Toyota Corollas, at a profit. So union labor isn’t the great big evil that bankrupted the Big Three.
Perhaps unfair subsidies to the competitors, the need to provide health care insurance, shrinking from a larger size, foolish decisions by past leaders, and currency manipulation have had some impact?
The cost of benefits for retired employees is an example of foolish decisions by past leaders – both in the Big Three and in the UAW. In order for a retirement program to be financially sound, three things have to happen. First, the cost of retirement benefits has to be paid for while people are working. If a person buys a car, the cost of the car has to reflect not just the cost of the workers’ current salaries but also the money that needs to be invested to pay for the workers’ retirement benefits. Otherwise, the retirement plan is a time bomb set set to explode, likely with catastrophic results, if serious competition arises from companies that are not burdened by heavy debts of unfunded promises to retirees.
The second critical ingredient in a sound retirement plan is that its investments have to be diversified. If a retirement plan relies solely on investment in a single company, it will not be able to deliver the expected benefits if the company doesn’t keep making a sufficient profit for the investment to pay for the benefits.
The third critical ingredient in a sound retirement plan is that it can’t keep paying out more than its return on investment can support. If it tries, the retirement plan will go bankrupt. And if the retirement plan’s assets are not kept clearly differentiated from a company’s assets, the retirement plan’s bankruptcy can drive the company into bankruptcy.
If the UAW and the Big Three had negotiated retirement plans that followed these rules, the cost of benefits for retired workers would not be a burden on the automakers. The retirement plans would already be paid for, and the automakers would not be under any obligation to keep draining their resources to provide additional support for current retirees.
But instead, the Big Three and the UAW negotiated a type of retirement plan with a time bomb built in, and the time bomb has exploded. It is tragic that there may not be any way for the Big Three to remain competitive while at the same time delivering the retirement benefits the autoworkers expected. But since the UAW was an equal partner in the negotiations that built a time bomb into the retirement structure, I don’t think it’s fair to demand that workers be protected from suffering any damage at all as a result of the time bomb having gone off.
In order to keep this kind of thing from happening in the future, I think it would be good to pass legislation requiring that retirement plans be structured in a way that does not rely on future earnings to pay for retirement benefits. That would prevent us from having future situations where companies are forced to drive themselves into bankruptcy trying to pay for benefits based on overly optimistic expectations of their future earnings. And it would protect workers from losing their retirement income if their employers become insolvent.
You’re making a lot of assumptions. One question I’d have is why the pension fund was not funded in advance, which is similar to your question but without the assignation of blame. If the pension fund was raided by Daimler, which is I suspect the case, that would leave the UAW and current and past management blameless.
Chrysler did not have this problem in the mid-1990s.
There is a lot of speculation,going on. Mr Barclay, i would like to ask you if the UAW didn’t pay a good wage,would the transplants pay as decent a wage as they do. If the UAW Lowered it’s wages what you would have is the lowering of the entire middle class. Do you think it is fair for a CEO to make in one year what a worker would have to work any where from 100 to 1000 yrs to earn.
Do you think that americans should have thought about what they buy and the effect it actually had on the american economy, instead of what is cheapest. Isn’t it a shame that the average american doesn’t make enough that they can shop with a conscience instead of buying what is cheapest. By attacking the average wages of the middle class we are dooming ourselve to another form of slavery where we work and work and in the end we retire and have nothing to show for it. And God help us if we get sick after we retire. Wake up people wages should never become a division amongst the working class we should draw from a better agreement and try to improve all our lives. Bad management and bad governmental policies that allowed companies to import and build in america without any accountability was and is the real crime. So congress should take a good look in the mirror while they are being smart mouthed with the industry.
Here is my question. Why should I bail out someone who makes more money than I do? It is my taxes that are paying their wages an retirement. It is a case of stealing from the lower middle class and giving it to the upper middle class. SCREW GM, CHRYSLER AND FORD. Its my money and you can’t have it. Let the industry equalize its self, rather than stealing from me to prop up some business. No where in the constitution is the government given the right to take money from one person and give it to someone else. The government is not given the right to decide what businesses succeed and what businesses fail.
A bit over a hundred fifty years ago, Karl Marx had this “brilliant” idea that if we got rid of executive salaries and profits for stockholders, workers would be a lot better off. What Marx didn’t understand was that both executive salaries and stockholder profits play vital roles in keeping an economy functioning efficiently – roles that Marxist theorists have not even come close to developing adequate replacements for.
If we had a communist system where executives and workers were all paid the same, many of our society’s best executives would have found jobs they were happy in and sat there until they were ready to retire, deliberately refusing any promotion to a job where they did not think they would be as happy. In fact, more than a few good executives would not be executives at all because there are other kinds of work they would enjoy more if the pay were the same. I suppose it would be possible for a communist-style system to draft administrators into accepting “more important” jobs against their will. But how motivated would the victims of such a draft be to do their best in their new jobs? And consider the consequences if administrators who are happy in their current positions would deliberately do less than their best in order to avoid being forced or pressured into promotions they don’t want.
What look like “wastefully high” executive salaries from a Marxist perspective are in reality serving a valuable economic function. Yes, in an abstract philosophical sense, it is “unfair” that executives earn so much more than ordinary workers. But as long as the people who decide how much executives are worth make good decisions, the unfairness does not hurt workers because the workers are able to earn at least as much as they would have earned if their employers had offered lower executive salaries and attracted executives who were correspondingly less skilled and dedicated.
I do think modern America has some serious problems in how executive salaries are determined. Executive compensation needs to be based more on how decisions affect companies’ long-term health and profitability, and less on factors that can be manipulated to make a company look better in the short term at the expense of its long-term prosperity. Also, it is dangerous when executives are offered large rewards if a high-risk strategy succeeds without having to risk correspondingly high losses if the strategy fails. And stockholders don’t seem to have anywhere near as much power as they should to influence decisions of whether to hire a slightly better-qualified CEO who wants a high salary or to settle for someone who probably wouldn’t be quite as good but would be willing to work much cheaper.
But even if these kinds of problems were fixed, CEOs in the largest corporations would still make salaries that are “obscenely high” by Marxist standards because it is worth an “obscene” amount of money to have them sit in the CEO chairs instead of someone else who probably wouldn’t do as good a job. There is no known way to prevent top executives from making high salaries that seem outrageously unfair by Marxist standards without destroying the incentive for top executives to work where they can do the most good. If we destroy that incentive, we hurt society ax a whole, not just the executives. Money we save by reducing executive salaries would not go to make workers’ lives better, but would instead be wasted by companies making less good decisions because their executives aren’t as good.
What exactly is the incentive for CEOs now, when they know that the salary gets bigger as they get more incompetent?
What is your basis for claiming that CEOs’ salaries get bigger as they get more incompetent? In the short term, I imagine there are under-performing CEOs who do great from having companies buy out the rest of a long-term contract in order to get rid of them. But keep in mind that if a CEO gets kicked out with a golden parachute, he likely won’t be able to find another job that’s anywhere near as good as the one he was forced out of. So in the long term, I would expect that competent CEOs come out better than incompetent ones, even though it doesn’t always seem that way at first glance. Do you have evidence of a pattern – not just isolated flukes here and there – to the contrary?
As for why golden parachutes exist, consider the situation of big-time college football coaches. It would be dangerous almost to a point of insanity for a coach who is doing well in his current job to leave that job for a slightly better job somewhere else without any kind of long-term guarantee. The coach might not be sure he can do as well in the new position as he is doing in his current one, in which case even though the school would be better off replacing him, he still needs to protect himself against being harmed as a result of giving up his current job and having the new one not work out. Worse, the coach might be fired because circumstances beyond his control (such as injuries or the situation he inherits from the previous coach) make him look bad, or because it takes time for him to make the new team what he wants it to be and the new employer doesn’t have enough patience to give him the time he needs. Without a long-term guarantee, a coach would risk leaving a stable job, being fired after just a year or two at the new job, and then not being able to find as good a job as the one he originally left. The only way coaches can protect themselves against this type of risk is by demanding long-term contracts, with some kind of buyout provision if they are fired before the contracts expire.
CEOs considering changing jobs face very similar issues. They aren’t always sure they will be able to do as well in a new job as they are doing in their current job. They have to worry that fickle stockholders might blame them for problems that aren’t their fault. And if it’s going to take time for their plans to bear fruit, they have to worry about the risk of being fired before they have a fair chance to show what they can do. Worse, if they are fired from the new job, there is a serious risk that they won’t be able to find a job that’s as good as their old job was. The only way they can protect themselves is with a long-term contract backed by the promise of a “golden parachute” if they are kicked out of the plane before it reaches its destination.
In an abstract theoretical sense, it is not fair for CEOs (or college football coaches) to get big bucks as a result of being replaced because they didn’t live up to expectations. But in practical terms, the unfairness is necessary as a kind of insurance mechanism to prevent the risk of changing jobs from being unacceptably great. Further, as I noted at the beginning of this post, the unfairness isn’t as great as it appears at first glance when you consider the fact that the short-term benefits of “golden parachutes” are balanced against a greater difficulty of finding good jobs in the future.
If you have any ideas for alternative ways of structuring CEO contracts that would work well in actual practice, I’d love to hear them. But if all you have to say is, “CEOs should be willing to take the risk,” that doesn’t cut it. Too many CEOs are fired due to factors outside their control, or because stockholders are so focused on the short term that they don’t recognize how the CEOs’ decisions will be beneficial in the long term. And if a company is begging a person to leave a safe job because “we really, really need you,” the idea that the person being begged to change jobs should be the one to take the risk if the new job doesn’t work out is absurd.
Compare the salaries of high performing CEOs and low performing CEOs. Start with Wagoner and Watanabe… okay, that’s unfair. But Business Week has, for years, noted no apparent relationship between performance and CEO salary. (Again, Wagoner…) and that seems reasonable. Indeed, in some years, some of the worst performing companies they looked at had the highest executive pay.
Your extremist arguments and references to Karl Marx do not bear refutation. The logical fallacies are classics. If Karl Marx liked a nice hot cup of coffee in the morning, do I need to switch to tea?
The idea that there ought to be a link between corporate performance and CEO salaries is based on a serious misunderstanding of how salaries are determined in a capitalist system. If a company is performing well, but there are a dozen different people who could lead it to do about equally well, it doesn’t particularly matter who the company picks. So it can choose whichever of them is willing to work cheapest. There are some situations where profitable companies have dynamic leaders who are worth high salaries, but there are other situations where companies are solid enough that they can pretty much run themselves without it mattering enough who is CEO to justify premium salaries.
At the other end of the spectrum, companies that are in trouble almost invariably need a CEO with special skills in dealing with the kinds of problems they are facing. Thus, it is not surprising that troubled companies are often willing to offer premium salaries to get the person they want as CEO.
Once you recognize that there are good CEOs in troubled corporations and solid companies where the reason for success has little to do with who the CEO is, it is not surprising that attempts to find a correlation between CEO salaries and corporate performance don’t work out very well. So the absence of such a correlation, in and of itself, doesn’t really indicate anything.
I’m not saying companies always make the right decisions, or that there aren’t things that would be worth doing to promote better decisions. But the flaws are in the execution, not in the fundamental concept of companies offering higher salaries in an effort to attract the people they believe could serve them best as CEO.
Regarding Wagoner, an LA Times article I found at http://www.latimes.com/business/la-fi-autopay3-2008dec03,0,5863676.story says, “In 2007, Wagoner received $3.4 million in salary and cash incentives, and Mulally was paid $9 million. In addition, Wagoner received almost $700,000, and Mulally got $1.4 million in “other compensation,” which includes services such as personal security and use of corporate jets.”
To me, Wagoner’s salary actually seems a bit low for the head of a company as enormous and as important to our nation’s economy as General Motors. Of course Wagoner stands to make a whole lot more if he can turn the company around enough to make his sock options and such worth exercising. But if that happens, I won’t begrudge him his reward. I question GM’s wisdom in keeping Wagoner in such high-ranking positions for so long when the company wasn’t doing any better than it was. But I don’t see any reason to view the salary itself as out of line – especially when dozens if not hundreds of entertainers and athletes receive higher pay for jobs that are nowhere near as important to our nation’s economic future.
The reason why I brought up Marx was to illustrate the danger of focusing too much on the question of what seems “fair” in an abstract philosophical sense and not paying enough attention to what actually works in practice in the real world. People who argue as if it is wrong for our society to allow CEOs to make dramatically more than most other people are adopting elements of Marxist philosophy whether they realize they are doing so or not, and they need to be reminded of Marx – or need to learn about him if they hadn’t previously. My concern was based directly on what makes Marxist ideology dangerous: the risk of getting so caught up in trying to be “fair” that we impose economic decisions that in practice cause more harm than good. That kind of concern is a very different thing from using guilt-by-association tactics based on nothing more than a coincidence, which is what you accused me of doing.
If you’re going to accuse me of using “extremist arguments,” please have the courtesy of giving a concrete example or two and explaining why you view my arguments as “extremist.” It is unfair to make accusations so vague that a person can’t defend himself without having to play guessing games regarding what you might mean. I think what I wrote took a relatively moderate tone, rejecting both the extreme that argues that anything the market decides should automatically be considered just fine and the extreme that wants government to dictate CEO pay based on essentially arbitrary criteria. Since I view my position as in between the two extremes, I find it difficult to figure out exactly why I am being accused of extremism – unless maybe you pigeonholed me and are responding to the pigeonhole you put me in instead of to what I actually wrote.
How about this?
“A bit over a hundred fifty years ago, Karl Marx had this “brilliant” idea that if we got rid of executive salaries and profits for stockholders, workers would be a lot better off. What Marx didn’t understand was that both executive salaries and stockholder profits play vital roles in keeping an economy functioning efficiently – roles that Marxist theorists have not even come close to developing adequate replacements for.”
Marx has nothing to do with this conversation.
For that matter, yes, executive salaries are important, but not the insane salaries given to the sleazy CEOs presiding over money-losing and bankrupt companies, the analysts who tell us all to buy shares as long as their consultants get a “cut,” etc.
Unless you can think of a reason why, for example, Bob Eaton was worth more than Bob Lutz and the CEOs of Toyota, Honda, and Daimler-Benz combined.
My reason for bringing up Marx was in response to Anthony’s words, “Do you think it is fair for a CEO to make in one year what a worker would have to work any where from 100 to 1000 yrs to earn.” Do you not see echoes of Marx in those words?
I do not see anything Marxist in arguing that particular CEOs did not do a good enough job to be worth what they were paid. Nor do I see anything Marxist if someone wants to argue an opinion that corporations in general have a tendency to overestimate how much CEOs are worth. It is when people start focusing on the question of whether it is “fair” for CEOs to make so much more than ordinary workers instead of on the question of whether CEOs are doing a good enough job to justify their salaries in economic terms that I see dangerous echoes of Marxism.
If my impression of Eaton is correct, he’s a good example of the old problem of employers sometimes guessing wrong about how well a person will do in a job. Unfortunately, that is going to happen sometimes in any system operated by human beings. I suspect that Eaton probably benefited from one of the most serious flaws in how CEO compensation is often structured: the way it can reward practices that are (or appear) beneficial in the short term but hurt the company in the long term. That’s something I’d like to see laws changed to address. But I don’t have enough information at present to go beyond suspicion and make an outright accusation.
If boards were as diverse as they should be, and as effective as they should be, etc., the system would work great. But you know, capitalism is not a perfect system. Adam Smith himself pointed out its many deficiencies. Nor do economists ever talk about free markets being perfect mechanisms except in certain limited cases where knowledge is complete and the items for sale are commodities, which people are not.
Some executives are worth almost any salary (Walter P. Chrysler for example). Others are not. Lee Iaccoca’s performance seemed to vary inversely to his salary… and what kind of “middle pay” talent could you buy for the price of that one executive on top?
If you look around, you’ll quickly see little evidence of your ideal world where CEOs get the pay you deserve. Some of the best get the least and vice versa. My experience as a consultant jibes with Business Week’s annual analyses. The system does not work and boards often do not remove bad CEOs – or seem to wait forever. Nor do they ever seem to respond to poor performance with financial disincentives. In real life, they are interlinked and often irresponsible and unresponsive. Not always, but often enough to break the system.
And I don’t find the crazy salaries paid to certain celebrities to justify CEO salaries. You can use that to justify paying George W. Bush a $40 million bonus this year if you really want to, as one of the biggest celebrities in the world, but I find two separate arguments there. Perhaps, ideologically, there is a common assumption that certain individuals are irreplaceable. (Some feel that when it’s time to invent a light bulb, someone will do so, whether Edison is there or not. Others feel you need an Edison. My guess is there’s truth somewhere between the two views – you get a light bulb and the needed electrical infrastructure a heckuva lot faster with an Edison, but without one, you will still get there sooner or later.)
EIther way, this is my last comment, so say what you like and it won’t be countered by me. I have to move on.
I have no illusions that our current system is perfect, or even all that close to perfect. Winston Churchill once said something like, “It has been said that Democracy is the worst form of government there is, except all the others that have been tried from time to time.” I look at capitalism basically the same way: it’s the worst economic system there is, except for all the others. Its virtue is not that it is so wonderful, but is merely that it is less bad than the alternatives.
At all levels, there are people who are paid significantly less than what their work is worth, generally either because they are under-recognized (and don’t have a good way to prove how good they really are) or because they do not push all that hard for higher pay. And at all levels, there are people who are paid significantly more than their work is worth – for example, because they are so good at “selling themselves” that they make themselves and their work sound better than they really are, or because they steal credit for other people’s work or ideas, or because they have friends in high places, or maybe just because someone made a mistake in hiring or promoting them and doesn’t want to admit the mistake. Unfortunately, when those kinds of things happen with CEOs, the stakes are a lot higher.
I wish there were a way we could have a perfect system where CEOs really are paid what they are worth instead of just based on people’s guesses at what they are worth. But in a system where we don’t have perfect knowledge, best guesses are all that’s available, and sometimes those guesses are wrong.
Suppose you had to draw the name of Chrysler’s next CEO out of a hat. One hat contains random names of CEOs who are currently making about one million dollars a year. The other hat contains random names of CEOs who are currently making about five million dollars a year. Which hat would you choose to draw from?
If you really believe that there is no meaningful connection between CEOs’ salaries and how good they are, you would be just as happy drawing from the one-million-dollar hat as from the five-million-dollar hat. But personally, I’d view Chrysler’s odds as much better with a randomly chosen CEO who makes five million dollars a year. And considering how small a four million dollar difference in CEO pay is compared with Chrysler’s annual revenues, I’d rather risk wasting a little money paying a CEO more than I need to than take a greater risk of the company failing because the CEO isn’t up to the job.
I would choose from the $1 million hat, if you must know, since you asked, because I know there is no relationship now between pay and ability. Since you have nothing but assumptions and suppositions on your side, and I have research on mine, I’m going to believe that I’m right.