CEO compensation

Today I read a couple of articles on CEO pay (here and here). This is an issue I have been privately stewing about for quite some time so I figured I would bring the news to you.

For those of you who have not been paying attention to economics for the past several years, CEO (and executive management in general) compensation has been rising rapidly while middle class incomes have risen very slowly, if at all. The first article above begins the discussion by mentioning that CEO pay increases have slowed a bit. The second discusses how while the growth may be slowing, CEO compensation is still much higher than other workers.

Now, obviously, the average company can not afford to pay every worker the same types of pay as the higher-ups. This is not the problem though. The problem is that CEO pay has been rising at a rate far faster than the rate for the average worker. As the second article states, if the minimum wage had increased at the same rate then it would be a staggering $22.00 an hour. What could possibly warrant this type of disparity?

Do CEOs really add that kind of value to a company? Do workers do so little for the company that they deserve less compensation? Is the labor market for CEOs so tight that pay increases like these are warranted? Why must workers be subjected to such conditions?

That last question is fairly simple I think. There is an essential difference I would say between your average CEO and the average worker. That difference is one of dependence. The average CEO, I would venture to say, has plenty of money that would allow him/her to leverage the kind of salary he/she wants. The average worker? Not quite. No, the average worker, even if he makes $100,000 a year is still subject to hunger, loss, and homelessness. He does not have the option of fighting for higher wages because he feels that the economy (while going strong) is not likely to be easily able to absorb and provide for him if he decided to leave his current job.

This is of course an overly simplified economistic situation: the merchant class always possesses the advantage over the worker because the worker is compelled to sell his life one hour at a time in the form of wage labor. You see, the capitalist class needs the worker in order to accumulate more wealth, but the worker needs the capitalist in order to just survive. Must this be the case because we live in a capitalist state? Not necessarily, perhaps.

I am doing some reading from Karl Polanyi and he has some good discussion in his work The Great Transformation about how it is the destruction of social institutions that actually has resulted in the anti-free market backlash. The problem is not free enterprise and self-determination, but rather the social destruction of community that has ended us up here. Unlike what the media and others would have you believe, free-market capitalism is something relatively new in this world. And, other systems prior to it succeeded also.

Perhaps one of the most unique things about where we have ended up is the separation of the community from work and livelihood. History shows us that the primary reason for work and production prior to capitalism was desire of each individual to have social status among community members, much like today. The difference is how we define and achieve that social status. Previously, that social status would be garnered from how well you particiapted in and contributed to the community. In our modern capitalist dominated culture we seem to define social status on one thing: the size of one’s bank account. It does not matter how the size of your bank account affects the community or if the activity you pursue is harmful to the community at large.

For shits and giggle I did a little experiment. The CEO of KB Homes was paid $156 million dollars last year according to one of the CNN reports. So I did some calculations. IF KB Homes had raised all 6700 of its worker’s salaries by $1 an hour it would have only cost the company some $13 million dollars. Gee, do you think that the CEO of KB Homes could have survived 2004 if he had only been paid $143 million?

Here is a link to a page with some simple charts on income inequality since 1947 for those of you who think that this trend is old news. Culture is a cumulative effect. Remember, Rome did not fall in one day either.

2 Responses to “CEO compensation”

  1. MK Says:

    Two quick comments:

    “The average CEO, I would venture to say, has plenty of money that would allow him/her to leverage the kind of salary he/she wants.”

    This is true, but that wouldn’t really explain why companies are willing to pay more and more for CEOs when there is not exactly a tight labor market for executives. CEOs don’t perform much value-added work for a company, and are essentially figureheads who steer the company’s strategic operations. My hypothesis for the rising salaries of CEOs is that the rise in importance of global finance capital is responsible. The global economic system has become increasingly subservient to finance capital, and as a result corporations are being driven to maximize short-term profits and indicators of performance (stock value) and pursue the maximization of shareholders’ value. These indicators are volatile and ephemeral and very much responsive to images and symbols. Picking a good CEO raises confidence in the company and gives a boost to stock prices and investor confidence (remember the frenzy surrounding the return of Steve Jobs to Apple). It is this “symbolic capital” which I think gives CEOs the bargaining power to command such high salaries, and why they are tending to rise over time as the hegemony of finance capital becomes consolidated.

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    “Previously, that social status would be garnered from how well you particiapted in and contributed to the community. In our modern capitalist dominated culture we seem to define social status on one thing: the size of one’s bank account.”

    A good read on this topic is Hannah Arendt’s book The Human Condition, which deals with the distinction between “labor” and “work” in human societies (she contrasts Ancient Greece with modern Western society). She argues that people who perform “work”, that is, artisan or craft production, pride themselves on the basis of what they produce, the chair or painting or whatever it is that represents the embodiment of their skill and labor. On the other hand, people who perform “labor” – wage laborers today, slaves in Ancient Greece – don’t produce any product of their own to take pride in, so they take pride in what they can consume as a result of the income they procure from their labor. She distinguishes the latter – what Veblen called “conspicuous consumption” – from the former, which she terms “conspicuous production”.

    It’s an interesting way to think about the psychology of consumerism.

  2. Administrator Says:

    Excellent commentary MK.

    MK wrote: “so they take pride in what they can consume as a result of the income they procure from their labor”

    As I was trying to fall asleep this morning I was contemplating just this sort of thing. I was thinking about how it is that human societies have ended up in this seemingly endless circular process of solving the problems of one need (say, food) and the spontaneous creation of other fictitious needs (say, DVD players). It seems to me that we have just traded one form of servitude for another. But thanks to pointing towards the work of Arendt, it seems logically sound enough.

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