I've got a few investments on a small scale, and it's not because I'm conscientously planning for my own future. I own stocks because once a year the various boards of directors have to hold a shareholders' meeting and they have to send me a proxy and ask my opinion and approval about certain kinds of business decisions they want to make. I know my few shares will be voted down by the superior numbers of shares owned by the men sitting on the board, but I think it must be galling to them that they have to ask such an insignificant frump as myself for my approval and I rather like that.
I'll just about always vote against salary increases for executives.
Don't get me wrong. I don't hold anything against the rich that I don't hold against the rest of us. As far as I can see, the rich and the poor and everybody in between have pretty much the same weaknesses and foibles. The mystery to me is that money doesn't seem to cure any of those problems.
For example, money doesn't cure greed, does it? No more than scratching cures poison ivy. Those executives on the board of directors who make five million a year will surely ask for six million on the next proxy. Do they need another million a year? No, they say they deserve it because they're "top quality people in key positions" and their expertise increases shareholder value. Well, Jake, if you've been pulling down five mil a year and you need another million a year to make ends meet, maybe you're not the financial genius you pretend to be.
What's a million bucks, anyway? It could be one of several millions the directors will sock away this year. Or it could be a A RAISE OF A DOLLAR AN HOUR FOR FIVE HUNDRED HOURLY WAGE EARNERS. Or it could be HEALTH INSURANCE FOR A THOUSAND HOURLY WAGE EARNERS. Or it could be TWENTY-THOUSAND DENTAL CHECK-UPS. Of course, the proxy the directors sent me didn't imply that the hourly workers contributed anything to shareholder value, so we should probably let those folks just sit tight.
In defense of giant executive salaries, it does seem to be the case that businessmen use exorbitant executive compensation packages in the same way medieval aristocrats used great big palaces and fancy ceremonies to impress their potential allies and rivals. If you want to be suddenly taken seriously in the business world, start ladling cash on your top execs like gravy on a roasting pig.
When I was in high school I worked as a groundskeeper at a country club and it seemed to me then that there was a pecking order in the arrangement of golf foursomes. If you barely made five figures, you probably weren't going to tee off with guys pulling down a million. So juicing up your executive put him on the links in more powerful company and positioned him to hob a higher class of nob and wheel and deal in a tighter and more powerful circle of movers and shakers. Representatives of companies who couldn't afford the executive ante had to play around the foothills of Olympus.
It seems a little sad to me, though, that companies in their prospectus will boast that their executives' compensation packages rank in the top ten percent of all comparable companies. Why would they not similarly boast that their starting salaries for entry level assemblers are in the top ten percent of all comparable companies?
Executives and managers are pretty good at determining the financial needs of their charges. Here's an example from my very own life. I've heard this story from my mom many times. Elsie was the very first woman to graduate from IBM computer school way back in the sixties. She was a programmer and systems analyst and she trained many many men to program and year after year those men were promoted over her and paid better than she after she trained them. When she protested to her boss she was told that because she was a woman, her salary was supplementary to the family and therefore she didn't need to be paid the same salary as a man doing the same work even though, yes they agreed, she deserved to be paid more.
So my mom got paid based on what the execs thought she needed and the execs get paid based on what the execs thought they deserved. I get it. Makes perfect sense. Mom eventually got her raises, but she had to quit in order to get them. "Oh, you meant THAT kind of raise, like a raise-type raise. Well, why didn't you say so?" And I imagine that the manager from whom she twisted the raise went to his boss and remarked about the surprising avarice of that Johnson woman.
Speaking of arbitrary pay scales, I've noticed something about the minimum wage. The people who complain most about raising the minimum wage are the people who have the most to gain by raising the minimum wage. True, raising the minimum wage increases the operating expenses of certain kinds of businesses, but it also increases the disposable income of the people who patronize those same businesses. Who eats at McDonalds? Who shops at Wal-Mart? Disproportionately it's lower income people.
Give a dollar an hour raise to a guy making six bucks an hour and that dollar will be back in the economy the Friday after payday. Give an extra dollar to Daddy Warbucks and that dollar will be locked up in a trust fund the way fresh water is locked into the polar ice cap. I can't even believe there's a minimum wage law at all. Executives, financial geniuses that they are, should be able to see that increasing the living standard of the lowest paid workers will have the most immediate positive effect on the economy at large and their companies in particular. What self-respecting, forward-thinking executive would pay his people as little as minimum wage if he didn't have to?
The confusing part is that every day I see evidence that fabulously wealthy people are not stingy. On the contrary, as a group their generosity is right there for all to see. How many poor people have built a wing on a hospital or a stadium for a university? It's plain to see that fabulously wealthy people are fabulously generous.
Ted Turner gave a billion damn dollars to the U.N. Damn! That doesn't happen every day. Bill Gates unloaded a dump truck full of cash, too. And these are just two examples that are recent and notable. So rich people aren't sitting in a cramped room giggling like maniacs and counting gold coins by the light of a single candle. If they were like that it would be easier to be angry with them.
What justifications remain for fabulously wealthy people to pay as little as the law allows to their unskilled employees while adding superfluous millions to their own compensation packages? Let me anticipate some executive reasoning.
1) It is counterintuitive in a capitalist system for a businessman to pay more than he has to for materials, capital or labor.
True, but just as a businessmen should expect to pay a premium for higher quality materials, he might expect to pay a premium for higher quality unskilled labor. For example, if you pay your bussboy an extra half dollar an hour (thats $20 more a week) he might think his job is not the equivalent of the minimum wage job across the street and you might not have to break in a new bussboy every two weeks.
2) If you start paying your stock boys eight dollars an hour and then the company has a bad quarter, those higher wages will hamstring the company competing with similar businesses who pay their stockboys minimum wage.
That makes sense to me, but on the other hand I've never heard of an executive taking a pay cut when the company has a bad quarter.
3) Unskilled labor has always been low paying. People without skills should not expect to be paid more than minimum wage.
Just because this is the way things are doesn't mean that it's the way things have to be. There are lots of companies whose prosperity is built on minimum-wage labor. While that prosperity is traditionally not shared with the lowest paid workers, that doesn't mean we should do it that way again. Look at the famous example of the Waltons' millionaire cashiers.
4) Increasing pay for unskilled labor would dilute shareholder value.
I'm not suggesting we pay for the raises out of earnings. I'm suggesting we pay for the unskilled pay raises out of executive pay raises. Shareholder value would be unaffected and the executives probably won't be hurt too very much. They'll just have to manage without that sixth million for a year or two.
5) The government should not set wages or prices. That smacks of socialism and socialism frightens me. The government should let me run my own business.
Agreed! The thesis of this essay is that there are several good self-interested capitalist reasons why a prudent businessman might want to pay his unskilled labor more than his competition pays and more than the minimum wage law will let him get away with; and that such pay increases could easily be borne by large companies by reducing the lavish compensation packages paid to executives.
6) An unskilled workforce is better motivated if it's a little hungry.
So unskilled labor is properly motivated by paying them as little as the law allows while executives are properly motivated by paying them as much as the company can bear? That's specious reasoning. Comfortable people don't rebel. Hungry ones do. How much loyalty can you expect from a worker who gets minimum wage from you? Do you think he doesn't realize you'd pay him less if you could?
(UPDATE 4/1/2000: From 1998 to 1999 the average number of employees at Caterpillar went from 64,441 to 66,225, an increase of 1,784 or 2.8%. Over the same period, Caterpillar went from spending $4.146 billion to $4.044 billion on wages, salaries and employee benefits. So the average Caterpillar worker went from $64,338 annually to $61,064 annually. That's a drop of $3,274, or about five percent. Over that same period the Chairman and CEO of the same company went from pulling down $972,003 to $1,376,322 in salary and bonuses--an increase of over 40%. Or $6.11 per employee. Similar raises for four group presidents amounted to a quarter million bucks total, or $3.74 per employee. Imagine these executives going individually in person to the employees, whose average compensation dropped $3000, and asking them for ten bucks to cover this year's executive raises. "Our CEO just can't make ends meet on $972,003 a year. Won't you please help? He NEEEEEEEDS the extra $400,000. He REEEEEEEALLY needs it." Maybe they could get Sally Struthers to make a heartfelt infomercial featuring corporate executives lamenting their fates at having to hit the same golf ball twice. These figures don't include stock options, expense accounts, enterainment and travel and country club memberships and any number of other things paid for by the company. Over that same period, earnings per share went from $4.11 to $2.63 per share--down 36%.) Source: Caterpillar 1999 annual report.
(UPDATE 6/1/2000:) From 1997 to the first quarter of 2000, Jill Barad was the CEO of Mattel. During that time Mattel stock plunged from a high of $46 in 1998 to a low of $12 in 1999. Jill's annual base salary went from 1.10 MILLION in 1997 to 1.31 MILLION in 1999. Over the same period she was given $945,543 in BONUSES, $486,441 in "other compensation," $16.9 MILLION DOLLARS in "Long Term Incentive Payments" and 4.9 MILLION SHARES in stock options. That's over $17 MILLION in three years. That doesn't include the consideration that in 1994 the company loaned her $3 MILLION at 4.12% per annum to buy a house and again in 1997 loaned her $4.2 MILLION at 6.1% per year secured by 292,968 shares of stock that the company issued her. The company had loaned her the money to pay the taxes on the stock that she was using to secure the loan. Sweet deal, that! That also doesn't include any of those options, since the stock has been steered into every iceberg that came along in the past three years.
I don't mean to lay all the blame with Jill. If she was making decisions that were outright silly there was a board of twelve directors and a pretty good handful of division presidents who could have said something, and they were all just as overpaid as Jill and their salaries all rose during the period of disaster.
So they share the responsibility, but not the blame. Barad gets that, plus the boot, poor baby. And by the way, just listen to her severance package. Remember that $3 MILLION loan? Well, the company just forgives all interest and principal on that loan, and by the way they're throwing in another $3.31 MILLION to pay the taxes on the gift. And remember the $4.2 MILLION loan? They're forgiving that, too. She also gets five years' salary, and layouts from company incentive plans. Cha-ching! $26.4 MILLION DOLLARS CASH (NOW GET OUT)! Now throw in open-ended agreements for continued health insurance, financial counseling, memberships, security services, life insurance, stock options and pretty soon we're talking real money.
What could possibly justify that kind of pay for that kind of performance? Only the fact that the execs know they can get away with it. The proxy statement also mentions that Ms. Barad has to sign a confidentiality agreement. That explains a lot. What nasty thing does she have on videotape? I can only guess that she caught some of the board members having too much fun with "Just My Size Barbie."
P.S.-- Quoting from the proxy statement "Mattel must offer competitive salaries to be able to attract, retain and motivate highly qualified and experienced executives and other management personnel." You boys certainly got your money's worth this time.
Source for figures is Mattel Proxy Statement and Notice of Annual Meeting of Stockholders, April 28, 2000.
Want to argue about it? E-mail me at Traveler. Put the words "Fabulously Wealthy" in the subject line.