Cartoon: CEO Pay Nightmare
| July 31st, 2008My newest cartoon is online at Dollars and Sense.
Also on D&S, “Ask Dr. Dollar” argues that the insanely high CEO pay in the US isn’t about productivity, and not just about crony capitalism: It’s also about political power.
And from Chuck Collins:
While average wages for all workers rose 3% in 1996, the average CEO salary and bonus rose 39% to $2.3 million — and that is without stock options. Benefitting even more than average were the top managers of the 30 U.S. corporations that laid off the most people last year, according to a new study, “Executive Excess: CEOs Gain from Massive Downsizing,” by the Institute for Policy Studies and United for a Fair Economy. The axmen who laid off between 2,800 and 49,000 workers last year upped their own compensation by 67%.[...]
Most corporate leaders would say any government regulation of CEO pay is an outrageous interference in the free market. But the government is already involved in CEO pay — through the U.S. tax code. The tax code allows businesses to deduct “a reasonable allowance for salaries or other compensation.” The catch is that the code doesn’t define “reasonable.” So companies can — and do — routinely deduct the entirety of grotesque executive pay packages. Corporations pay less in taxes than they should, and regular taxpayers pick up the slack.
July 31st, 2008 at 9:36 am
I love the cartoon! Alas, I am nitpicky. You have a couple of misspellings: “corportate” and “croney.”
This comment was written by That Queer Chick.Report this comment to the moderators
July 31st, 2008 at 9:45 am
Aaargh!
Thanks for pointing the misspellings out. Off to make corrections….
This comment was written by Ampersand.Report this comment to the moderators
July 31st, 2008 at 10:07 am
I have a question that’s sorta off topic, but…
What’s the name of the font you use for the dialogues in your cartoon? Anyplace where I can buy/download?
This comment was written by Charles Brubaker.Report this comment to the moderators
July 31st, 2008 at 10:39 am
That doesn’t sound right. Maybe he means the CEOs of Fortune 500 companies?
This comment was written by Brandon Berg.Report this comment to the moderators
July 31st, 2008 at 10:45 am
Sorry - the font is one I made myself, from a scan of my own writing. So although I’m flattered you ask, it’s not available.
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July 31st, 2008 at 11:48 am
what seems improbable about those figures, Brandon? remember, average is not median.
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July 31st, 2008 at 12:43 pm
funny comic, if only if only…
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July 31st, 2008 at 1:25 pm
I love the cartoon…and the idea. I bet we could find plenty of competent CEOs in India or China who’d feel pleased to work for $50K per year. It’d make the stockholders happy too since they could get more money AND increase worker pay, thereby netting positive media. Why hasn’t anyone done it yet…
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July 31st, 2008 at 1:38 pm
It is entirely possible that the average went up because (hypothetically) a large number of small businesses just closed up shop.
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July 31st, 2008 at 2:51 pm
“The axmen who laid off between 2,800 and 49,000 workers last year upped their own compensation by 67%.”
CEOs are far from the only ones who profit from layoffs. When I worked in automating production lines, my employment contracts always stipulated a bonus based on the number of line workers and line supervisors who were replaced. Most years, my bonus was two or three times my actual salary.
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July 31st, 2008 at 4:17 pm
what seems improbable about those figures, Brandon? remember, average is not median.
It’s improbable because there are thousands of CEOs, if not more. A few megarich ones can’t be pulling the average up that much.
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July 31st, 2008 at 4:20 pm
what seems improbable about those figures, Brandon? remember, average is not median.
It’s improbable because there are thousands of CEOs, if not more. A few megarich ones can’t be pulling the average up that much.
The “Dollars and Sense” column being linked, by the way, is more than ten years old.
These numbers are a decade younger, and considerably more believable.
This comment was written by Robert.Report this comment to the moderators
July 31st, 2008 at 8:59 pm
If one wanted to make CEO pay appear as low as possible, median salary would just about do it.
Conversely, average CEO compensation appears to be about $10.7 million. Keep in mind average is different from median, and that most CEO compensation comes from bonuses besides salary. Much of the confusion probably arises from just what it means for a CEO to “make” a certain amout of money - left wingers would use total compensation, right wingers would use the most restrictive definition.
Average CEO salary, on other hand, is around $1.2 million. I wish I had the figure for median compensation; I’ll update if I can find it.
It should be noted that “CEO” encompasses a quite diverse crop of people. When most people think “CEO”, they think “Rich old white guy with a Roman numeral in his name who spends more time on the links than working”. And, this is exactly true for some, mostly true for many others. However, startup CEO’s and the like are markedly different. This is perhaps why the average and the median are an order of magnitude in disagreement.
I love the second last panel, by the way. I’m all for a globalized economy, so long as it is a universally globalized economy, and not just for blue collar workers in traditionally unionized sectors. (This is no longer how it is, as workers in any non-service, non-governmental, or non-finance industry will see their jobs outsourced. But the regime of “free trade” began under suspicious circumstances.) Yes, people in India are willing to work the factory floors for 50 cents an hour. People in India are also willing to sit in big chairs for just $30,000 a year, or be financial whizzbangers for half that.
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July 31st, 2008 at 9:15 pm
Sylphhead:
From the article you linked to:
Emphasis mine. I can believe this for CEOs of large companies, for some definition of “large.” But it’s not quite clear what that definition is.
This comment was written by Brandon Berg.Report this comment to the moderators
July 31st, 2008 at 9:42 pm
Hmm. The following sentence,
… came without any disclaimers of any sort, and was the part I focused on. I didn’t catch the “many of the biggest companies” disclaimer.
This article from Business Week suggests that average total CEO pay (by which I assume they mean total compensation, as not even the leftiestest of advocates claim a figure this high for average CEO salary) was about $9.6 million for 2004. That’s at the high point of the post-bubble recovery, and before the current credit uncertainty and crushing commodity prices, so take of that what you will.
Business Week says they surveyed 367 CEO pay packages. I assume these were randomized - if they said that it wasn’t, I must have missed it. Regardless, this all misses the point: when people like the good folk at Dollars and Sense rail against CEO pay, they aren’t talking about the nervous 30-year old MBA for a crack entreprenuerial firm who barely makes more than a police officer. I think it’s fairly obvious what they’re talking about, and that others willfully miss the point.
This comment was written by sylphhead.Report this comment to the moderators
August 1st, 2008 at 1:28 am
Also from the Business Week article you linked to:
I’m not 100% sure, but I believe that “biggest companies by market capitalization” refers to the companies in the S&P 500, which would be an average of $7 million each, which would mean that the $9.6 million was probably not based on a random sample.
Also, take a look at these lists:
Highest-paid CEOs
Highest-paid celebrities
8 entertainers making $100 million or more last year compared to only 4 CEOs. And only 2 CEOs averaged $100 million or more per year over the last 5 years. Where’s the outrage over celebrity pay?
I do think it’s relevant that only a handful of CEOs running huge corporations are making this much money. The message we’re supposed to take away when we hear that CEOs make roughly nine bajillion times as much as the average worker is that we could take all that money away from those greedy CEOs and give everyone a big raise. But aside from the fact that we already do take away a big chunk of that money in the form of taxes—as much as 45% in states with high income taxes—it just isn’t true. From sampling this list, I would conservatively estimate that the average S&P 500 company has 25,000 employees. If the average CEO of an S&P 500 company takes home $7.5 million after taxes, that’s $300 per employee per year, or about fifteen cents per hour.
This comment was written by Brandon Berg.Report this comment to the moderators
August 1st, 2008 at 10:49 am
This is just silly. Yes, the corporation gets to deduct CEO compensation, but then the CEO has to pay taxes on it. Technically the slack is picked up by regular taxpayers, but those regular taxpayers are the CEOs themselves. The real tax loophole is low-paid workers. The employer deducts the employee’s salary at a marginal tax rate of 40% or so (depending on the state), and then pays only a payroll tax of 15% or so. You know who picks up the slack? CEOs and other people in the 35% bracket.
This comment was written by Brandon Berg.Report this comment to the moderators
August 1st, 2008 at 12:49 pm
To be clear, firms deduct all forms of compensation as a business expense, whether the compensation goes to executives or not. It is sometimes difficult to measure this compensation, of course. If a corporation has to fly an executive to a week-long business meeting in Hawaii, well, that’s just a business expense – deductible by the corporation, but not necessarily recorded as income to the executive. And even when benefits are recorded as income, quantifying the income is notoriously difficult. David Cay Johnson details the challenges of measuring the value of a corporate jet in his book Free Lunch.
For what it’s worth, the tax code does distinguish between corporate pension plans that are biased in favor of “highly compensated employees” and those that favor all employees proportionately. The latter kind of pension plan gets more favorable tax treatment. Thus, this tax policy reflects SOME effort to acknowledge disparities.
Depends on how you look at things. Presumably wage rates are set by supply and demand. But in high-cost areas the labor supply is distorted by government subsidies for low-income people. In the absence of government subsidies, presumably such workers would not be able to afford living in (or commuting to) such high-cost areas, and would move away. The resulting decline in the labor supply would result in increased wage rates for those that remained.
Consider: Joe is able to work at the Oakland Walmart because he receives just enough income from Walmart + government subsidies to be able to live/commute there. Then Joe’s cost of living increases by $100; what now? If Joe is going to continue working at Walmart, then either 1) he needs to increase his income by at least $100 or 2) he needs to increase his subsidies by at least $100 or 3) some combination of 1 and 2. Every dollar of subsidy that Joe gets from government is a dollar less of (after-tax) wages he needs to receive from employment. By this analysis, employers are the net beneficiaries of programs subsidizing the poor; the more efficient the labor market, the larger portion of the subsidy gets absorbed by the employer.
This comment was written by nobody.really.Report this comment to the moderators
August 2nd, 2008 at 1:13 pm
Don’t CEO and other rich people have ways to avoid paying a 45% tax?
You tell me that someone who makes 300 million a year is getting 135 million just in taxes or are they able to deduct stuff, put it in plans and use legal tax loopholes to reduce their contribution significantly? Maybe I’m wrong, but that’s what I heard (unsubstantiated though).
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August 2nd, 2008 at 9:28 pm
nobody.really:
Taxation of non-monetary compensation is an interesting topic with implications going far beyond the corporate boardroom. For example, I’ve toyed with the idea of quitting my relatively high-paying job to go teach English in China or Japan. The pay would suck, but there would be major non-monetary benefits (it would be exciting, I’d get much better at either Chinese or Japanese, and it would be much easier to find an attractive girlfriend than it is in Seattle), so it’s nearly a wash. I’m sticking with the money for the time being, but it wouldn’t take much to push me in the other direction.
I can’t see the merit in any theory of justice which says that I should pay tens of thousands of dollars per year in taxes if I choose to take my compensation in the form of money, and a small fraction of that if I choose to take my compensation in the form of nonmonetary benefits.
Tax incidence theory is hard. Definitely in the colloquial sense, and maybe even in the academic sense. We can analyze this further. When employment costs go up, businesses lay off marginal employees, and marginal businesses close up altogether. Or maybe people just hire fewer new employees and/or start fewer new businesses.
One way or another, supply decreases and costs get passed on to consumers. So it’s really the consumers who benefit from subsidies. But they pay the taxes to fund the subsidies, too. And around we go. I have no idea what the actual solution is.
But in a naive analysis, at least, total tax burden (corporate + individual) declines more when paying a low-earning employee than when paying a high-earning employee because the low-earning employee will usually have a lower marginal tax rate (unless there are welfare phase-outs involved).
Schala:
I welcome evidence to the contrary, but AFAIK tax loopholes are largely mythical. Nobody.really pointed out one above (non-monetary compensation taking the form of a quasi-legitimate business expense), but in terms of actual cash wages, I don’t know of any legal ways to shelter them, other than IRA and 401(k)s, whose limits are low enough that they’re relatively worthless to people making millions per year.
At one point there may have been, but Congress created the AMT to prevent that. And even then, there were only 155 taxpayers with incomes over $200,000 paying no income taxes. I haven’t been able to find out exactly what loopholes they were exploiting. For all I know, they were just donating all their income to charity—whatever it was, it must not have been very attractive if so few people were doing it.
This comment was written by Brandon Berg.Report this comment to the moderators
August 3rd, 2008 at 8:08 pm
Your quote of the article is a bit gerrymandered, Brandon. Here’s more of it, in context:
The first paragraph certainly doesn’t seem like it’s only talking about the CEO’s of S&P 500 companies. And while the article maintains the S&P 500 companies, I was under the impression that they were using S&P stock performance as a backdrop for overall market performance, like it usually is, against which to measure CEO pay. (The S&P index grew 11% and CEO pay grew 11%? Okay. S&P grew 7% and CEO pay grew 13%? Something’s not right… ) The italicized portion of the quote (emphasis mine) - which you spliced by beginning your blockquote mid-sentence - supports my interpretation. It seems like they’re acknowledging that CEO pay rose substantially, but excluding one notable outlier, pay growth matched that of the overall stock market as gleaned from S&P averages, thus the rise in pay was justified. That’s a far cry from saying the CEO’s picked were only those of S&P 500 companies.
Just for the record, I agree with the article’s analysis. They defend the rise in CEO pay as it correlates roughly to overall market performance, but from the tone, apparently believe that CEO pay overall is too high to begin with. That is essentially my position.
And while it seems unlikely, I won’t completely rule out your interpretation. I encourage everyone to actually follow the link and to form your own opinions - the article’s wording can be vague at times.
It’s there, but that’s not what this topic is about. Liberals don’t like overpaid celebrities, either. (Or, for that matter, baseball players.)
To be exact, at the height of the dotcom boom, it reached nearly 500X the compensation for the average worker, and currently sits, I believe, at around 300-400X - which is still nearly an order of magnitude higher than the US of a few decades ago, or of other capitalist countries in Europe and East Asia.
The central message behind quoting these statistics, I’ve found, is not the advocacy of a particular policy as such (such as higher taxes on the wealthy), but puncturing a rhetorical hole in the “That’s just the way it is, c’est la vie” defense of exorbitant executive pay. Yes, top executives will make more than the average worker. How much more, however, in our current case, is historically and globally unprecedented.
Aw geez. Should I go there, shouldn’t I go there… 95% of people who’d say that last bit are gormless creeps. If you count yourself among the 5% who aren’t, know the thin, super-permeable line between guys who go to Asia “to find a girlfriend” and creepy sexual tourists, and to try not and say it in those terms.
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August 3rd, 2008 at 11:31 pm
Wow. I’m not sure if you’ve totally failed to get what this blog is about, or if you do get it but you’re deliberately trying to get a rise out of folks.
Either way, consider yourself banned until September, at least.
This comment was written by Ampersand.Report this comment to the moderators
August 4th, 2008 at 8:00 am
I think Brandon was simply alluding to the exogamy premium. “Foreign” men and women (in most any context or country) often have an allure that puts them several rungs higher on the dating hierarchy than they would be in their homeland. I know that when I was a (shy, geeky, bespectacled - but blonde and American) teenager visiting Italy, the level of interest from girls was about 1000% higher than it was before or since. Certainly, if I were on the mate market, I’d be much more valuable in Italy (or Japan or China) than in Indianapolis.
Are exogamy premiums another entry on the list of facts about human reproduction that must not be alluded to within earshot of feminists?
This comment was written by Robert.Report this comment to the moderators
August 4th, 2008 at 3:57 pm
Interesting robert, I thought he meant Asian chicks were hawt and would dig him.
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August 4th, 2008 at 10:55 pm
Well, I realize Brandon isn’t going to post anymore in this thread, but I’d like to say sorry for the tone in the last paragraph of my previous post. This is a subject I rightly feel very strongly about, as it’s an issue of national pride. But “creep” is an ad hom, however conditionally guised.
True… all else being the same, there should be no difference between Westerners going to Asia to get girls and college boys backpacking through Europe for sexual (mis)adventure.
But the thing is, all else is not the same, and context matters. Saying that you’re taking a trip to Italy for the women - wink, wink - conjures up images of wine, cheesy background music, and a candlelit dinner on a patio overlooking the sea. Saying that you’re taking a trip to Thailand for the women - wink, wink - conjures up images of whorehouses, war brides, and sexual colonialism. If it doesn’t for you, then it does for me and a whole lot of other people, so please understand the difference.
Now, Japan and China are not exactly the same as Thailand (at least the parts of China where someone like Brandon is likely to find work), but much of the historical context is similar. What gets me most about this whole thing is how this attitude is presented as “progressive” or racially groundbreaking by some. No - “going to Asia” in this manner - Southeast Asia in particular, but also Asia in general, is barely above purchasing already-bethrothed internet order brides from Russia. I daresay some part of Brandon’s mind imagined himself to be saying something remarkably tolerant or racially enlightened by such a statement. No, no, no, no it’s not, and I can’t emphasize that enough.
I mean, the whole “I like Asian girls” kind of has its own ugly backstory - most guys who say this don’t actually prefer Asian over white, just looking for girls for whom deferential shyness is a mercilessly inculcated trait, as they can’t handle modern women - but at the very least, can’t you find a nice Asian-American girl instead? I know several I could set you up with. Must you travel halfway around the world to exploit an ugly colonial past?
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August 5th, 2008 at 6:28 am
Sylphhead, those are fair points.
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