Coyote Blog

Critics of high executive pay on the soft-core / moderate left (as opposed to the hard-core socialist left) often argue that they are not against large incomes per se.  However, they argue that high executive pay is often the result of a failure in the structure of corporate governance, where a group of cozy insiders on the board and management hand each other compensation packages to which the rank and file of shareholders would be opposed  (a subset of the agency cost problem).

I am somewhat sympathetic to this argument, as I have personally observed instances where I thought boards and management were too cozy by far.  However, no one has really succeeded at proving this hypothesis on executive pay, and in fact shareholders when they have had a chance to vote on such packages have never really made a meaningful dent in them, and one can find a number of private companies where such governance issues presumably don’t exist but high executive compensation packages can exist.

Just as an aside, a classic example of this can be found in the fabulous book “Barbarians at the Gate” about the RJR Nabisco takeover fight.  The book does a great job of portraying a company with horrible corporate governance issues that seemed to be used to enrich managers with both salaries and perks, but then observed that the new private owners of the company gave their new CEO a compensation package that might have made the previous executives blush.

Anyway, I am yet again off the point.  My point was to observe that the mainstream left seems to believe that there are corporate governance issues at large corporations that disenfranchise the majority of shareholders vis a vis key decisions involving the company executives.  So I have to ask myself, if this is a real fear, then how does one justify having the President of the United States effectively fire the GM CEO, without any vote or substantial input from shareholders?

Postscript: It is all well and good to be cognizant of agency costs.  Everyone should understand when an employee (or contractor or whatever) has different incentives than they themselves possess.  For example, on my recent backyard renovation, I always kept in mind that my architect wanted to create a showplace that would advance his business and possible get into a magazine.  In general, this alligns our interests, but there were times he pressed for things I did not value and I had to be insistent we were not going to do those things.

However, many folks seem to want to run off to government to do something about agency costs whenever or wherever they are found.  This is hugely dangerous, as Congress tends to have the highest agency costs one will ever be likely to find.

The auto bailout is dead, at least for now:

A bailout-weary Congress killed a $14 billion package to aid struggling U.S. automakers Thursday night after a partisan dispute over union wage cuts derailed a last-ditch effort to revive the emergency
aid before year’s end.

Republicans, breaking sharply with President George W. Bush as his term draws to a close, refused to back federal aid for Detroit’s beleaguered Big Three without a guarantee that the United Auto Workers would agree by the end of next year to wage cuts to bring their pay into line with U.S. plants of Japanese carmakers. The UAW refused to do so before its current contract with the automakers expires in 2011.

Good.  Chapter 11 was made for this kind of situation, and folks will quickly come to understand that productive assets don’t go *poof* in a bankruptcy  (though equity values can).

By the way, you will note that Senate Republicans did not suddenly become economic libertarians.  Their objection seems to be that the bill does not micro-manage the auto industry they same way they would want to micro-manage the auto industry.  You can see in these political battles that Congress brings its usual identity politics to these decisions:  Republicans want to hammer the unions, Democrats want to hammer executive pay.  Which is why these restructuring discussions don’t belong in Congress.

Apparently, the Democratic Congress is trying to "take on" high executive pay with some kind of punitive taxation plan.  This fits well into a class of legislation I would describe as "useless at best, probably counter-productive, but of high symbolic value to our base," something to which both parties are unbelievably susceptible.

I’m confused, by the way, about why exactly I should care how much CEOs are paid, particularly for executives that don’t work for companies in which I own stock?  I don’t think Paris Hilton, George Clooney, or the CEO of Home Depot are worth what they are paid, but I don’t know how it affects me except perhaps for some simmering envy.  Does anyone with above a 5th grade education really believe that they will pay one cent less for gas or a refinery worker will make one dollar more if the CEO of Shell is paid less?

I do understand why the shareholders of Home Depot might be pissed off about what they were paying their CEO, or more accurately, what they paid him to go away.  I am sure the Arizona Cardinals felt the same way about Dennis Green.  Now, if Democrats wanted to suggest that shareholder voting and corporate governance rules needed to be amended to make it easier for shareholders to hold managers accountable for bad decisions and to overrule sweetheart deals between buddies on the board, I am very open to listening.