The perverse effect of high CEO salaries

               

By Jack E. Lohman

The Big Three want a bailout even after running their companies into the ground. After all of the political posturing, they’ll get it even though they shouldn’t.

The special interests have paid their dues, and it’s payback time. That’s the way the game is played.

Clearly, Congress is a whiz with money but a dud with math. The $34 billion loan to the Big Three is about twice the market cap of all three companies combined. The taxpayers could buy them all, twice, then combine them, dump the unprofitable models they never should have wasted money on in the first place, and sell the new company back to private investors!

If congress does nothing, that’s what they themselves will likely do. We shouldn’t be giving them a bridge loan to bankruptcy, we should let them consolidate, where the “industry” doesn’t go belly up but the waste does, and suppliers deal with one company rather than three.

If there is not a consolidation of the three, there will be three bankruptcies. Though if GM drowns first, and sells off its profitable lines, perhaps Ford can survive. A bailout of all three will ensure their ultimate demise.

The CEOs are not worried anyway; they received their life’s requirements during their first year on the job. And then some.

Ironically, $50 million salaries and golden parachutes meant that their business decisions needed to be maximized for the short haul, not for long term profits or viability. They didn’t have to make intelligent decisions, so they didn’t. Gas guzzlers for the short term rather than electrics and hybrids for the long term. Wow.

It’s called “get your money and run!” and the CEOs played it well. Yet in the process they inspired unions to ask for higher worker wages, which the CEOs fought with a vengeance even while taking theirs. The redistribution of wealth is good, only if in an upward direction.

Short term and generous CEO salaries have had a perverse effect on their long term leadership. Try as we might, the windfall giveaways cannot be justified, especially when CEOs trash the company.

Heretofore we’ve allowed the CEOs to select their own directors, and they’ve picked their friends. Instead, the shareholders — the owners of the company — must be given clear power to elect their own board and approve the wages of executives. Even a maximum wage, if they want, like capping executive income at 25 times the average worker’s wage!

That’s what you call free market!

Tidbits:

Bottom line is that none of this crash would have happened under an honest political system, where politicians were not paid to turn a blind eye to industry malfeasance. They are bought and paid for by everybody but their constituents, and that must change. Can you imagine a member of a corporate board being on the competitor’s payroll?

Unions can no longer protect the demand side from the supply side, because the supply side is de-unionizing us via outsourcing to non-union countries. Part of that is because unions pushed too hard and got what they wanted — high salaries — and the CEOs wanted those for themselves.

Call it a depression, if you will, but I see it as the very messy end of capitalism as we know it. We don’t want communism but we do need some degree of socialism. I like nationalizing the banks and domestic oil market, and at least the auto industry until we can turn it around and sell it back to private industry. I also favor tariffs to divert the work back home.

But a big blocking of any rational movement is taking place via campaign cash flowing from the special interests who like things just as they are, to the politicians who should be working for us instead of them. Only public funding of campaigns will reverse that trend.

$1.69 per gallon? Sounds like the speculators backed off to let it cool down a bit. A congress with guts would outlaw speculating!

Job losses? The most important will occur on January 20th.

8 Responses to The perverse effect of high CEO salaries

  1. Harold says:

    Massive wealth preceded the 1929 crash too. Can you imagine sitting at the poker table and there’s only one person with any chips? Sure he was smarter (shrewder?, dishonest?), but the game is over nonetheless.

  2. Yea, what is it they say about wealth inequality? The richer they get the more jobs they will create!

    Jobs? Where are they creating them? Seems to me the are just hoarding the cash that (a) caused the crash in the first place, and (b) is preventing its recovery.

    Importantly, our politicians have maneuvered the rules to allow the imbalances to take place, because they shared in the largess. Free market? How about free-for-all market instead?

  3. Nick says:

    Well, believe it or not, the current system actually does allow for Shareholders to select the board of directors. That’s how a publicly run company works. You may not like the selection, but if that’s the case, then buy a bunch of shares and vote.

    The reality is that Chapter 11 would do even better, because it liquidates all shareholder stakes, and puts the control of the company in the hands of the debtors, where they would be able to clear the board and select entirely new management if they wanted to.

    Of course, if there is a bailout, that is less likely to happen.

  4. Nick, there are indeed companies in which the shareholders have all of the say, but there are others where the rules and proxies are so stacked against the shareholders and in favor of the CEO and board members that one’s only choice is to sell their shares and move on. Take away proxies and perhaps it would be fair, and we’d see far fewer shareholder lawsuits in the process. But that creates other problems.

    I agree that chapter 11 is better than a bailout.

  5. A big part of GM’s problem is legacy costs: pensions and health care for retirees. Remarkably, the city of San Diego has the same problem. It is on the verge of bankruptcy because of pensions and health care costs for retirees. These problems did not just innocently happen in both cases. They came about because deals were made with unions to keep wages lower in return for higher pensions thus making the short term profits look better. Put off to the future the costs and make the present day balance sheet look better. Unfortunately, now the chickens are coming home to roost and GM and San Diego find that they’re hamstrung by huge legacy costs. In San Diego’s case it got the union to approve a less than full funding of the pension fund. I suspect something like this happened at GM. Unwise decisions that seemed like a good idea at the time have resulted in catastrophe now that the bill has become due!

  6. Yea, John, this is privatized retirement/Medicare gone awry. We must either force companies to contribute to a secure third-party system or mandate that employees participate in the social security and Medicare system. As it is now, the taxpayers are going to have to pay the tab.

    Likewise, can you imagine what would have happened had Bush privatized SSI for the rest of Americans, and we had our retirements in the stock market? (My IRA already is, and has lost 40% of its value!)

    If SSI/Medicare isn’t good enough, FIX IT! If we don’t fix it the taxpayers will continue picking up the tab. Workers must be assessed enough while they are working to fund the system. We don’t want them on food stamps and welfare after retirement.

    However let me add that there is nothing wrong with Medicare (I see the same doctor and go to the same hospital I always have), it does need fixing here and there. But the politicians keep getting in the way (of course they are being paid to by the insurance industry).

  7. The first year I qualified for Medicare, I went on the Advantage program because you got a lot more for the same money. It also included a free once a year physical which Medicare doesn’t. Then I figured out I was contributing to the privatization of Medicare and, not wanting to do that, I switched back to traditional Medicare. Now I can see any doctor I want without a referral but that’s the only advantage. It seems like the copays, deductibles, supplementary insurance and everything else stacks the cards against traditional medicare and for the Advantage program. Medicare should be completely free for seniors without all these add-on fees. It doesn’t compare at all with Canada where all you do is present your card at any medical facility and there is no charge whatsoever.

  8. John, check with your doctor. My traditional plan covers a yearly physical.

    Moving from an Advantage plan to traditional Medicare offers many more benefits. The Advantage plans don’t offer the same level of coverage when you get sick, and some of them are capitated, which means that the less care they provide translates to greater profits to the shareholders. I have traditional, but have a friend with Advantage. He has had no problems. Yet!

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