Should salaries be capped?

[vern_humphrey]

Vern, to be sure there is plenty of blame to go around. One temptation to which folks can succumb (including me) is to subscribe all economic problems to the rich. Others tend to blame the economic problems of the poor only on the poor. As catholics though, we ought to realize that ALL of us are good, but fallen and subject to temptations. Therefore, we can’t demonize any particular group of PEOPLE as the source of the problems, but must look for problems in the system that tempt people to exploit them.

I’m not blaming anyone or demonizing anyone. I’m just explaining how the economic system works.

1. Businesses are created to make a profit.
2. CEOs are hired to make that happen.
3. CEOs are judged on how well they make that happen.
4. CEOs who lose money get fired.

It’s that simple.

The point of all that is to prepare to answer your claims. You cite the Dow and WalMart stock results as proof that the system works. Is it?

The market is an indicator, not a balance sheet for individual businesses. If we want to talk about one business (for example, Wal-Mart) we need to look at their balance sheet.

If we need to talk about business in general, we can either look at all the balance sheets, or look at a good indicator – the Dow-Jones and other market indexes fill that role.

The fact that the market indexes are up indicates that businesses in general are making a profit.

Or can it be explained because A. This economy still is coasting on the momentum boost we got out of World War II

World War II ended before most of us were born. We can hardly attribute today’s economy to something that happened that long ago.

And if we do – how do we explain the economic successes of countries that lost the war?

and B. People (me included) have a hard time resisting low prices at the consumer level.

And low prices don’t just happen. CEOs are paid to make those low prices happen.

Companies that cannot keep prices low go bankrupt – or replace their CEOs with people who can keep prices down.

How will Walmart’s bottom line change if its philosophy permeates the entire marketplace and middle class small business owners are all converted into $7.50 an hour “associates?” Might there eventually be a bit of a shrinking market? In spite of their success over a couple decades, is this really a classic win-win business model?

It has been for more than a generation.

As conditions change, Wal-Mart expects its management to adapt, to adopt new strategies to capitalize on new opportunities and avoid new dangers. To the extent they succeed, their decisions are called good. And if they fail, they will be considered bad decisions.

You suggest that the stock market portrays the level of health of our economy. Why that?

Because that’s generally what it does.

Doesn’t the number of people who can afford health insurance count for anything? The number of families that can afford to own their own homes? The number of families that can afford to send their kids to college? The number of families that can afford a catholic education? How are THOSE economic indicators looking to you? Compare the situation of those families today (usually with two incomes) to families in the 70’s (more often with one income) and I wonder if the conclusion is any different?

What has that got to do with the quality of CEOs’ decisions?

If you want health insurance, go buy health insurance. If you cannot afford it, you might re-look your own decisions to understand why.

 

[Maui71]

Vern, to be sure there is plenty of blame to go around. One temptation to which folks can succumb (including me) is to subscribe all economic problems to the rich. Others tend to blame the economic problems of the poor only on the poor. As catholics though, we ought to realize that ALL of us are good, but fallen and subject to temptations. Therefore, we can’t demonize any particular group of PEOPLE as the source of the problems, but must look for problems in the system that tempt people to exploit them.

The point of all that is to prepare to answer your claims. You cite the Dow and WalMart stock results as proof that the system works. Is it? Or can it be explained because A. This economy still is coasting on the momentum boost we got out of World War II and B. People (me included) have a hard time resisting low prices at the consumer level. How will Walmart’s bottom line change if its philosophy permeates the entire marketplace and middle class small business owners are all converted into $7.50 an hour “associates?” Might there eventually be a bit of a shrinking market? In spite of their success over a couple decades, is this really a classic win-win business model?

You suggest that the stock market portrays the level of health of our economy. Why that? Doesn’t the number of people who can afford health insurance count for anything? The number of families that can afford to own their own homes? The number of families that can afford to send their kids to college? The number of families that can afford a catholic education? How are THOSE economic indicators looking to you? Compare the situation of those families today (usually with two incomes) to families in the 70’s (more often with one income) and I wonder if the conclusion is any different?

I really like your post. I guess to bounce off of itand further your post; is that the economy needs people at all levels, employed, households, unemployed, under employed, frictionally employed, employers, production, government and the markets need the freedom to move wealth from the different areas. The economy needs the homeless, garbage man, postman, taxicab driver, manager, ceo, investor, crook, politician, charity in order to function. Each piece needs the other. A charity that feeds the homeless would not have money to buy food if the corps/individuals/government did not give it money to do so. If there were no homeless that entity would have no purpose. Just as if the employee did not have the investor who risked his capital to start a new venture they would not have a job to earn money.

Measuring decisions is really a matter of perspective. What is a “good or profitable” outcome to you might be a “bad or poor” outcome to someone else.

Blame - the economy is cyclical there cannot be perpetual growth. It expands it contracts it expands it contracts the height of the wave or the depth of the valley varies with each cycle. To say blame for ups and downs at the micro or macro level is really judgmental, which leaves any blame to be view through perspective.

The person that cannot afford health care can either accept their position or do something to change it. They can change trades, professions or positions. I think the bigger issue is; are the people that can’t afford health care, school, or anything else, willing to pay the price, make the sacrifice, and have the desire to better their lot? Everyone can give 1,000 reasons why they can’t do it, better themselves, change, but it is only those that give 1 reason why they can that actually do.

 

[chevalier]

Here’s a novel idea culled straight (more or less) from Distributist theory:

Would it be morally superior to cap the total compensation of CEOs and other top execs? Say, to $1 mil annually?

Consider the modern delimma. We here time and again of companies losing money, laying of workers, and CEOs getting multi-million dollar bonuses. If you capped total compensation and required any excess income to be either donated to a charity of one’s choice, re-invested in the company, or used for a government program of your choice, everyone (except the CEO) would benefit. Charities would see a big boost; the government would receive a slight increase in income; shareholders would benefit; employees would work in a much more equitable situation; and in any case, no one would be laid off to pay for the bosses’ new beachfront houses. And I think, after considerable self-sacrifice, corporate-types could learn to live with $1 mil a year

What do you think?

People would feel less incentive to work if their salaries were capped. Who knows at what level they would perform. I think the best option would be to make sure that a particular CEO or other officer pays well. Say he takes one million more than the norm. But what if he brings the company ten million more than the typical CEO does? I say take the big salary CEO who brings more profit to the company. If he, however, earns more for himself but less for the company than the average, then perhaps there are more worthy candidates.

 

[vern_humphrey]

The person that cannot afford health care can either accept their position or do something to change it. They can change trades, professions or positions. I think the bigger issue is; are the people that can’t afford health care, school, or anything else, willing to pay the price, make the sacrifice, and have the desire to better their lot? Everyone can give 1,000 reasons why they can’t do it, better themselves, change, but it is only those that give 1 reason why they can that actually do.

A wise man once said that the difference between winners and losers is that losers look for excuses why they can’t do something, and winners look for ways they can do it.

 

[melensdad]

Doesn’t the number of people who can afford health insurance count for anything? The number of families that can afford to own their own homes? The number of families that can afford to send their kids to college? The number of families that can afford a catholic education? How are THOSE economic indicators looking to you?

Compare the situation of those families today (usually with two incomes) to families in the 70’s (more often with one income) and I wonder if the conclusion is any different?

Compare also the CHOICES that families make, but do it before you see if they can afford things on your list above. For example in the 1970’s ***(which is the time period you chose) ***most families lived in small homes (under 2000 square feet) and paid small utility bills. Most families had 1 or 2 TV sets and didn’t pay any subscription fees each month to watch them. No family had cellular phone bills. No family had internet access bills. Most families had 1 car, but some had 2. You could get coffee for 5-cents a cup.

Today the average family home built is over 2600 square feet and has a 2 car garage. Just the utility bill on the larger house can cost an additional $200 per month. And the bigger garages are filled up with 2 cars and often a third is parked in the driveway that the teenagers use. It is very common to have a cable TV bill that exceeds $75 per month and many exceed $100 per month. That is money that could be used for health care. Internet access, if you want high speed, can average $35 to $50 per month, but it is also possible to get it for about $12 per month for dial-up and you can easily spend $200 a month for satellite uplinks/downlinks. Families typically have 1 landline telephone and 3 or more cellular phones, the combined bills can easily exceed $150 per month for all those phones. Dropping down to 1 landline with a basic package can lower the phone bill to $35 a month, a savings of $115 each month that could be applied to health insurance.

And the cost of 2 cups of Starbucks coffee a day will pay for a Catholic School education, if the parents CHOOSE to give up that cup of fancy coffee. But that brings us back to choice. Families today make very different choices. They look to the government for healthcare and they blame a handful of CEOs who get huge salaries for all the ills of society.

 

[Maui71]

A wise man once said that the difference between winners and losers is that losers look for excuses why they can’t do something, and winners look for ways they can do it.

You know you made realize that the real question, the underlying force, in this thread is who is responsible for an individual’s present state? Is it the individual’s responsibility or is it the state’s responsibility? Should everyone one be taken care of by their own choices or should their choices be taken care of by the state? Who should be responsible for their well being? The person or the state? How much more should one person have than the other or how much more should the person who has the most should have than the person who has the least? (Again this is all perspective as “to have” means something different to each person).

And finally, who get’s to decide the state or the individual? It can’t be both.

 

[stinkcat_14]

If you disagree, tell us by what standard you think stockholders should measure decisions.

First of all, I think that fixed price options should be eliminated, and replaced with options whose exercise price increases every year. The reason is that with fixed price options, which usually have a duration of 10 years, the stock price can be manipulated upward by the company buying back shares of stock.

Warren Buffet, discusses this in his 2005 letter to shareholders:

Take, for instance, ten year, fixed-price options (and who wouldn’t?). If Fred Futile, CEO of
Stagnant, Inc., receives a bundle of these – let’s say enough to give him an option on 1% of the company –
his self-interest is clear: He should skip dividends entirely and instead use all of the company’s earnings to
repurchase stock.
Let’s assume that under Fred’s leadership Stagnant lives up to its name. In each of the ten years
after the option grant, it earns $1 billion on $10 billion of net worth, which initially comes to $10 per share
on the 100 million shares then outstanding. Fred eschews dividends and regularly uses all earnings to
repurchase shares. If the stock constantly sells at ten times earnings per share, it will have appreciated
158% by the end of the option period. That’s because repurchases would reduce the number of shares to
38.7 million by that time, and earnings per share would thereby increase to $25.80. Simply by withholding
earnings from owners, Fred gets very rich, making a cool $158 million, despite the business itself
improving not at all. Astonishingly, Fred could have made more than $100 million if Stagnant’s earnings
had declined by 20% during the ten-year period.

The whole letter can be accessed here:

berkshirehathaway.com/letters/2005ltr.pdf

 

[Maui71]

First of all, I think that fixed price options should be eliminated, and replaced with options whose exercise price increases every year. The reason is that with fixed price options, which usually have a duration of 10 years, the stock price can be manipulated upward by the company buying back shares of stock.

Warren Buffet, discusses this in his 2005 letter to shareholders:

The whole letter can be accessed here:

berkshirehathaway.com/letters/2005ltr.pdf

Do you realize that the people that are truly affected by this are but a few thousand. How many people do you know that have fixed price options as part of their employment contract? I think the SEC and AICPA need to stay as far away from limiting how CEO or officers are recruited or compensated because they only find better and more creative ways of making up for those limits in their pockets. The nation really needs to stop looking at profits and earnings and income as evil and see it for what it is compensation and reward.

The whole issue of options came about because they do not affect the P&L directly but through other comprehensive income that 99% of the population has no clue what Other Comprehensive Income is. I can’t think of the last time I looked a prospectus to purchase listed stock. The last prospectus I looked at was for a bank instrument for an off-shore bank and I did not care what the bank CEO was paid or not paid but were they had their money invested in.

In the end it is the responsibility of the Board of Directors to oversee management’s strategic plan and the results of its implementation. It is their responsibility to make corrections and adjustments if they feel the direction is not correct. They can also limit the CEO on how or when stocks are bought and it is usually a board vote to acquire treasury stock. It does not happen out of the blue.

 

[anthony022071]

It is not envy and venom to point out that the current system lends itself to exploitation by insiders and that reforms are needed. This is the issue that needs to be explored. “Envy and Venom” are smokescreens like “choice” that are designed to mask the substance of the issue.

It’s ironic for capitalists to speak of class envy as if it were something bad.
A capitalist economy thrives off of the competitiveness that is sparked by class envy and avarice. Many of the advertisements we are bombarded with in the media play upon class envy.
Ambitious people from poor backgrounds are often motivated by class envy to work their way up into the ranks of the middle class. When they reach the middle class,they may still be provoked by envy – for the prestige and lifestyle of the upper middle class. Some people in the upper classes are prone to class envy,but they’re circumspect about it,and they don’t look like sore losers.
That’s the whole point of capitalism – you get to move up in society. The very historical roots of capitalism have to do with class envy – the merchant classes of Northern Europe asserting themselves up against the feudal aristocracy.

That said,we usually shouldn’t make it our business what private citizens are getting paid.

 

[vern_humphrey]

It’s ironic for capitalists to speak of class envy as if it were something bad.
A capitalist economy thrives off of the competitiveness that is sparked by class envy and avarice. Many of the advertisements we are bombarded with in the media play upon class envy.
Ambitious people from poor backgrounds are often motivated by class envy to work their way up into the ranks of the middle class. When they reach the middle class,they may still be provoked by envy – for the prestige and lifestyle of the upper middle class. Some people in the upper classes are prone to class envy,but they’re circumspect about it,and they don’t look like sore losers.
That’s the whole point of capitalism – you get to move up in society. The very historical roots of capitalism have to do with class envy – the merchant classes of Northern Europe asserting themselves up against the feudal aristocracy.

That said,we usually shouldn’t make it our business what private citizens are getting paid.

That’s your theory, but Capitalism has nothing to do with classes. Capitalism is merely an economic system – pure and simple.

 

[anthony022071]

Compare also the CHOICES that families make, but do it before you see if they can afford things on your list above. For example in the 1970’s ***(which is the time period you chose) ***most families lived in small homes (under 2000 square feet) and paid small utility bills. Most families had 1 or 2 TV sets and didn’t pay any subscription fees each month to watch them. No family had cellular phone bills. No family had internet access bills. Most families had 1 car, but some had 2. You could get coffee for 5-cents a cup.

Today the average family home built is over 2600 square feet and has a 2 car garage. Just the utility bill on the larger house can cost an additional $200 per month. And the bigger garages are filled up with 2 cars and often a third is parked in the driveway that the teenagers use. It is very common to have a cable TV bill that exceeds $75 per month and many exceed $100 per month. That is money that could be used for health care. Internet access, if you want high speed, can average $35 to $50 per month, but it is also possible to get it for about $12 per month for dial-up and you can easily spend $200 a month for satellite uplinks/downlinks. Families typically have 1 landline telephone and 3 or more cellular phones, the combined bills can easily exceed $150 per month for all those phones. Dropping down to 1 landline with a basic package can lower the phone bill to $35 a month, a savings of $115 each month that could be applied to health insurance.

And the cost of 2 cups of Starbucks coffee a day will pay for a Catholic School education, if the parents CHOOSE to give up that cup of fancy coffee. But that brings us back to choice. Families today make very different choices. They look to the government for healthcare and they blame a handful of CEOs who get huge salaries for all the ills of society.

All of that may be true,but do you realize how damaging it would be for the national economy if American families actually did as you suggest? Less buying means less selling,which means an unhealthy economy.
The economy thrives off of people’s wasteful expenditures,which are often provoked by company advertizements.

 

[vern_humphrey]

All of that may be true,but do you realize how damaging it would be for the national economy if American families actually did as you suggest? Less buying means less selling,which means an unhealthy economy.
The economy thrives off of people’s wasteful expenditures,which are often provoked by company advertizements.

It’s funny how people are smart enough to make the money for all this stuff, but at the same time are so stupid their purchases are “provoked by company advertizements.”

 

[TIME]

A thing is worth what a willing buyer will offer and a willing seller will accept. The owners of the business offered the CEO his compensation package and he accepted it. Therefore buyer and seller have reached agreement on his economic worth.

Vern, you are simply being naive here. If you think that CEO’s do everything above the table you have another thing coming. Things are done everyday behind close doors, with a wink and a nod, etc. With the slight of hand. But so what, God will deliver eternal justice, period.

 

[vern_humphrey]

Vern, you are simply being naive here. If you think that CEO’s do everything above the table you have another thing coming. Things are done everyday behind close doors, with a wink and a nod, etc. With the slight of hand. But so what, God will deliver eternal justice, period.

Is there an English version of this post available?

 

[manualman]

I musta took a wrong turn somewhere. Thought I was at catholic answers and found I was at the Ayn Rand fan club site!

Chesterton and Belloc must be rolling in their graves. Not to mention Pope Leo XIII. For anybody who cares to hear what the Church teaches on the matter THIS is a great start: papalencyclicals.net/Leo13/l13rerum.htm

Claiming that poverty is entirely the fault of the defects of the poor is as revolting a rejection of catholic teaching as that spouted by “Catholics for a Free Choice” or “Call to Action.”

 

[vern_humphrey]

Claiming that poverty is entirely the fault of the defects of the poor is as revolting a rejection of catholic teaching as that spouted by “Catholics for a Free Choice” or “Call to Action.”

Who made that claim? Or are you just venting?

 

[rlg94086]

I musta took a wrong turn somewhere. Thought I was at catholic answers and found I was at the Ayn Rand fan club site!

Chesterton and Belloc must be rolling in their graves. Not to mention Pope Leo XIII. For anybody who cares to hear what the Church teaches on the matter THIS is a great start: papalencyclicals.net/Leo13/l13rerum.htm

Claiming that poverty is entirely the fault of the defects of the poor is as revolting a rejection of catholic teaching as that spouted by “Catholics for a Free Choice” or “Call to Action.”

I must have missed something. Who claimed that?

It is a fact that whining about your situation won’t help to improve it; however, that is not to say that the situation is wholly the whiners fault. It is how we deal with adversity that makes the difference.

 

[rlg94086]

Originally Posted by vern humphrey forums.catholic-questions.org/images/buttons/viewpost.gif
A thing is worth what a willing buyer will offer and a willing seller will accept. The owners of the business offered the CEO his compensation package and he accepted it. Therefore buyer and seller have reached agreement on his economic worth.

Vern, you are simply being naive here. If you think that CEO’s do everything above the table you have another thing coming. Things are done everyday behind close doors, with a wink and a nod, etc. With the slight of hand. But so what, God will deliver eternal justice, period.

How does Vern’s statement show he is naive? He didn’t say anything about the uprightness of the CEO. He mentioned the compensation agreement between the CEO and the business.

BTW…I think people have an equal tendency to assume that everything that all CEOs do is “behind close doors, with a wink and a nod, etc.”

 

[rlg94086]

Vern is right in that this IS how it works on Wall Street. When you post several good quarters in a row, you get to negotiate a fat contract renewal, complete with golden parachute. This is also why corporate America is getting its arse kicked in the global marketplace: other countries still value long term planning and solid strategies. Sure, we still lead in a few industries, but the number is dwindling amongst the established markets. Innovation is all that keeps us ahead, but other nations are rapidly closing that innovation culture gap too.

American CEOs have NO incentive to plan for the company’s growth and success beyond a year or two in advance. Rather, they have a DISincentive to do that since such planning often involves long term investment in R&D, committment to product quality and customer retention. None of that stuff is likely to help much at the next CEO contract negotiation session. Therefore it is often ignored.

It may be how things work, but it is as idiotic and short-sighted as TIME implies.

LOL…I’ve worked for multinational corporations headquartered in the UK, Germany, Japan and the Netherlands (currently). I’ve also sold to companies in Europe and Asia. Their executives are not significantly different, and I have not found their long-term planning and strategies to be any more brilliant than the US. I’m not sure how your experiences have led you to that conclusion.

 

[vern_humphrey]

BTW…I think people have an equal tendency to assume that everything that all CEOs do is “behind close doors, with a wink and a nod, etc.”

Is there some special virtue in leaving the door open when you sit on the pot?