Wednesday, February 20, 2008

Income disparity

Hi Dotmom - This was getting to be another long comment - figured I would just post it in my blog space rather than hog your comment space again. This is in response to this comment from you:
What does this statement exactly mean then??
am talking about the disproportionately high incomes of CEOs compared to the lowest workers at least in garment factories and such...
they are disproportionate for a reason.
By disproportionate I mean it is ridiculously so. Of course it is disproportionate for many reasons. I assumed you would understand what I meant - and not in the literal sense - that I expect an unskilled laborer to be paid exactly the same as the CEO or the doctor to be paid the same as the janitor.

There is competition for talent and so of course the cream of the crop gets huge amounts in pay and all sorts of incentives when s/he gets hired as the CEO. But the disparity, not just between CEO and the lowest level worker, but even the CEO and the average skilled worker is can understand a disparity - but 200 - 250 times (see link below) more money than an average worker - seems very* disproportionate to me. Esp if the workers way down below are being paid pittance and often has to live below poverty lines...

Companies have to make profits against stiff competition...the only way to win now is to have cheap labor but a large percentage of the profits reaped go to the CEOs and top level people extremely disproportionately.

My original point was that there are injustices everywhere. In my opinion, this kind of egregious disparity (which is what I meant by disproportionate and of course we can argue over weather it really is egregious or not) in pay is an injustice to the lowest level worker. I am trying to say that we are willing to live with one kind of injustice or the other in different aspects of our lives…but that doesn’t mean one doesn’t stop trying to work towards a fair and just society as a whole – you do it in your own way say when you wrote about the blood diamonds and some other person does it in some other way…There will always be inconsistencies but people try in their own ways and every bit counts…
Adding to this post instead of writing in the comment space:

Preethi – thanks for reading and for commenting. My response to your comment will be my post itself – since that is what I was writing about in the first place – that it is disproportionate and of course with reason – but that in my opinion it is egregious – the disparity. Every one knows the skill sets and responsibilities are different – if not any Tom could be the CEO of a company. It is how much more should he/she be paid that we are arguing about.

Dotmom – An average programmer makes 150K and the CEO makes 300K – not a lot – in terms of just pay – but the stock differences awarded to each are huge. You can see that the CEO is not just making twice what the programmer makes but 250 times more. You cannot compare just base pay – the stocks contribute to the egregious difference. And CEO pays are determined by boards, I agree. But who make up the boards and how do they arrive at the package?

Here’s a part of the text from Mr.Warren Buffet’s shareholder newsletter:
Buffett on compensation committees:

From 2006 shareholder letter (Page 19 of
You’ve read loads about CEOs who have received astronomical compensation for mediocre results. Much less well-advertised is the fact that America’s CEOs also generally live the good life. Many, it should be emphasized, are exceptionally able, and almost all work far more than 40 hours a week. But they are usually treated like royalty in the process. (And we’re certainly going to keep it that way at Berkshire. Though Charlie still favors sackcloth and ashes, I prefer to be spoiled rotten. Berkshire owns The Pampered Chef; our wonderful office group has made me The Pampered Chief.)
CEO perks at one company are quickly copied elsewhere. “All the other kids have one” may seem a thought too juvenile to use as a rationale in the boardroom. But consultants employ precisely this argument, phrased more elegantly of course, when they make recommendations to comp committees. Irrational and excessive comp practices will not be materially changed by disclosure or by “independent” comp committee members. Indeed, I think it’s likely that the reason I was rejected for service on so many comp committees was that I was regarded as too independent. Compensation reform
will only occur if the largest institutional shareholders – it would only take a few – demand a fresh look at the whole system. The consultants’ present drill of deftly selecting “peer” companies to compare with their clients will only perpetuate present excesses.
From CNN:
Buffett and Munger both were scathing on the subject of executive compensation and the process of how pay is set at major corporations:
"The typical large company has a compensation committee," said Buffett. "They don't look for Dobermans on that committee, they look for chihuahuas."
He paused amid laughter, then added: "Chihuahuas that have been sedated."
Munger interjected: "I would rather throw a viper down my shirt front than hire a compensation consultant."

I agree that the CEO deserves to be paid a lot more than an average worker in the company – he clearly has a huge responsibility. But what is the risk involved in his job? If the company fails, aside from the fall from grace, how is the CEO penalized? With a generous severance package? Check out this link about the “risks” involved in becoming a CEO.

CEO compensation is not necessarily tied to the performance of the company or adjusted as per the company’s growth anyway.

Stock prices do not slide because of CEO pay -- they slide because of drop in earnings. And a drop in earnings is not entirely because of a CEO not doing his job. Likewise, CEO is not entirely responsible for increase in earnings either.

Free markets are good and bad. Depends on which class of society you are talking to.
I feel I am able to sit in a comfortable situation and talk about its merits. But I cannot deny that there are a lot of people paying the price for my comfort and definitely that of an extremely indulgent life style for CEOs of big companies. If Walmart (or any large company for that matter) sets a price to its manufacturer in China, who in turn has to pay his laborers poorly to meet the price, who is likely to ignore environmental damage to balance costs – I am part of that system that doesn’t demand the laborer be paid more. Not as much as a top level exec to put it clearly here - but more than the pittance they get for the long hours they work. I am not out there saying that I want to pay more for my goods so that the laborer there gets more. Which was my point in the first place – that I am only willing/able to fight some battles…And we all try to contribute to a fair and healthy society in our own ways.

I finally got some uninterrupted time at 11.30pm. Too tired to write more – but we know where we stand in this issue.
Anyways – made for an interesting exchange!
Continuing the post:
In response to your last comment:

I agree that those sorts of things – 35h weeks only etc are not sustainable in this competitive world. But all my points still stand. It is more after coming to the US that I have noticed, read and thought more about all this. Free market is good – leads to competition, quality, consumption, jobs etc etc. But free market is not really a free market - it favors the rich and powerful. It certainly does not trickle down in an ideal manner. If it was trickling down so well, then the disparity in wealth, in what kind of health care, education and retirement people can afford won’t be so wide and obvious. My point about CEO pay and how the compensation gets decided etc is to highlight this. One person gets grossly over paid irrespective of performance and the lower level workers grossly underpaid in comparison

(as GND has written in the comments here). CEO pay is not governed by free market economics. Free market is driven towards maximizing profits which doesn’t often go with protecting the environment.

How much do we - on a day to day basis - think about all this or protest what we think may be an injustice? Again my point really is that we can/are willing to only fight so many battles. And that we all keep trying in our own ways.


DotMom said...

I don't think its egrerious at all. the CEOs increase the value of the compnay and find ways to make it grow. The shareholders and the board feels the CEOs deserves the payment and in most cases they do. Because if the company doesnot grow and make profit the skilled worker will be out of a job. It's a HUGE responsibilty. And CEOs get fired to for not doing their jobs. The average CEO salary of a midsized company is about 300K a year + bonus + stock. That's not a whole lot. Considering a really good software programmer can make about 130-150K/yr writing production quality code. and if the CEOs paypackets were out of control, the market will respond accordingly. Stock prices will slide since the analysts will rightly feel that the money dished out to the head honcho is not worth what he is brininging in. Free markets are wonderful things. They correct themselves all the time.

Preethi said...

The CEO's and the workers income are 2 very unrelated things.. although they seem like they should be related. I am not against what you say, that the worker needs to be paid a decent pay.. but there is no comparison between him and the CEO is there.. first of the skill sets and responsibilities are way different and miles apart.. The cost of failure is very different and therefore cost of retention is bound to be different...which is why they are disproportionate for a reason!

noon said...

Preethi, Dotmom,
Posted more comments as part of this post...

DotMom said...

then the situation will tuen as it is right now in Germany. where workers demand to be paid more, demand 6 week vacations and other perks. A company cannot afford it. Which it why companies are shutting down and unemployment is rising. It becomes unsustainable. That's what has been happening to France too. Workers are not allowed to work more than 35rs/wk. WTF? Such economies are very unsustainable. They will collapse. Just as Russia did and France, Germany and to some extent UK is. I am also against minimum wage. It is because of minimum wage we have the problem of illegal workers from mexico. They are willing to work for a lot less. I have been meaning to do a post on it. that the workers should get mroe money etc. are very direct, visible results. But there are also direct invisible results. I would strongly urge you read Bastiat's pieces. They are lucid, written for a layman like you and me. Very enlightening. Growing up with the Indian socialist mindset, where making money and profit are dirty words, it shows how wrong we can get. Just look at India. pre and post economic liberalization. Enterprenership is a great thing. And it should be encouraged because the feect trickles down. If I make more money, I can buy more goods and hire more people and so can they and it continues to the very bottom until all out lifestyles go up a bit. Do this for 50 years and you have a rich economy whose people are reaping its profits. Even the hourly paid walmart worker.

Girl Next Door (gnd) said...

Just trying to highlight one point that noon is trying to make that keeps getting missed. I don't think she's comparing a well-paid software programmer to an average CEO. It's about grossly underpaid laborers who work for grossly overpaid CEOs.
Not to mention the bonuses and stocks which more than double the $$ they get to take home.
Most big companies have a 100% overhead, and even the decently paid software developer is denied his full worth because there are ten other people above him in the hierarchy wanting a piece of his hard work! (This is "Big" companies I am talking about here).

Anyways, If I understood it right, the point noon was trying to make, which I agree with, is that not everyone can fight every fight.

I will most certainly do what best I can to be a decent human, and not turn a blind eye, but I know there are things that I simply cannot follow all the time. Principles are a guideline for me. If I want to be inflexible, I am not helping anyone.

noon said...

Dotmom - responded to your comment in the same post.

GND - Thanks for visiting and for your comment. Yes, we cannot fight all the battles...nevertheless we keep trying.

noon said...

Hi Dotmom - also forgot to mention - thanks for the Bastiat suggestion - have and will read more of his pieces now.