Friday, February 27, 2009

Keep the government out of the CEO's pockets!

Before you write a lengthy response to the title of this blog and accuse me of supporting 'greed' and the 'ultra-rich,' allow me to explain myself.

Big government has led us into a situation that I can't see ending well. Public outcry about excessive executive salary has been going on for years. "Why should they make $1,000,000 and the worker only make $20,000?" "They don't do more than the average worker!" The comments go on and on and on. I think people need to look at this from a totally different perspective instead of believing they are getting jipped or ripped off.

Let's take a look at just a small business. Let's say there is one owner and ten employees. Let's say the owner has stepped away and there is one head manager of the business. The owner is totally non-involved in the day-to-day operations, but obviously keeps tabs on how the business is doing. The owner decides how much the manager and employees make. So we have this established: the owner decides how much the employees of his company gets paid. Fair enough?

Now, a corporation is just a very large business that has many owners. These owners ELECT a board of directors, who then approve compensation of executives among other things. The board of directors answers to the stockholders (the owners). The owners are the ones who are financially linked to the performance of the company, and since it is THEIR business they should decide how much the executives should be compensated.

People who argue about employees being compensated too much really should not be upset about this compensation. The only people who have a credible argument when they complain about executive compensation are those who are stockholders. Further, the stockholder should not expect the government to intervene, or some other third party, as it is their responsibility to vote in directors who have the same opinion of lower executive pay. If someone complains, "Oh, Disney executives make so much money it's just wrong!" Well, are you an owner? If not, then why are you complaining? It is not your operating revenue going to the executives. It is the stockholders' who could be getting that money in dividends.

But of course, people turn to the government to solve this 'problem.' I personally do not see the problem. If the shareholders would rather pay executives extreme amounts of dollars for their service instead of receiving that extra revenue in dividends, then what is the 'problem'? So we have all these people complaining about executive compensation most likely with the false notion that if the executives did not get paid as much that it would go back to the employees. But it won't go back to the employees in the form of higher wages. It will go to the owners!

Now we have this strange situation where the government has injected money into companies, which has caused two things: 1) Dilution of stocks 2) Government having 'stakes' in companies. Now with the government owning these stakes they feel like they're influence must be felt, so they want to cap executive compensation. I believe people think that after this happens that 'working class' wages will rise. As I said previously, this is not what is going to happen.

Once again, government intervention has made a mess of things in the private market. Let's hope that enough Americans find the common sense to see the false premise of the war against executive compensation.

1 comment:

jpberthiaume said...

The thing that seems to get missed is that these execs that are being paid well are extremely talented. If the government decides they can only make 500k per year (as opposed to the 10 mil. or more they were making), they'll simply go somewhere else. If a large corp is willing to pay them 10 mil. it is quite likely another business is willing to pay them more than 500k to do the job for them.

So, all the cap guarantees is that the failing companies won't have the best talent running the program. That doesn't seem like a good idea for a large corporation that is already in trouble...