Posted by
Andrews on Sunday, March 30, 2008 12:03:01 PM
I think I just heard the most stupid thing I have heard in a while, and that is saying something. It is election season so it is time for really stupid ideas. Yet the most recent stupidity (as far as I know) has not been adopted by any candidate.
The comment I heard was this: As long as corporations are being bailed out, they should be prevented from paying CEOs such huge salaries.
Now, the people with whom I was watching "This Week" attributed this to George Will, and it is possible. While Will often gets called a conservative pundit, he also occasionally puts forth some really foolish ideas. Then again, I did not hear it from Will himself, only second hand. But, based on the possibility it was Will who said it, let me use baseball to dismiss this idea.
Here is a similar proposition: The Orioles can't even put people in the stands, why would they want to spend so much on a star player?
In baseball, no one would think this made sense. If you can't draw in the fans, it is usually because you are not winning games. Adding a star player may well be worth the money, either by drawing in spectators or by increasing the number of wins.
But because people don't understand CEOs, they don't draw the same conclusions. Most people seem to think CEOs simply sit in an office and draw a big paycheck. It is a variant of the Marxist theory that only labor adds value. Because few people are managers, it is a safe bet to slander management, as most people have a gripe against at least one past manager.
But CEOs do not receive millions of dollars out of kindness. Corporations bring in superstar CEOs because they expect them to turn around a failing corporation, or improve a successful one. And, if you think about it, it is very obvious that a CEO could have millions of dollars of impact in a year. What we forget is that a CEO runs an entire corporation. His impact is huge.
An example: Let us say a wily CEO saves $1 per year per employee on employee health insurance costs through slick negotiation. If the company has 2 million employees, that is a $2 million savings*. It is the scale of the corporation which makes a CEO's impact extend into the millions of dollars. And, as he can have millions of dollars of impact, he can also ask for a multi-million dollar salary.
There is also the competition for a limited pool of CEO superstars. Just as there are few superstar profession baseball players, there are few proven multi-million dollar CEOs, so there is a lot of competition between companies for these few stars, driving up not just their salaries but that of the second stringers and even lesser CEOs.
Now, that is not to say that every CEO earns his salary. But not ever superstar hitter has a .300 year every year. And a CEO who consistently under-performs will see his options dwindle pretty quickly. Only those who consistently win, or at least recover strongly from their flops, will manage to draw the huge salaries.
So, whether I should be laying this at George Will's doorstep or not, to say corporations which get bailed out need to cap CEO salaries is to condemn them to hiring only the most mediocre managers, which seems a poor scheme to get them back on their feet**.
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* This is over-simplified in the extreme., A CEO is unlikely to directly negotiate such a policy. More likely he will hire good subordinates who will organize their departments in such a way as to save $1 per employee. Or he will institute incentives which will inspire such a savings. I use this overly simple and unrealistic example just to make a point about the scale of the organization over which a CEO exercises control, and the fact that the scale makes his actions have millions of dollars of impact.
** Not that I support any bailouts at all. I think corporations, like individuals, should stand or fall on their own, and the state should stay out of it. My whole point is that, if we are bailing out companies, limiting their hiring options when it comes to their top leadership seems a poor plan.