Ethics @ Work: Executive pay beauty show

There's a big debate lately about "excessive executive pay."

July 7, 2006 02:58
businessman 88

businessman 88. (photo credit: )

There's a big debate lately about "excessive executive pay." A widely cited statistic claims that US chief executive officers are making over 400 times as much as their workers - much higher than in previous generations. Anyone who was worried by that number can relax. Ace compensation consultant Fred Cook explained in Congressional testimony that the 400-fold number is based on a lot of flawed statistics. He made a lot of good points. For example, the old number valued stock options based on what they brought in, not on what they were worth when issued. And it artificially excluded some higher-paying workers from the base. If you accept all of Cook's suggestions, the number is fairly modest: chief executives in the US are being paid "only" 187 times the pay of workers. Is this the best these guys can do to defend their pay packages? In my opinion, the principle obstacle to getting a good understanding of this topic is that people have a misunderstanding of what these executives, or any of the super-rich, are really working for in the first place. Hint: it's not the money. Let's examine why. Practically anyone can enjoy a million dollars. That's about what it costs for a couple just to live and raise three kids in a wealthy country at a middle-class standard of living. Most people could easily learn to enjoy three or four million dollars. A second house, a few vacations abroad, sending the three kids to elite colleges or having a few more kids - these delights can easily burn up another seven-figure nest egg. A significant minority have the fine taste that would enable them to appreciate the rarefied delights made possible by 10 or 20 million dollars. (In Yiddish, we call these people feinschmeckers.) Beyond this level, no one is making money in order to raise their standard of living. From the middle-low eight figures onward, money is just a way of keeping score in a competitive game among business people. In Israel, where standards of living are (believe it or not) much more modest, it starts being a game at even lower pay levels. I have lots of evidence for this claim - if evidence is needed. At a conference in Mishkenot Sha'ananim on the topic of Israeli banking, one speaker stated that a few years ago bank regulators decided that salaries of bank executives should be made public. The idea was that, if executives knew that their pay packages were being publicized it would influence their demands. The idea was confirmed because, within a year of the publication, almost all the managers negotiated new salary packages - to much more generous ones that compared favorably with the highest salaries publicized. A further example: Just after my last column on this topic, a board member at one of Israel's largest and most successful companies told me that getting executive salaries under control will be nearly impossible because managers see what others are obtaining and don't want to fall behind. Just a few days later, I was present at a meeting with a leading capitalist describing some recent nine-figure acquisitions and explaining as an aside, "Of course these are only phone numbers." After a while, it's impossible to think of a few hundred million dollars as "real money" and still care about living your life and not getting ripped of by being overcharged a few dollars, or a few hundred dollars, in everyday situations. This realization is a two-edged sword. On the one hand, it enables us to see that the richest capitalists are in a way very altruistic individuals. They invest incredible amounts of effort and energy in running businesses and in return get nothing in the way of an improved standard of living. Ultimately, their efforts will accrue to others either through bequests or through charitable gifts. On the other hand, it makes us wonder if there might not be some way of keeping score that doesn't move billions of dollars into the pockets of individuals who value the money only as a kind of high-powered monopoly money. One approach that would definitely be a mistake would be to substitute influence for money. One of the most important benefits of the capitalist system is that it creates a way for people to reach the top without gaining coercive power over their fellow citizens. The great English economist John Maynard Keynes gave as one of the positive justifications for "significant inequalities of incomes and wealth" that "dangerous human proclivities can be canalized into comparatively harmless channels by the existence of opportunities for money-making and private wealth, which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandisement. It is better that a man should tyrannize over his bank balance than over his fellow citizens; and while the former is sometimes denounced as being but a means to the latter, sometimes at least it is an alternative." And the Austrian-born champion of the market system, Friedrich Hayek, wrote: "The power which a multiple millionaire, who may be my neighbor and perhaps my employer has over me is far less than that which the smallest functionary who wields the coercive power of the state, and on whose discretion it depends whether and how I am allowed to live or to work." Where does that leave us? On the one hand, we can concur that the most successful capitalists are, on the whole, a unique group of hard-working, even self-sacrificing, individuals who devote immense talents to creating wealth. On the one hand, we should recognize that these super-rich individuals are no longer concerned with money as a way of improving their standard of living, but rather as a way of demonstrating their unique contributions. Perhaps there is a better way of acknowledging this contribution than giving them ownership of astonishing sums. Again quoting Keynes: "But it is not necessary for the stimulation of these activities and the satisfaction of these proclivities that the game should be played for such high stakes as at present. Much lower stakes will serve the purpose equally well, as soon as the players are accustomed to them." The system must give an attractive reward, in material standards of living and in prestige and recognition, to the dedicated individuals who devote their considerable talents to wealth creation in the modern economy. At the same time, we should look for effective ways to lower the astonishingly high stakes that the last generation has made commonplace. [email protected] The writer is research director at the Business Ethics Center of Jerusalem (www.besr. org), an independent institute in The Jerusalem College of Technology. He also is a rabbi.

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