Executive Compensation

Back in February Pres. Obama moved to limit the pay of some Wall Street execs to $500,000. His rational was the Golden Rule: If Uncle is lending you his  gold (well, actually your gold and mine), he gets to make the rules on how it's spent. Fair enough. If you're crazy enough to borrow from a loanshark, you'll do what he says.

But what about limiting pay? Most Obama supporters think its a good idea. I'm not an Obama supporter but I did have the good fortune--or misfortune--of working for five years for investment bankers. These are the very people whose compensation is being called into question. I was stunned at the money these guys would suck out of the company for what appeared to be very little effort. But the company did well. Employees were knowledgeable and hard working, and the money men, while not as hard working, did what money men always do: they borrowed money and moved it around at no personal risk to themselves, creating wealth for the investors and jobs for employees like me. 

I personally invested a little money in the company through the money men and realized a handsome profit when the company was sold. So I guess that made me a money man, too. I did little work with the investment, but realized a return of 300%. Perhaps one of our clerks would think that I too sucked money out of the company for doing nothing. But the money I invested helped the company expand, allowed us to hire more workers, pay them decently and to sell the company for much more than we originally paid for it.

People who believe in wage caps like executive compensation look at earnings as a zero-sum game. If the CEO is making 20 million dollars there will be that much less for the drill press operators. But capital, if used properly, is expansive. Good management creates capital and distributes it in rough proportion to the value of the employee earning it. 

Let's say I'm the CEO of Consolidated Flange Corp. My executive compensation is $50 million. Exhorbitant. But Consolidated Flange is a $5 billion company. My compensation amounts to 1% of the company's value. But if I help the company raise its value a paltry 5%, that's an increase of $250 million. So while I've walked away with $50 million, I've also been responsible for netting the company $200 million that can be used for salaries, expansion, new hires and the like. And I haven't disadvantaged our drill press operators. Because of my work, there is money to raise their salaries as well. 

Tom Cruise is one of the most bankable Hollywood stars. For the second Mission Impossible movie he was paid $75 million. But who would argue that in his career, which has spanned nearly 30 movies, he hasn't returned that investment handsomely for studios, producers exhibitors and other employees? Was any key grip or best boy on one of his sets disadvantaged by his financial success? Doubtful. But you never hear griping that Tom Cruise or Denzel Washington, or Will Smith makes too much money.

For a common-sense understanding of this whole issue of compensation, pick up a copy of Thomas Sowell's Economic Facts and Fallacies. Dr. Sowell is a noted economist, author and columnist and his down-to-earth style breaks down economics into a language non-economists can understand. Economic Facts and Fallacies explodes a number of beliefs long held as Gospel writ, especially by those who favor government-interventionist policies. And it does so without any economic mumbo-jumbo, statistics, graphs or charts. 

When you start looking at compensation as a zero-sum game--where my gains are your losses--then you are flirting with socialism. I say that because to believe in comp limits is to believe that capital is static and limited. But capital is dynamic and expansive and in our system those who create capital are rewarded and those rewards are shared through the whole enterprise.

Just thought you might like to know.