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Chapter 32: Fair Pay, Big Business & Crony Capitalism

September 2, 2012

 

“Far too many executives have become more concerned with the four P’s—pay, perks, power, and prestige—rather than making profits for shareholders.” —T. Boone Pickens, business tycoon

 

What’s wrong about fair pay in America

  • The income gap between rich and poor is growing. We’ll always have rich and poor, but the gap between the two has been growing dangerously in America.
  • Globalization hurts blue-collar workers. As explained in the “Economics” chapter, the shift to a global economy is causing America’s overall standard of living to decline relative to the rest of the world.
  • Gains in productivity limit the number of jobs. To compete in a global economy, the United States has dramatically increased productivity—which is good. But most of these gains have come from finding ways to produce more with fewer workers (investments in more efficient equipment, technology, computers, and software) and from the massive outsourcing of jobs that can no longer be done for a competitive cost in the United States.
  • For executives, bureaucracy trumps competition. Competition is supposed to be the moderating force that determines each person’s value in the workplace, but bureaucrats and their lobbyists have managed to suspend the rules, especially when Big Business, Big Labor, and Big Government are involved. So while blue-collar workers are suffering, the compensation of business and government leaders has become even more glaringly disproportionate.
  • Crony compensation. Big company executives pay consultants to recommend outlandish compensation plans. They pack their boardrooms with executive cronies who approve these plans. It’s often a “you scratch my back and I’ll scratch yours” arrangement. Then managers of labor unions and government agencies (where real competition is missing or limited) use comparisons to obscene corporate compensation to justify their own excessive compensation packages.
  • Size matters. Scale is part of the problem: when a company earns billions in profit, it may not seem unreasonable to pay the CEO a few million. When a professional sports league develops a virtual monopoly, it is perfectly natural for the owners, executives, coaches, and players to spat over who gets to divide a huge pie. And what government or union official doesn’t want similar rewards for comparable duties?
  • Long-term performance doesn’t matter. Most Americans don’t resent it when brilliant executives earn a lot of money for creating real value. The trouble is that many Big Business executives reap obscene compensation for destroying value that somebody else created—very often by merging and slashing companies and laying off employees. The company may show impressive short-term profits, and the CEO can bail out with a golden parachute before the long-term damage becomes apparent.
  • Government bailouts. When reckless behavior gets big businesses into trouble, politicians declare them “too big to fail” and use taxpayer money and credit to bail out the culprits. Then the companies reward their executives with obscene bonuses, and reward the politicians with more campaign contributions.

How to fix what’s wrong

with fair pay in America 

  • Government isn’t the answer. Should the government step in to control the salaries of CEOs, Hollywood actors, and sports stars to make things fair? No. Over the long haul, free markets truly are the most efficient. The laws of economics simply cannot be legislated. Every time governments try to control wages or prices, they make a mess of it and people (usually those at the bottom of the economic ladder) get hurt. Government control also inevitably leads to more political corruption.
  • Protectionism isn’t the answer. Can we use tariffs to protect American workers from the global economy? No. In fact, if politicians convince enough frustrated people that government control of the economy is needed to ensure fairness, we’ll create a new generation of dependency and make it even less likely that we’ll be able to thrive in the global economy.
  • Freedom works. Free market competition is the best way to determine compensation levels. Make yourself more valuable, and you’ll earn more. If your employer isn’t willing to be pay you competitively, you can leave and go elsewhere. Executives shouldn’t be exempt from these principles.
  • Executive compensation reform. Competition and disclosure are the keys to moderation. Instead of deferring to the recommendations of fat-cat consultants, corporate directors need to ask themselves if the company’s executive compensation is truly competitive in the marketplace. (“Would we really have to pay this much to attract a CEO as good as this one?”) Along with other measurements, directors should consider any proposed compensation package as a multiple of the average worker’s pay. (“Is this executive really worth twenty-five times more than our average worker? Fifty times? One hundred times? Five hundred times?”) Total executive compensation (not just salary) should be published in the annual reports of public companies. (See more about this in the “Big Business” chapter.)
  • New skills for workers. American workers have always made whatever changes are needed—usually a lot faster than central planners expect, and in spite of burdens imposed on them by government bureaucrats, corporate executives, union leaders, and politicians. Now they’ll figure out what skills are needed to thrive in a global economy. Many are thriving (even in a weak economy) because they have overcome their dependence on others and are reinventing themselves through individual initiative. In fact, these remarkable individuals (not big businesses) are driving the new economy in the United States (Also see the “Freedom” and “Education” chapters.)
  • Safety net. Some workers won’t make the changes fast enough because they are too stuck in their old ways or too inclined to depend on a company, union, or government to take care of them. That’s why we should adopt a negative income tax as a safety net and incentive to climb the ladder to prosperity. (See more about this in the “Poverty” chapter.)

“Democrats’ definition of ‘rich’ always seems to be set just above whatever the salary happens to be for a member of Congress. Perhaps that says it all.” —American entrepreneur Steve Steckler

 

“Hollywood is a place where they’ll pay you a thousand dollars for a kiss and fifty cents for your soul.” —American actor Marilyn Monroe

3 Comments
  1. Mike Ruddell permalink

    Crony capitalism is like a retrovirus, they invade, take what they want, destroy the host and move on to the next project. Solyndra donations to Obama, and the subsequent grants to the already doomed company is a prime example.

    Like

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