Greed or envy? Pick your sin.

January 10th, 2011
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If we absurdly reduce the deadly sins of the Right and Left to one each, one arguably comes up with “greed” on the one hand and “envy” on the other. I couldn’t help thinking that when skimming last week’s debate between the Post’s Kelly McParland and one of their stable of mainstreamers, John Moore. Not surprisingly, less is Moore.

The debate was about executive compensation and the recently released “independent study” on that topic. The facts are fairly straightforward.  Canada’s 100 top CEO’s each make about $6.6 million per year. That’s less than their U.S. counterparts ($15MM/yr) but 150-ish times more than the average Canadian.

The predictable McParland/Moore set-to had the former blowing off some journos’ interest in executive pay and the latter appalled by the “spoiled rotten, self-entitled class” of CEOs, who were “making off like bandits”. To be fair to McParland, his underlying criticism of the group pushing the compensation statistics – the Canadian Centre for Policy Alternatives – was as important, or more, than his sarcastic lead in. The group styles itself as an “independent, non-partisan research institute” which, without getting into semantics, is about like saying that Friedrich Engels was non-partisan. McParland notes that “founding publisher” of the group, Judy Rebick, is organizing a “Canadian Boat to Gaza”. ‘Nuff said.

Regarding executive compensation, it’s hard not to have some sympathy for Moore’s position. Modern executives certainly seem to be different from the preceding generation or two. I’m reminded of the former president of a Canadian conglomerate I became acquainted with some years ago. He was a WWII vet, dropped over Normandy with the 101st Airborne – what you’d call “of the old school”. His analysis was as follows. He first observed the younger executive phenomenon some years ago with the takeover of a large utility in his home town of Omaha. Omaha Light and Power, something like that. The company hired a bright young thing as its CEO, one of those MBA-types, who was clearly not satisfied with the steady-as-she-goes business model. He realized that the only way he’d ever get rich was to spin off this company, sell it or break it up.

The result was predictable. The utility was sold, to of all things Enron I believe, and the young CEO extracted his pound of flesh – a multi-million dollar settlement. Equally predictably, Enron had promised to keep most of the jobs in Nebraska but of course ended up moving them to Texas.

This has happened in companies I worked for. They’ve been sold or split and some executives made tens of millions in the bargain. Anecdotally at least, the older generation of blue-chip executives were “builders” who could look forward to retiring comfortably, that’s about it. They weren’t trolling for ultra-lucrative pay-outs. This contrasts with the modern, “rapacious” breed.

That’s a plausible narrative, but deserves some investigation. My further, limited observation of these trends suggests there are other factors at work too. For one, there’s the very common scenario in of an individual, or individuals, building a company to a certain level and then selling off for a monster windfall. At least that’s the model. What percentage succeeds at this is anybody’s guess. The rest are left holding an empty bag. Similarly, demographics is at work. Some execs clearly want to reach a certain age and then cash out. They’re not looking at passing to the next generation, just passing into a wealthy early retirement.

Another example. I remember an acquaintance of ours in the 1970′s was making multiple six-figures as an analyst of the aviation industry for an investment firm. He was in his thirties then ,and making between five and 10 times my dad’s salary as a teacher. This caused some discussion around our diner table as to what this young fellow could possibly know that would make him worth that salary. The bottom line is, some investors were willing to pay a princely sum to get more comfort, real or imagined,  around their investments.

This all suggests that, despite our gut reactions and ideological biases, there’s more driving compensation that blind greed. Mr.K suggested to me that, firstly, scarcity has something to do with it. There’s clearly a relatively small pool of people qualified for executive positions; positions of not insignificant insecurity. Not to mention that senior execs garner about as much respect as journalists and lawyers – look at John Moore. So there are external, as well as “self-entitlement” factors that drive executive compensation. One shouldn’t underestimate the impact of jurisprudence either on buy-outs and pay-outs. What size of parachute does a board think is advisable to grant if it wants to fire a CEO overnight and avoid litigation?

Fundamentally this comes down to my first point, greed versus envy. What people like Moore can’t seem to stomach is that boards of private firms can compensate as they see fit, which makes a few hundred people in Canada very rich indeed. None of his criticisms are lost in a free market. If a company’s board has a history of grossly over-compensating and rewarding failure the market will surely take notice. As with other aspects of a free market, they should be free to fail for this too. Although he doesn’t say so, I expect Mr. Moore’s envy would get the better of him and he would advocate prohibitive taxes on these high earners. Just a guess.

At some point in these arguments athlete compensation usually gets trotted out. Should Marty McSorley have made $1 million per year? Should baseball and basketball players get tens and hundreds of times that – more than corporate execs? What is fair?

And there’s the rub. Knowing him only by his writings and pedigree I’d guess John Moore is pretty concerned about this kind of fairness and, as I suggest above, would be fast to impose a remedy. Fair enough. While we’re at it though, why does John Moore get paid for writing while so many excellent bloggers don’t? Is that fair, or the entitling of a “self-entitled class”? Just wondering.

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By John Weissenberger