Monday, May 2, 2011

Why CEO's Make Astronomical Salaries

I recently stumbled upon a commentary from Thom Hartmann that speculated about why CEO's make so much money. Is it free market forces? Ron Paul doesn't think so. I think largely that they do it because they can. CEO's have a lot of control of who board members are these days and are in some ways less regulated than they used to be. So they do what it takes to increase their own salaries to absurd levels. It's tough to resist the temptation.

Hartmann offers another theory which may play a role in some cases. Perhaps CEO's have a feature that you lack. Namely, they are sociopaths. The corporate world is going to select for that which maximizes profits. Not all industries would see profits maximized via destruction. But some do.

Take Coca-Cola. It happens that those that attempt to unionize in Colombian Coca-Cola bottling plants tend to get shot and killed. Maybe the CEO is unaware. Maybe he just applies pressure to keep labor rates low to a bottling subsidiary and doesn't know how that is achieved. Paramilitaries working in conjunction with industry do what is necessary.

But on the other hand maybe the CEO is aware. And you can see how being a sociopath would be beneficial in terms of profits. Not caring about destroying the lives of others means you can prevent unionization, keep labor rates down, and maximize profits and stock prices.

I thought that was an interesting theory, though speculative. But I recently listened to a lecture on morality from Dr Andy Thomson. In that lecture he explains how moral tensions arise when a portion of our brains that evolved earlier comes in conflict with the portion of our brain that developed later. It's a pretty interesting lecture. Near the end a questioner asked if these days in our world we are selecting for what we might regard as psychopathy. Those that succeed in the corporate world are often uncaring towards others. They benefit monetarily from that behavior and hence are able to reproduce more successfully since potential mates prefer wealth.

Thomson's answer reinforced Harthmann's theory. Apparently a world leader on psychopathy is a guy named Robert Hare, and he has developed a test, known as the PCL-R test which, according to Thomson, is quite effective at identifying psychopaths. Thomson further claims that in one of Hare's book there are details about this test being applied to CEO's of Fortune 500 companies. Apparently the test questions were obscured within a larger questionnaire so the takers were unaware they were being tested for psychopathy. Thomson claims that in fact these CEO's scored higher on the psychopathy spectrum than the remainder of the population.

Whether that's all true or not I really don't know, but I thought it was interesting.


Andy said...

Maybe the CEO's are just advanced humans on the evolutionary scale?

Sheldon said...

I find this psychological hypothesis worthless. Instead, they have the power and influence to capture high salaries, and so they use that power.

Chad said...

CEO's are like Quarterbacks in the NFL - if you don't have one of the best you will not make it to the Super Bowl.

I find Jon commenting about business practices laughable, but I come to his blog to laugh. He doesn't own a business, would not know the first thing on how to build a successfull business, but he'll certainly tell you what is wrong with said businesses. That is why he will always be an employee and not an employer.

About this fake, phony, pscho babble test thing - I suspect that if that test was broadly given to every 18-22 year old in the country the winners/athletes and those driven to be successful would all test similar to CEO's - that is why they are CEO's and why they win. Test any of the top flight athletes, top lawyers and anyone on Seal Team 6 and again I think they will test similar to a CEO - winners.

Jon said...

No need to make it personal, Chad. Let's suppose I'm not competent enough to run a business. Does that really mean I'm not entitled to have an opinion about Coke's involvement in assassinating union organizers or Shell Oil dumping crude all over the Amazon rain forest? You should address the substance of my comments rather than speculate about my own personal inadequacies.

With regards to your claim that athletes and lawyers would likewise show a propensity towards psychopathy, I want to encourage you once again to focus on actual evidence and data rather than speculation. Again, you can indulge fantasies about "Going Galt." That may tickle your fancy. I'm suggesting you bring it back to the real world and use evidence to find out how well the plausible sounding theories that you would like to be true, since they fit your worldview narrative, how well they in fact correspond to reality.

If you have actual evidence that lawyers and athletes do poorly, bring it forward. If you have nothing but speculation about what you would like to believe is true because it makes better sense of the idealism associated with free market capitalism, what good is that?

Not that I think thought experiments are totally out of place. It's sometimes worthwhile to speculate. But if you are going to confidently dismiss it as fake, phony, psycho babble you need something better than a confident assertion that an athlete would have the same problem.

Chad said...

Why shouldn't it be personal to a degree? Your attacking that which you know absolutely nothing about - your not responsible for the success or failure of a company, your didn't build an oil empire from ground up and you certainly have never taken your own capital to start a business to compete, but you expect to offer your opinion and expect it to not be challenged? Start a business with your own money, interview and hire a CEO that will be responsible for day to day ops then you can lecture me, but until then I would stick to trying to convince everyone that the Koch brothers are evil because they make too much.

As far as the test - I said that I suspect only because it is probably not on-line for me and others to take. I am guessing that a left winger designed it and looked specifically for certain traits that you/the left think as evil and nasty like a drive for success, an acceptance of competition and the over whelming enternal desire to win! If you got a copy of the test I would love to take it, but CEO's are all cut from a similar cloth of top notch athletes - they work harder than takers at their craft and they will succeed.

Jon said...

I am not a CEO and don't run a business, but we have to be allowed to offer opinions even though we don't have first hand experience. If I'm wrong, explain to me based on substance.

Should a non-soldier be permitted to have an opinion on war? Should a man be permitted to have an opinion on abortion? Should you be permitted to have an opinion on the best way to handle potential environmental destruction from the fossil fuel industry even though you don't work in the fossil fuel industry and you aren't an environmental expert? I think so. Offer an opinion, and if I think it's wrong I'll address it on substance, not on the fact that you don't have certain experience.

By the way there are plenty of CEO's and ex CEO's that see things the same way I do. But an argument is not true or false based on who utters it.

I think your suspicions about the test for psychopathy are perfectly fine and worthwhile, but I think if you are going to confidently assert that what I've offered is wrong despite the fact that it is based on sources that are available and can be checked, I think you should offer more than just speculation.

Maybe super athletes are psychopaths as well. Doesn't mean that what I've offered is wrong. I'm thinking of a person that has an abnormal lack of empathy. That's often very profitable. Perhaps it's something an athlete would be prone to be as well. Maybe someone that has no qualms about injuring someone on the field. Could be true. Worth considering.

Chad said...

I heard you deleted your brothers post - shame on you.

Bringing in the soldier is too far, when an actual life is in the balance no one takes that for granted.

Bringing it back to reality, should the line worker have an opinion about their company - sure, but it is irrelavant. A CEO has, in most cases, put in the time - they know what it takes to keep the company a float and prosper.

For me, my input directly affects our companies bottom line and my pay check reflects my efforts - I earn my pay and it feels good. I will not apologize for creating wealth for me or my boss. If an employee stops producing he/she is gone and that is fair. Competition is good and healthy!

Jon said...

Yeah, that's right. I deleted my brother's post. You see up above how you talk about how you come here for a good laugh. I put up with a lot of that kind of aggravation. It tends to cause the tone of the whole discussion to sour. See how I responded about your "Going Galt" fantasies. Maybe that's rude on my part. What happens though is I see your aggravating statement and it prompts me to respond in kind, and then the whole discussion is ruined.

Some of this is going to happen and I'm going to put up with it. But the goal at this blog is to have a productive, informative, non-aggravating discussion. The insults undermine that goal. So if you continue with those type of insults and it goes on for months, and we even talk on the phone and you acknowledge how it is out of line and you commit to stopping, but then you violate that commitment, then when you offer another rude and insulting post I'll delete it. I hope it doesn't come to that. I wish my brother could make his point in a non-insulting way, because he has useful things to say. But he can't seem to and that's his choice. I have to balance my level of aggravation with the amount I expect to learn and decide if it is worth it. It's not any more.

As far as the remainder of what you write, I don't see that it's on point. I haven't argued that some employees aren't valuable or that people that don't bring value must be retained. I haven't said that competition is bad. These are just right wing talking points. It's very much disconnected from the discussion. Here's what we're talking about. Companies exist to make profits. Sometimes acting in brutal and harmful ways increases profits. Do you agree with that or no? People that lack empathy are better able to act in brutal and harmful ways towards others. So there's a tendency in a case of a company that can improve profits by being brutal and harmful, for the system to select for a CEO that is a psychopath. In the same way nature selects for the cat that is the most successful predator, if being a successful predator means you are best suited to produce fertile offspring.

If that's wrong tell me how it's wrong. Saying I'm not a CEO or saying that you earn your paycheck really has nothing to do with it.

Paul said...

Hey Jon -

Sorry for temporarily digressing from this issue but the following peaked my curiosity.

W/ regards to your brother. I am curious about the type of things he is saying. I don't know how many people read your blog but in terms of people who comment on them I think I am familiar with the regulars. though there seems to be some new folks - which I appreciate. I recognize that discussions regarding your brother may be a private matter so I don't actually expect a response. It is just that sometimes exchanges between you, Darf and HP sometimes get heated. So I think on some level you welcome aggravation (challenge?). Anyway just curious.

Paul said...

one other digression -

A few months back you had a post about some lady whose husband who doctors thought had died but ended up resurrecting some hours later. Whatever happened w/ the proof you were to be given regarding this?

Paul said...

Ok - one last thing. Sorry for the poor verbiage and sentence structures in my last two posts.

Jon said...

Yeah, maybe I do welcome aggravation to some level. I guess the question is, at what level? Not at all levels.

My friend stands by his claim that he can produce the evidence of that resurrection. He claims the problem is merely logistics. Lining everyone up. I'll bug him again.

Jon said...

And by the way, Chad, what do you think of Ron Paul's claim that executive pay cannot be justified by free market forces, meaning it is a violation of free market principles that leads to their salaries? They're now making a lot more than they did pre-recession. They consume about one third of all pay in America. Ron Paul says that can't be justified by the amount of value they bring. What do you think?

Chad said...

I am not a big Ron Paul fan actually - his son Rand is a different story, I really like his policies and thoughts - really really do.

By the way - you may want to check out my post on the Chomsky thread. I didn't know the guy like I said before and what I found out was astonishing - I can not believe that you support this guy - he is obviously a fraud and he doesn't even hide it.

On a previous post you said "I am not a CEO and don't run a business, but we have to be allowed to offer opinions even though we don't have first hand experience. If I'm wrong, explain to me based on substance."

Really? Of course you may have an opinion, but without first hand experience how can your opinions carry any weight what so ever? Your not a business person - you have not been successful at any form of business, you don't have the responsibility of the success or failure of a business yet you want to show - using a left wing test - that CEO's are evil and can be connected to a mental disorder - that is a stretch at best.

My counterpoint to your message was that I suspect the findings to be 100% true - I am not fighting that this persons test revealed those types of tendencies because the group of us who thrive on competition, who are leaders and who strive to be the best carry those types of traits. You want to vilify those traits and I say we should encourage those types of traits.

Chad said...

Timing is good for me on this topic. Oparah had to fire her Liberal thinking CEO of her Own Network the other day and replace her with a guy that came from Fox. Wonder how she would do on this guys test? Lol.

HispanicPundit said...

Also, lets not forget that there are indeed peer reviewed accepted views of why CEO's make so much more now. No conspiracy theories needed.

See here, here, for example. All of this makes just as much, if not more, sense as Jon's theory but comes with the unfortunate fact that it doesn't fit so nicely into his simplistic paradigm. So Jon rejects it out of hand.

Personally, I choose the peer reviewed views.

Jon said...

HP, the point of this post is that in a lot of cases maybe the CEO is worth it. He really is being paid for performance. And he out performs a lot of people, namely people that lack a callous disregard for the suffering of others. That's profitable. He's earning his money, doing much better than I would do if I were in his shoes. I'd have a hard time turning a blind eye to the assassination of people struggling to increase their salaries from like $5 to $10/day. Profits could decline if I were running the business.

In a lot of cases though it's probably not that but that they do it because they can in violation of free market principles. Is that a conspiratorial assertion in your mind? The idea that people pursue their own self interest, including a willingness to subvert free market forces? That's about as conspiratorial as the claim that people prefer a salary increase to a salary decrease.

HispanicPundit said...

What is a conspiratorial assertion (is that really a word?) is your belief that CEO's are as violence prone and contrary to the workers and workers rights as you claim. I dont believe it. I dont think you have demonstrated it either (maybe if we were talking about governments, and politicians, I'd jump on board - but even then, its still a stretch).

Again: just look at the last 30 years or so, just as neoliberalism took off, world poverty has been decreasing rapidly. You know, free markets, competition, and all that good stuff. :-)

Jon said...

There's a difference between a conspiracy theory and an institutional analysis. The incentive is to improve profits. Sometimes disregarding the suffering of others leads to improved profits. Do you regard that as true or false? How is that a conspiracy in any case?

Globalization if anything has slowed economic growth. So while world poverty is dropping, it's dropping at a slower than it was prior to the financialization of the economy and globalization.

Chad said...

Forgive the elementary thinking, but I am confused about something in regards to GDP or growth in general and how that relates to this conversation.

Shouldn't we have expected that growth was bound to slow based on the increased population/longer life expectancy and less ability to invent things?

I never like it when Jon would reference that GDP/job growth was better in the past because common sense would tell you that is true. Women didn't work for a period, there was a race divide in the work force and overall less people in America to work. Not to mention America was in the middle of inventing things almost daily, as a country we were in the middle of building cities, building infastructure across the country, we were inventing or implementing new technologies that required an entire fleet to install (phone lines, sewer lines, power lines and so on.) We were building up our military so opportunities were greater than the work force and money could keep up with for many decades regardless of who sat in the WH.

I don't know - it just feels like this discussion is similar to when someone trys to convince me that Joe Dimaggio could play in the MLB today which is completely false. Today's players are bigger, faster, stronger, smarter more practiced and sophisticated so you can not compare across different decades - it is not logical.

HispanicPundit said...

You need to clarify Jon: I can concede that economic growth within the United States has slowed (can, haven't yet). That's a separate point.

My point is different; I am making the argument that world poverty has decreased significantly faster than it did prior to, say, the 1980's, and especially 1970's.

So it's simply false for you to say "So while world poverty is dropping, it's dropping at a slower than it was prior to the financialization of the economy and globalization."

World poverty has decreased MORE rapidly since "financialization of the economy and globalization". Far faster than anything we ever saw previously. That is my claim and I provided a link to prove it. Do you disagree? If so, please provide data. Again: remember, were talking about world poverty, NOT United States wealth.

With regard to your question: "Sometimes disregarding the suffering of others leads to improved profits. Do you regard that as true or false? How is that a conspiracy in any case?"

yes, I disagree with this fundamentally. Happy employees make for better profits. Employees can quit if their alternatives are better. And companies care ALOT about their PR. All of these factors are also profit maximizing and go counter to your premise above.

Now granted, I agree that there may be some small rare short term scenario where a purely harmful decision to employees maximizes profit...but long term profits (ie, PR, laws, etc) mitigates that.

HispanicPundit said...

Chad - good point. Its a given in economics for new growing economies to have higher GDP/capita as they grow. Doesn't mean they are richer.

Also, lets not forget that the rest of the world was generally going communist through much of this era (remember, the cold war!) so that artificially boosted our economy (lots of intelligent people, ideas, and inventions flowed to the USA - fleeing communism).

Jon said...

We've been down this road already. I don't think your Ted talk shows that world poverty is decreasing. You need to distinguish between inter-country poverty and within country poverty. I'm talking about the later and you are talking about the former.

We've covered your claim about how our prosperity was due to the fact that the talent was fleeing to the free market US and away from the command economy of the Soviet Union. As if the US decline, which started in the mid-70's, is due to the 15 years into the future fall of the Soviet Union. Our economy was heavily regulated with extensive unionization and social government expenditures during the aggressive egalitarian growth. Government funded high tech was (and is) enormous. We were nothing like a free market economy and we never were. Meanwhile when the Soviet Union opened itself up to market reforms post 1990 the whole economy collapsed in ruins. Millions died with the collapse in basic health services. Go to Gapminder and see. Your theory may sound plausible, but how does it stand up to the facts? Not well in my view.

Chad said...

I get so confused sometimes and so I apologize if my thoughts are many levels below yours.

I thought that the energy crisis of the 70's was the number one reason for the economic slowdown?

How about this other article talking about Stagnation.

The work force (baby boomers, women, people of race, illegals) all increased, but the number of new opportunities reached is peak around the same time - doesn't it make sense that growth would slow or stop?

Not sure I understand the issue?

Chad said...

One more thought - the 70's also marked about the time people voluntarily choose to not work and collect a gov't check as well. The parasites were born about that time as well, right?

Jon said...

I think the 70's oil crisis was more of a short term lull. But what we're talking about here is the long term increase in inequality and reduction in economic growth that started somewhere around the mid 70's and has continued to this day. You have a massive increase in family working hours, continued increases in productivity, but incomes for the middle class that are close to flat, while income gains for the wealthy class continue to increase. Overall economic growth has slowed as your second link showed. In fact it has slowed world wide.

So my friend HP agrees that this is happening, but he disagrees with me about the causes. For him the increase in immigration is a major issue. Also the other claims regarding the US being the de facto capitalist alternative.

HP and I have had discussions and presented data to show that family working hours are up quite a bit, both for the upper class and middle class. They are close to flat for the lower class. Generally people are working more. So it's not that we don't have opportunities to work. We do and we work longer. My claim is that systemic changes from the early 70's created conditions that lead to the rich benefiting disproportionately.

As far as welfare expenditures, I'm really not sure what it looked like through the 70's as contrasted to other periods.

Chad said...

Interesting - why can't you both be right to some degree? Is there really a clear right or wrong?

I think HP's claim that immigration has something to do with it is super valid and in fact - in my opinion only - if the border was locked down in 1970 and a wall was built to make it really happen the economic growth would have been greater throughout the 70's thru today. 12 million illegals today - if they magically disappeared unemployment would drop to nearly zero overnight, health care costs drop what 25-30% and the general labor would be valued again. Let's face facts it is not like the immigrant population are made up of doctors, lawyers and inventors - that is not the demographic, they work the jobs the spoiled Americans don't normally want. But take the low cost labor out of the equation and suddenly those who are willing to hump wood or dry wall or what have you become a valued work force.

To your point, sure we work more hours in comparison to the 70's for basically the same or less pay, but the factors and reasons for that is not strictly caused by the rich - the poor and big gov't have a big hand in that too. Plus Americans started wanting more material things, we wanted two cars and a bigger house, a couple computers, a special breed of dog and 2 vacations a year so by choice we needed to work more to have more. My grand parents took 1 vacation in 35 years my grand father worked at Ford - they owned one car and lived in the same house for 55 years which was paid off in 10 years. He paid cash for his new vehicles and still hasn't owned a credit card to this day. If we didn't want so much then we wouldn't have had to work more, we could have worked less, but that didn't happen and that - to me - is the #1 reason for a lack of growth by your scale. The rich saved, the middle class spent every dime.


HispanicPundit said...

Yes, we have gone down this road before and I encourage your readers to read our exchange (especially the Ted Talk - and really all of it), but I am curious Jon, you made a specific claim, namely: "So while world poverty is dropping, it's dropping at a slower than it was prior to the financialization of the economy and globalization." Where is your proof for such a claim? I've backed my claim up with data, from notable economists and UN sources, you find the data wanting...fine...but where is your data to back up your claim?

Oh, and speaking of inequality, there was a recent report on it, see here. What are the causes they give? Here is a list: globalization, technological changes, unemployment insurance, and of course changes in marriage patterns.

Now that list sounds awfully familiar, don't you think Jon? :-)

Jon said...

Chad, your claim that Americans are just bigger spend thrifts is wrong. See here.

Immigration does play a role, but my point to HP is that the effect needs to be quantified. You can't just look at some measure that happens to correlate and assume there is a causal link. So for instance I could say that inequality rose along with consumption of baby carrots. The fact that they happen to go up at the same time is not a proof. Quantify the effect and see if it explains the entirety or majority of the inequality.

HP, you are right that I shouldn't have said poverty is decreasing at a slower rate. What I should say is that world wide economic growth is on the decline as I showed at my link. And like your source Chrystia Freeland says the increase in inequality is not just in America but also in the rest of the Western world since 1975. Given those things I think the presumption that world poverty is not reducing as fast is a more plausible presumption than your claim that it's reducing faster.

We don't really know, or at least I don't know, because the data I look at at Gapminder is too incomplete. You think you've presented data to show that it has, but I keep saying the same thing. That talk considers inter country inequality, not within country inequality. I'm not sure if you are understanding my point here. Do you know what I'm saying? In other words suppose peasants in Honduras make a subsistence living. Globalization comes in and many people lose their farms. But a tiny sector makes huge money. GDP is up. Profits are up. But now you have half the population starving whereas before only 1% were starving. You look at the fact that GDP is up and you don't consider that within the country poverty could still be up.

Jon said...

Doh. Forgot the link for Chad. It's here.

HispanicPundit said...

We agree that income inequality is increasing(though not necessarily on WHY). But my point here isn't that, its absolute poverty.

For proof, I showed a Ted Talk that relies heavily on UN Data. I also provided a link by respected economists (see here) arguing the same thing. I have yet to see any respectable economist dispute this. You disagree. You don't find the evidence convincing. Fine. But why shouldn't that view be my default view? What do you have (aside from inequality stats, which really are separate issues) to prove contrary?

I'm not trying to be dense here, but I really dont get how you can think otherwise. Spell it out for me, please!

Jon said...

Here's the key point, HP. Your source shows that inter country inequality is dropping (I agree) and also within country inequality is increasing (key point). Here's another key point. My claim is not that poverty isn't dropping world wide. My claim was that it was dropping slower than pre 1975. Now, that's a claim that goes beyond the evidence. I admit that and am backing off the claim. Not that it's false, but that I haven't shown that it's true. What I have shown is that world output is slower since 1975 and within country inequality is increasing, as both your prior link and your prior source (Chrystia Freeland) claim.

Why would you think that showing that inter country inequality is dropping from 1970 onward in any way shows that my claim is false? Number 1 you need to also consider pre-1970 data to know if my claim was wrong. My claim is about the contrast between pre 1975 and post 1975. Second you need to look at within country inequality.

Here's another point related to this worth considering. The poverty reduction is driven primarily by China. 300 million people have been brought out of poverty in China over the last few decades. China (and also India) are the two emergent market countries that had the ability to violate key elements of the neoliberal regime. Latin America was not strong enough to do it. The Washington Consensus was not something they had the power to resist. And what has been the result? Almost all of the reduction in poverty comes from the country that expressly violated neoliberalism. China has managed to sustain enormous growth year over year. Like 9%. Latin America's growth in the 90's in the immediate aftermath of the imposition of Washington Consensus policies, was about half of what it was in the 50, 60's, and 70's.

What did China do? Among other things they blocked short term capital flows and blocked imports. They are clearly the world's model for success over the last 30 years. Latin America is the model for failure.