Why do American CEOs get paid so much?

A new CEO was hired to take over a struggling company. The CEO who was stepping down met with him privately and presented him with three numbered envelopes. “Open these if you run into serious trouble,” he said.

Well, three months later sales and profits were still way down and the new CEO was catching a lot of heat. He began to panic but then he remembered the envelopes. He went to his drawer and took out the first envelope. The message read, “Blame your predecessor.” The new CEO called a press conference and explained that the previous CEO had left him with a real mess and it was taking a bit longer to clean it up than expected, but everything was on the right track. Satisfied with his comments, the press – and Wall Street – responded positively.

Another quarter went by and the company continued to struggle. Having learned from his previous experience, the CEO quickly opened the second envelope. The message read, “Reorganize.” So he fired key people, consolidated divisions and cut costs everywhere he could. This he did and Wall Street, and the press, applauded his efforts.

Three months passed and the company was still short on sales and profits. The CEO would have to figure out how to get through another tough earnings call. The CEO went to his office, closed the door and opened the third envelope. The message said, “Prepare three envelopes.”

 

The problem, and this does feed into CEO overpayment, is our warped cognition. Anything good? That reflects our ingenuity. Individualism rules. Anything bad? That reflects bad luck. The market belches. I'm fortunate as I largely employ honest gits. Information flows ensure that I know my place, including blinkered managerial bluster outmaneuveured by worker knowledge.

 

HIGH POVERTY RATES

Bollocks! Were that the case, there would not be so many classic failures of companies.

Quoted above is Right-wing BS by people who will not face the basic fact that Income at the top MUST BE REGULATED, and the US very badly needs a law that limits rights of inheritors. This accumulation of Wealth at the top must stop, particularly because of the very high poverty-rates at the bottom. (Which is the root-cause of most crime today!)

From here: U.S. Census Bureau Reports Poverty Rate Down, But Millions Still Poor

That poverty number above has most certainly turned south since Covid-19, and economists are say that there is very little chance that it turns north in the near future. The money garnered by the increased taxation could be employed for the general betterment of the lives of ALL AMERICANS.

Two easy "for instances": A National Healthcare System and Guaranteed Post-secondary Education in state-schooling throughout the US.

Those two elements mentioned above alone would make America a better, safer place to live. Because that is most certainly not the case today as regards "Education Outcomes":



PS: From here - United States incarceration rate - Wikipedia

 

I am not a right winger. If you can't explain your point simply, maybe you don't understand it. CEOs make the amount they make simply because they go to the best offer. Simple.

 

I make my "point" in a DEBATE FORUM with factual evidence if and where I can find it. Or I don't make-my-point at all.

Yes, I know, it's a bad habit - but that's life, isn't it ... ?

 

You are entitled to your opinion, but the facts are:

American CEOs do command a high rate of pay because their skill set is in demand. Offer less and they go elsewhere. Simple.

 

You have no idea how CEO pay is determined, do you?

 

YOUR QUINTILE SAYS EVERYTHING

Once upon a time, in a place called Yugoslavia, there were no "bosses" in place because others "owned the business". And the industries worked just fine because profits were shared within the workforce that produced decent-enough products. (Not that I would call the YUGO-car an exceptional example!)

The US is a graveyard of companies that were once fashionable "industries" that were run by their male-owners. Most of that Old Manufacturing has moved elsewhere. We are not clearly into the Information Age. (But still generating billionaires!)

Uncle Sam has done ABSOLUTELY NOTHING to assure that those who help make the profits (meaning the entire staff) also share in those profits. So, yes, after-low-tax profits are going to a select group of people way, way up the corporate ladder. They are being paid far, far beyond what they truly deserve, whilst others further down are simply scraping by on "average salary structures".

The US needs a Rules Change. One that stipulates - by LAW - that all who participate share also the profits in the manner that they have contributed to making those profits. Meaning that, yes, there is a pyramidal management structure, but the law must assure those at the bottom and middle levels are not treated unfairly and some grossly unfairly!

Let's not get blinded by a long, long history of American businesses that have been run by "families". From which the profits are shunted after death from generation to generation to generation. There is another way. (And high death-taxes are the best-way to correct that unfairness.)

Americans are so fascinated by "winners" it does not even consider the losers. It's a highly unfair country when it comes to sharing the profits that everybody's hard-work generates.

No, we cannot all be equal-earners. Soviet communism proved that such doesn't "work".

But neither is the present manner of shifting billions upwards really any better. From the Census Bureau here:

The two highest quintiles along with the Top-5 percent garner 75% of the total Money Income generated in the US. And that aint fair ... !

 

Uncle Sam can't manage his own finances and has no business running corporations. The feeling of entitlement you are pushing only creates laziness. If you want more money, be worth more. Most of our new millionaires are foreigners. You make what your time is worth.

 

SPEED KILLS

Europe proved a long time ago that "bosses" are not everything. The notion of a singular possession of the right to "boss", whether you own the business or not, is outmoded.

It still works for very small companies - but complexity sets in when the total number of employees rises. Which happens because the business is expanding. But, why is the business expanding? Because people purchase a company's products/services. And where do shoppers get the money? From their own jobs.

So, "what goes around comes around". But, what comes around - as the numbers I put up show - the salary-number is not fairly distributed to all. Yes, any pyramidal organization has different levels of job-pay. But, the way it is working today, far too much goes to a special class at the upper-end.

Whyzat? Because top-management has designed the pay-structure in that manner.

We have a pay structure with higher levels of pay for higher levels of job-responsibility - that's fine. But we have one also that is NOT FAIR AND EQUITABLE. And whyzat?

Because we have allowed upper-management to decide pay-scales and they have tipped the advantage in their favor. Perhaps they thought "that's the right thing to do" because it promotes good work habits? But, even so, it isn't better. Because it leads to the economic malcondition of Income Disparity.

What does Income Disparity look like comparatively? Like this (note that the more red a country is the worse is Income Disparity):


Speed kills - and not just on the roads ... !

 

Since the end of Reconstruction in 1876 there has usually been more tolerance for extremes of economic inequality in the United States than in Europe. I can think of two reasons for this. First, the United States has never had a hereditary, titled, and leisured aristocracy. This has led to the belief that anyone can get rich in the United States if they work hard enough.

Americans often think of a rich person as someone who delivered newspapers at the age of twelve in order to help support his widowed mother and two younger sisters. Europeans are more likely to think of a rich person as one who inherited a fortune, and who devotes his life to the idle pursuit of pleasure. This is true, even though social mobility is declining in the United States and increasing in Europe.

Second, the U.S. population has always been more diverse than European populations. For most people most of the time loyalties of class are less strong than loyalties of race, nation, and ethnicity. It has always been the case that most Americans were more ethnically similar to America's rich than to many Americans who are not rich. This combines with the first reason to cause most Americans to like and admire rich people.

 

WORST INCOME DISPARITY

All perhaps very true. Some historical facts, however, emerge when considering the history of Income Disparity.

After WW2, when Nazism was finally defeated, the Europeans looked for "another solution" to adopt. Europe has raaging Income Disparity, which is why so many were hightailing to the US. After WW2, however, they found in what is called a Social Democracy - which is neither Communism nor Arch-Capitalism but somewhere in between.

The US went on its merry way because it thought its high rate of taxation of Upper-incomes would prevent what had happened in Europe - the Wealth was cornered by a select group of individuals (typically families tied to existing royal families).

In the US, it was Kennedy who started the reductions in Upper-income Tax, and Reckless Ronnie who finished the work. This chart below is the history of Upper and Lower Income Taxation over the breath of the 20th century:


Reckless Ronnie contributed to a massive reduction throughout his term in the White House. Today Upper-income is taxed at just below 40%. Which, along with a burgeoning economy (until 2008 or so) had caused millionaires to become billionaires. And with US Inheritance Law, that fact is transmitted from generation to generation.

Which is why we have in the US the developed world's worst Income Disparity on earth (see chart here) ...

Have I got that all wrong? Do tell me how ....

 

Yes, because it can. Most Americans are completely unaware of what has happened to Income Disparity in the country, and most don't even give a damn. They think the super-rich are so because "they worked hard" - when in fact they "inherited" easily.

But when push-comes-to-shove it is not THEIR KIDS who go off to fight the war! No way, José .... !

 

Most of the super-rich did not inherit much if any of their fortunes. But what they almost always worked hardest at was rent seeking: legally getting something for nothing by owning privileges. Don't ever kid yourself: it's hard work getting something for nothing. Ask any professional thief.

 

No. It is not low top income tax rates that make millionaires into billionaires, because that happens through uncrystallized capital gains, which would not be taxed as income anyway. What turns millionaires into billionaires is PRIVILEGE -- land titles, bank licenses, IP monopolies, broadcast spectrum allocations, oil and mineral rights, etc. -- which legally entitle their owners to profit from the abrogation of others' rights without making just compensation.

True. The stepped-up cost basis on inherited assets means that most of the value of large inheritances is not only not being "double taxed," it is not even single taxed, and is in fact, unlike working people's wages, never taxed at all.

You need to stop obsessing over excessive income disparity and income tax, and find a willingness to think about the real problem: excessive wealth disparity, and the increasing economic dominance of the unjust privileges that cause it.

 

You need to find a willingness to understand that income disparity is not the problem, but merely a symptom of the real problem: massive, systematic, institutionalized, and wholly gratuitous injustice.

The natural variation in something like income will follow a probability distribution. We are all familiar with the normal distribution -- the bell curve -- but there are good reasons why that does not describe a natural distribution of income. Instead, economists have found that income and wealth follow a different distribution called the inverse exponential distribution, which also occurs in nature as a result of certain kinds of random grinding and accretion processes. This is true in every country. The difference is in the exponent of the distribution: a higher exponent means a more equal distribution, a lower one a less equal distribution.

Consider several different hypothetical countries that all have the same inverse exponential income distribution:

In country A, everyone's income is equal to what they contributed to production.
In country B, a universal lottery distributes income to everyone at random.
In country C, everyone gets the same income they got last year.
In country D, everyone's income is in direct proportion to their wealth.
In country E, government officials decide everyone's income based on lobbying, favor trading, personal loyalties, popular sentiment, and other political considerations.
In country F, everyone just gets to keep however much they can steal.

Can we agree that country A is the fairest, and will also be the wealthiest and most prosperous? Country B is also fair in a sense, but does not offer much in the way of incentives, and will probably be poor. Country C looks even less fair, and is probably even poorer than country B, and country D is worse still, as it is the only one where the distribution is virtually guaranteed to become increasingly unequal. In country E, how well things turn out will depend on the quality of the government officials, and in country F, you essentially have the Hobbesian war of all against all, and life is solitary, poor, nasty, brutish, and short.

Notice that we can hypothesize distributions that are more or less equal under all these scenarios: in fact, country F would likely have the most equal income distribution; it's quite possible that country A would be less equal than country B, C or E; etc.

These hypotheticals should make it clear that inequality in the distribution of income per se is nothing but a red herring. What matters is how that distribution arises: justly or unjustly; in a way that creates prosperity and harmony, or one that creates poverty and conflict. And because the distribution of income is a red herring, income tax cannot be a meaningful or effective solution to the problem. It is impossible.

What you should notice here is how meaningless income disparity is to people's actual welfare: Iraq and Venezuela are more equal than Poland or Spain; Afghanistan is more equal than Australia; Bangladesh is more equal than South Korea. It's a red herring.

 

THE MOST IMPORTANT ECONOMIC PARAMETER IS "INCOME DISPARITY"

One of the problems of Capitalism is that it is very heavily based upon one and only one principle. That profits are the worlds Prime Objective and all else is unimportant.

Well, boyz-'n-girlz, the world has go that all-wrong, all-wrong, all-wrong, The Real Purpose of any country's - I repeat any country - societal goal is the Well-being of its people. And how do we measure that? By means of how well or not the population lives.

And what is the measure of THAT attribute? It is called Income Disparity (Or Income Inequality) of the economy, which economists calculate in this manner: See the OECD's ID-graphic here.

For the moment, there are two economic entities that are comparable on that graphic. One is the US, and the other is an entity called the EU (European Union). Note the difference in ID between the two comparative values. That is, the US has the highest of any developed-economy at a value of 0.39. Note that the UK is not that far behind at a value of 0.36.

Most importantly, note that a group of countries that one might call the EU have rates that range from the Slovak Republic at 0.24 up to Ireland at 0.29.

Need more be said to underline the fact that - comparatively - the US is a quarter (1.24 times) larger than the EU as regards National Income Disparity?

What does this typically mean? Many things, but there is one that is almost certain in terms of gravity: The higher the Income Disparity of a country the more likely is the difference between the Very Poor* and the Very Rich highly significant both socially and economically.

Is such a condition Fair and Equitable to the inhabitants of those countries with a high Income Disparity? Methinks not ...

PS: In America, 29.1 million people live below the Poverty Threshold (in families that earn less than $24K per year). Now you guess, America, where those people who are bursting your prisons with inmates come from ...
PPS: There is no such entity known as Equal Income Disparity. There is always Income Inequality in any country that allows the Accumulation of Net Income into Net Wealth. That such exists is unimportant because it is human-nature to accumulate wealth.That the amount is far too high for some in its distribution of Wealth is, however, a very important.

 

In case you didn't notice, you are replying to a joke!

 

Shhh, that's not a funny thing to do to someone.

 

No it isn't. Read post #341 in this thread.

So, median discretionary purchasing power?

I already proved that is false in post #341.

Irrelevant. See post #341.

And any other country.

Garbage. What matters is how people come to have more or less income, and how they accumulate wealth. See post #341. Are you willing to know the fact that there is a crucial difference between obtaining more income and wealth by making others richer and obtaining more income and wealth by making others poorer, and that income disparity completely ignores that difference?

 

Why must income disparity be reduced? And why would doing so be the government's responsibility?

 

Those demanding that wealth be redistributed may not have had parents that raised them to be self sufficient or read them books like "The Little Red Hen".

 

Income disparity should be reduced, but not redistributing wealth, but by encouraging work, real work, not selling drugs and knocking off 7-11's, but earning a living, deferring wants and trying to meet needs.

Sadly too many people in the US believe that taking money from someone who has more and giving that to someone who has less, makes that person whole, which is totally effed up, all that does is enslave them to the money changers.

I'm not smart enough to claim I have the perfect solution, but based on my own life experience, allowing a person to be able to earn their own money feeds their soul and despite all of the naysayers who claim otherwise, living in this country allows everyone the freedom to become as wealthy as they wish to become, it's all a matter how hard they are willing to work and save.

 

Why? (to your statement I bolded)

 

If a company is privately owned then I imagine it’s their business about how much each employee is paid. I can’t imagine any company paying any CEO the crazy high salaries I see in the US but I don’t have any pull with any multinational corporation or sit on any of their boards.

My bigger issue is taxation. I’ve always favored a flat tax but the wealthy don’t want to pay anything and neither do the poor. But a flat tax still provides an incentive to achieve and invest.

My understanding is that during the Eisenhower administration, the top tax rate was about 90 percent. Why would anyone try to achieve under that burdensome a system? What would be the point?