Sunday, February 23, 2014

The Rewards of CEOs

At $44,000 per year, the average income of 99% of Americans has barely budged in real terms since 1970 (flat bright blue line at bottom.) Meanwhile, the average annual income of the top 1% (dark blue) has more than tripled to $1.3 million, and the average for the top 0.1% (light blue) has multiplied more than five times to $6.4 million.

 No matter how you measure it, the incomes of the top 1% are growing much faster than the incomes of the bottom 99%, and they have been for a generation. The incomes of the top 0.1% and 0.01% are growing even faster . A handful of people are getting fabulously wealthy, while hundreds of millions are running as fast as they can just to stand still. Many are falling further behind.

Why are the incomes of the very rich so high?

Harvard economist Gregory Mankiw gave the conventional answer. They earn every penny. The rich are rich because what they do is so valuable. For instance, Robert Downey Jr. makes a lot of money because people pay to see his movies. However, most of the very rich aren’t actors, or athletes, doctors, or even small businessmen. For the most part, the top 0.1% are executives of financial firms, corporate executives in other sectors, or lawyers in the service of those corporations. He then argues those working in finance face particularly risky incomes and greater risk requires greater reward. Uh-huh, and we have all heard the analysis that they respond much like a member of a herd to investment policy rather than any individual inspiration. And mediocre CEOs often make just as much as any of the talented ones.

 Mankiw argues that,
“Those who work in banking, venture capital, and other financial firms are in charge of allocating the economy’s investment resources. They decide, in a decentralized and competitive way, which companies and industries will shrink and which will grow. It makes sense that a nation would allocate many of its most talented and thus highly compensated individuals to the task.”  Mankiw insists these individuals hold enormous power over our economic destiny and they justly deserve the trimmings and trappings of wealth.

 CEO pay has no correlation with either performance or market capitalisation. It is the market that determines CEO pay is fixed. CEOs aren’t paid according to the value they bring to their company; their pay is set using a method that’s guaranteed to inflate CEO salaries without any relation to value added. And once CEO salaries are inflated, so are all the other salaries and compensation packages for top executives.  If you can increase the scarcity or value of what you own — by creating a monopoly, or by having your colleagues set your salary, or by having your flunkies write the rules on trade, taxes, patents and so on — you can extract extra profits. Economists call these extra profits “rents.” Some may argue that CEOs and financiers who make up the top 0.1% earn their money because their talents are scarce and their work is valuable, but it’s harder to explain why these executives and financiers get paid twice as much in real terms as they did in the mid-1990s and five times as much as they made in 1970. Or why CEOs in other countries earn much less, even though their companies are just as profitable as ours. Or why the ratio of CEO to worker pay has risen from 20:1 in 1950 to 200:1 today. Is it that much harder to run a large company in the America of 2014? Are talented CEOs harder to find? Are financiers so much more efficient at channeling savings into productive investments?  According to the Economist, the top 25 hedge fund managers make more money than all the CEOs of the S&P 500 combined. Mankiw’s view of the financial elite as hard-working and talented supermen collecting their deserved enormous rewards is completely at odds with reality. The more accurate picture is that they are greedy, grasping thieves who have fixed the system to keep more of their ill-gotten gains. Others in the plutocracy are slowly realising the fact and wish to re-write the rules to rectify the share out of the surplus value extracted from the working class. Socialists want to do away with the whole exploitative system of capitalism - the only permanent cure to stop Robber Barons from arising.
From here 

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