Welcome Theology and Economics students of Marquette University High School in Milwaukee, Wisconsin! MUHS was founded in 1857 and celebrated its 150th anniversary in 2007. It has carried on its Catholic education mission of teaching the whole person for generations. It is a good place in which to learn.
Thanks go out to Fr. Tom Doyle, S.J. of the MUHS Theology Department and to Dave Cooks, MUHS Economics Chair for directing some of their students’ intellectual capital toward this week’s discussion question.
Will President Obama’s limit on executive pay promote justice and efficiency?
To frame the question a bit, let us define some terms. Justice, put simply, means a person receives what is due to him. Somewhere between the extremes of all the money in the world and none of it, there is an amount of compensation for executives that we would recognize as just.
Efficiency, in an economic sense, has to do with getting the most output from productive resources for the least amount of money possible. Harvard tuition may or may not be efficient in this sense.
A limit on executive pay could be viewed as an effective or ineffective price ceiling.
Apostles and Markets lessons combine principles from Catholic social doctrine with economic concepts to help us think through the strengths and weaknesses of certain policy proposals. But doing ethics and economics isn’t easy. So I thank you for your efforts. I know you are busy and that your time is valuable.
If you decide to answer this week’s discussion question you have my thanks, again. Secondly, please don’t bother playing the “guess what the teacher is thinking” game. I’m not looking for a certain answer that matches up with an answer key. Rather, I’d very much appreciate the opportunity to eavesdrop on your thinking as you come up with elements of an answer to this question. This is more a building exercise than a test. I’ll respond to each one who shares his thoughts. God bless.
President Obama’s limit on executive pay will promote justice and efficiency. By only applying the salary caps to companies that requested government aid, the plan will target unsuccessful companies. Why should executives get paid millions of dollars for leading their companies into bankruptcy?
Hi Sam. Thanks for your response. You make three solid points:
1. caps only apply to firms that took aid
2. taking aid is a marker of an unsuceessful company
3. we should not reward bad leadership with high pay
Wouldn’t the more direct approach be to fire bad leaders all together, government aid or no? If so, wouldn’t stock holders be better suited under the Catholic principle of subsidiarity to be the ones who make that decision rather than the federal government farther away from the specifics? Finally, would you favor this federal cap strategy for professional sports franchises, some of whom have good coaches and others who don’t?
I agree with Sam Johnson because executives absorb so much money that could be used to bail their companies out of bankruptcy. The executives will naturally take their money and and run and let the rest of the employees suffer through the recession, since they are well-off. It would be better to more evenly disperse the salaries and take away that option for the executives. That way, the executives will have a motive to keep their companies running and profitable.
Jake, this is interesting. Thank you. Have you seen any figures on the amount executives absorb? The cool thing about economics is that it looks at issues like this objectively. For example, if we found figures that indicated executives absorbed $856 million dollars, that could support a position that executives absorbed a lot of resources. However, if we were able to find out how much value created by the companies these folks led, say $856 billion, that would put their compensation in a slightly different perspective. Your final point is interesting too. What would evenly distributing look like? Should everybody earn the same amount, no matter their role in the company? That would accomplish the equality goal, but what might it do to motivation?
Hey Jake, thanks for your ideas. I see you advocate evenly spreading salaries. How would that motivate executives to run their countries better? How would that work with grades, or would it? For example in math class, everyone gets more or less the same grade regardless of effort? How is that fair? Compensation could be viewed as a reward for good leadership, or the carrot in the carrot-and-stick motivational scheme. Another question is who decides? Should government decide? How does that square with Catholic social doctrine principle of subsidiarity? Should government spread Bill Gates’ salary?
I also believe Obama’s limit on executive pay will promote justice and efficiency. Justice will be promoted in that failing/unsuccessful companies who requested government aid will not benefit as a result of their sought out help due to their loss. Efficiency will also be promoted in way which will hopefully lead these failing companies to realize their “weak links” in their workforces, bringing new executives into the workforce which will reduce some of the developed stress and debt.
Hi Austin, thanks for your comment. I would like to focus on your last sentence in which you talk about efficiency. You say “hopefully” these capped executives will highlight “weak links”, and attract better talent to fix the firms. What is the source of this hope? And, why would a talented young business leader want to go to work at a firm with a ceiling on how much he or she could learn. I would think capped salaries would work to keep talent away. Brains drain away from government-regulated firms.
Thanks Austen Ebert for your comment. If a troubled industry needs extraordinary talent to make wise decisions that would help turn that industry around, what method of atracting that talent would you recommend?
There are two trains of thought: first the executives of various banks brought their firm to its knees by losing money and should they be rewarded for poor performance? The U.S. Government/ U.S. taxpayer is trying to be just by not rewarding top executives for failure. However, on the other hand, you will not have the best executives to lead the bank out of this recessionary time or turmoil as they will terminate their employment and join a bank that did not receive payment from the U.S. Government. In my opinion, restricting pay will not be just as the key executives are not fully responsible for their subordinate’s poor decisions. Henceforth, these executives will leave their organization and seek higher compensation elsewhere. This is not just.
Thanks Aaron Schwei for your comment. You raise the point of who’s responsible. That is important. You go on to say it is not just to penalize with capped pay those executives who are not fully responsible for their banks downturn. Shouldn’t rewards and punishments be left to the banks’ themselves? Should teachers at MUHS grade student performance at Catholic Memorial? Hmmmm, maybe that’s a good idea. Kidding! kidding…. Or am I.
Newsweek Magazine recently hailed: “We are All Socialists,” and went on to explain the massive expansion of government brought on by the “stimulus” plan. This headline in some ways, provides one opinion on the efficiency of the Obama economic agenda, namely the limitation of executive pay. First, socialism is, in the simplest sense inefficient. The difference in GDP between the United States and France provides raw data that highlights socialism’s lackluster performance when stood up against Capitalism. Ironically, French President Sarkozy recently proclaimed the death of the Lassiez-Faire system. Furthermore, when Washington injects itself into the Free Market, inefficiency becomes seemingly inevitable, evidenced in slow breakdown of the social security system and ever-increasing taxes to fund promises that are rarely delivered on. The second main question regarding Obama’s pay-limitation regards its “justice.” First, in my opinion, governmental strong-arming of the private sector never represents justice. Secondly, if justice is termed as “A person receiving what is due to him,” then why is Barack Obama suddenly granted the privilege of determining what each American deserves. Clearly, from a Catholic perspective, that is a judgement reserved for God alone, and while I realize that Obama has recently been elevated to near-messianic stature, he is overreaching. In fact, the proposal reminds me of one of Western History’s most frightening phrases: “From each according to his ability, to each according to his need.” Sure, this central tenet of the Communist system sounds just on paper, and in many Americans it evokes a “feel-good” response, but in reality it strays away from the very essence of social justice. Government-controlled economies negate man’s incredible ability to innovate, and to use his talents to better his own situation and thus improve the human condition. Communist and Socialist systems inevitably put down their subjects, reducing citizens to pawns under the false banner of social betterment and justice for all. Take, for example, the U.S.S.R. of Joseph Stalin, or Cuba under Fidel Castro. Cleary these cruel, and coincidentally socialist regimes did not represent social justice, and they stood in the way of human rights. In response to your above point of the necessity of regulating the use of government funds, I agree that money cannot simply be doled out, with the recipients free to spend in any way they want; however I have been against the entire “stimulus” bill since its beginnings. Keynesian economic theory, which explains a majority of the bill, has been tested, and has failed on numerous occasions. One must look no further than the Great Depression, and the subsequent spending spree undertaken by President Franklin Roosevelt, which, in my opinion, prolonged the Depression. Furthermore, it left us with expanded governmental programs, such as social security, that would grow into unbridled monsters. It was only after World War II, a conflict which spurred innovation, and turned the inevitable wheels of American progress, that the United States experienced a substantial economic boom that would usher in new prosperity. Finally, the billed is scarred with the rancor of partisan politics, and illustrates a Democratic Congress and Administration in complete contradiction of their own proclaimed principles of a “New kind of politics” and “Civility.” In short, I see the wage contol measure not as Obama’s attempt to promote justice, but rather as his opportunity to “poke” corporate America in the eye. It is the President’s chance to finally punish an enitre segment of society which, I believe, he demonstrates an unusual and frankly unhealthy loathing toward.
Wow, thanks Sam Dettmann for the thought-provoking comment. Your position is clear and reasoned. Let me just raise one or two points. As you probably know, a test taking skill in multiple choice options is to beware of words like “always” and “never”. Did you mean to say government strong-arming the private sector never represents justice? I would like child pornographers to be strong armed by government law enforcement officers whether they are in the private sector or not. I read in a great book by Johannes Mesner called Catholic Social Ethics this quote which I liked: “As much freedom as possible, as much control as necessary.” You’re on solid ground too I think in Catholic social doctrine as the Church as rather consistently condemned collectivism, or socialism. It has not, however, condemned capitalism, though it has criticized some abuses. Your comment raises the question of President Obama’s over reaching his authority. Interesting. Is there a Constitutional argument here? Does this pay cap interfere with interstate commerce? One more book recommendation in case you haven’t seen it yet. Amity Shlaes’ The Forgotten Man: A New History of the Great Depression. Supports the claim you made about federal spending not helping much during the New Deal years. Thanks again Sam for your wonderful comment.
President Obama’s limit on executive compensation is just, but not efficient. The executives of the companies receiving government aid have made poor decisions, and resultantly, they deserve a decline in their wages. Once the companies can repay their debt, these caps should be removed. These limits are inefficient, however, because executives having caps on their wages will not have as much incentive to be as productive. Additionally, those highly educated people who are able to recover an indebted company will choose to take positions at a firm with no cap on salaries.
Thanks Brennan Fentzlaff for your comment. You say the policy is just but not efficient. Might the cap on pay be unjust because it is inefficient? By inefficient, I presume you mean wasteful of resources, in this case human resources. I think you’re correct in predicting the impact of the pay cap; talent will flee the capped companies. So would that make the President’s policy unjust as well as inefficient?
I believe President Obama’s attempt to justly and efficiently handle the problems concerning executive pay is both correct and incorrect. It really depends on the lens one sees this issue under. From a moral standpoint, President Obama is justly handling this situation. The “insider security” that has been occurring with corporate CEOs and other executives is immoral and wrong to say the least. Gaining profits at the expense of others angers far more than it does please people, especially those who are being taken advantage of, like workers and the american public itself. Like Sam says, why should business leaders be rewarded for their carelessness and greed? From a strictly Christian standpoint, what constitutes justice is something I think only God can know. Now to say Obama is playing God is a bit extreme, but it he is definitely playing with fire here when it comes to government regulation and its limits. In terms of the free market system that has built this country from the ground up, ideally the economy should be the “judger” itself. In a free market system only the strong and best companies survive the movements of the market. So, in a way what goes around with the insider deals could and should end up coming back around to hurt the companies and possibly taking them under. A prime example is with the head banks Citi Group and AIG and the Lehman brothers. Government intervention among the workings of free capitalist trade should be kept to a minimum because it hinders the natural effects of the economy. Congress should take no action to set the terms of executive compensation, because it tampers with capitalism and the workings of the U.S. economy. Rather, the government should have addressed a problem that needs to be fixed which I think is more fundamental and at the root of corporate business corruption. This problem is the failure to strictly regulate the governance structure of major public companies. Cozy insider transactions must be prevented. The solution to this problem is another topic, but it would involve not government bailouts and salary caps, but a redesigning of how boards function and establishing their boundaries as heads of major corporations. A stiff policy and watchful eye would eliminate the chance for such occurrences to plague our economy again. Since the Obama administration has already begun its bail out process and government intervention plan, I think the only way to now justly handle the situation is by having salary caps. Personally, I would have placed government intervention elsewhere and not directly affecting the workings of a capitalist society. So, I guess depending on which lens you look through, Obama could be completely right, or maybe completely wrong. It’s a tough challenge to face no matter what one sees or doesn’t see. In the end, I hope for all the best that ensues for our country in terms of solving this crisis we are currently facing.
Thank you Ryan Cisler for your comment. You raise the matter of perspective, and that viewed in one way, the pay cap is right; viewed in another (from the persepctive of free markets and limited government) the pay cap is wrong. I also sense some concern in your comment about the near extreme measure. If what Pope John Paul II called “the free economy” built the country from the ground up as you say, isn’t that the preferred perspective from which to view this policy? A liberal economist (Alan S. Blinder) once wrote a book called Hard Heads and Soft Hearts in which he pointed out that sometimes good economics makes terrible politics. Your comment also said Congress should not intervene in compensation because it is tampering with the free economy. I’d agree. Congress did pass, though, the Sarbanes-Oxley (http://www.sec.gov/about/laws/soa2002.pdf) Act which attempted to address some of the corporate scandals of 2002 by requiring “independent” governing boards, and that seems to have imposed extra regulatory costs without a whole lot of effectiveness in terms of reducing aspects of crony capitalism.
President Obama’s implementation of a “pay cap” on top-level CEO’s and executives is the first of many steps down a path which ultimately ends in the death of capitalism. While it is perhaps sensible to place temporary restrictions on the ability for executives to continue to accept bonuses, while simultaneously receiving federal aid for failing enterprises, it is the prospect of such government interference in commerce that is truly frightening.
On the employment of the plan itself, there is no set consensus on the potential repercussions. Wall Street Journal presents the plan as “still being worked out”, with my favorite phrase being “thinks…to prevent unintended consequences” (1), thus implying that the both the plan, and its prospective outcomes, are not entirely reliable nor predictable. Accordingly, Fox News reports on Robert Gibbs, Obama’s press secretary: “Of Gibbs’s comments about the provisions and their enforcement…‘it seemed…he was waffling a bit.’” (2) As revealed, this plan is an initial ploy to “gain public support for more funding for the ailing financial sector” (2), alluding to future interference by the government into more commercial affairs.
Now for the plan. Obama claims that such measures, as presented in the plan, are taken “to put a stop to what he called a ‘culture of narrow self-interest and short-term gain’ at the expense of taxpayers” (3), which is exactly what his stimulus bill is geared at expanding. America has become a nation that indulges in reaping the benefits of others’ labor; Obama’s plan to expand taxation, and limit the incomes of those who have taken risk to elevate their status is in this sense, neo-American. He claims that not preventing executives from accumulating the fruits of their labor is, in itself, “being rewarded for failure, especially when those rewards are being subsidized by U.S. taxpayers”. (3) You may at this point see where I am going; a bailout plan for business is the equivalent of social welfare; both systems are intended as “government regulations that undermine performance-based pay” (3), and undermine the fundamental assumptions of the capitalist model. The plan is to limit bonus payments on acting executives, “effectively the 25 highes-paid people at an institution.” (1). The problem is that the repercussions of such an implimentation are currently unforseeable. According to the Wall Street Journal, any number of things could result, including an eventual cap for every single employed person as a result of a “weird game of leapfrog”. (1) In terms of business executives and wall street analysts, elimination or reduction of salary bonuses will in effect act in “limiting performance-based compensation” (1), and thus act as a deterrant to success and progress.
If there is nothing to gain from interaction, what is the point in applying yourself to situations?
1: http://online.wsj.com/article/SB123491033872703471.html
2: http://www.foxnews.com/politics/first100days/2009/02/15/white-house-considers-changes-executive-pay-limits-outlined-stimulus/
3: http://www.foxnews.com/politics/first100days/2009/02/03/obama-plans-cap-executive-pay-government-assisted-financial-institutions/
Thank you very much Cody Buth for your thoughtful comment. Incentive systems that reward risk taking and careful planning and punish bad judgments or miscalculations seem to work best. Bad decision-making is perhaps its own punishment and government sanctions just amplify the mistakes. But rewards, or the promise of rewards, does a lot to motivate and encourages decision makers to “get it right.” And I loved the WSJ article you reference. Some pointed out that with the caps on pay in one term, who the top 25 paid executives are could be lowerd and the second tier of earners now become the ones whose pay is capped. It would be simpler to let the companies sort out who should get what.
The restrictions promoted are just for they, as Sam stated, target unsuccesful executives who are overpaid and underperforming. I do not think that a federal cap strategy would work for professional sports franchises, however, because every year is different for professional sports teams. Teams that were good one year could be bad the next; therefore, restricting the pay of a coach who had one bad year is unjust.
The restrictions are overall efficient because they increase the money supply in the economy. My only concern is the executives’ reactions to the pay cuts. A lower salary offers little, if any, incentive to a previously highly-paid executive and thus, his effort may decrease, causing a further decrease in productivity for the company.
Thanks Amit Singh for the comment. It is an error to claim compensation restrictions will increase the money supply, as the money and banking chapters will soon make clear. However, the point that the pay caps will impact executives’ anticipation of rewards and punishments is quite right. If pay caps wouldn’t work in professional sports because every year is different, wouldn’t they also not work in the financial services industry because, as recent events have clearly demonstrated, every year is different too?
Newsweek Magazine recently hailed: “We are All Socialists,” and went on to explain the massive expansion of government brought on by the “stimulus” plan. This headline in some ways, provides one opinion on the efficiency of the Obama economic agenda, namely the limitation of executive pay. First, socialism is, in the simplest sense inefficient. The difference in GDP between the United States and France provides raw data that highlights socialism’s lackluster performance when stood up against Capitalism. Ironically, French President Sarkozy recently proclaimed the death of the Lassiez-Faire system. Furthermore, when Washington injects itself into the Free Market, inefficiency becomes seemingly inevitable, evidenced in slow breakdown of the social security system and ever-increasing taxes to fund promises that are rarely delivered on. The second main question regarding Obama’s pay-limitation regards its “justice.” First, in my opinion, governmental strong-arming of the private sector never represents justice. Secondly, if justice is termed as “A person receiving what is due to him,” then why is Barack Obama suddenly granted the privilege of determining what each American deserves. Clearly, from a Catholic perspective, that is a judgement reserved for God alone, and while I realize that Obama has recently been elevated to near-messianic stature, he is overreaching. In fact, the proposal reminds me of one of Western History’s most frightening phrases: “From each according to his ability, to each according to his need.” Sure, this central tenet of the Communist system sounds just on paper, and in many Americans it evokes a “feel-good” response, but in reality it strays away from the very essence of social justice. Government-controlled economies negate man’s incredible ability to innovate, and to use his talents to better his own situation and thus improve the human condition. Communist and Socialist systems inevitably put down their subjects, reducing citizens to pawns under the false banner of social betterment and justice for all. Take, for example, the U.S.S.R. of Joseph Stalin, or Cuba under Fidel Castro. Cleary these cruel, and coincidentally socialist regimes did not represent social justice, and they stood in the way of human rights. In response to your above point of the necessity of regulating the use of government funds, I agree that money cannot simply be doled out, with the recipients free to spend in any way they want; however I have been against the entire “stimulus” bill since its beginnings. Keynesian economic theory, which explains a majority of the bill, has been tested, and has failed on numerous occasions. One must look no further than the Great Depression, and the subsequent spending spree undertaken by President Franklin Roosevelt, which, in my opinion, prolonged the Depression. Furthermore, it left us with expanded governmental programs, such as social security, that would grow into unbridled monsters. It was only after World War II, a conflict which spurred innovation, and turned the inevitable wheels of American progress, that the United States experienced a substantial economic boom that would usher in new prosperity. Finally, the billed is scarred with the rancor of partisan politics, and illustrates a Democratic Congress and Administration in complete contradiction of their own proclaimed principles of a “New kind of politics” and “Civility.” In short, I see the wage contol measure not as Obama’s attempt to promote justice, but rather as his opportunity to “poke” corporate America in the eye. It is the President’s chance to finally punish an enitre segment of society, which, I believe, he demonstrates an unusual and frankly unhealthy loathing toward.
I think that in terms of firing bad leaders, from a business management standpoint, there is not always someone better standing ready to take their place, so firing these business leaders, however badly they’ve done, could end up causing alot more turmoil. Also, if they own the companies, there is no real authority justified in firing them. However, I think that the cap strategy is a great move for the same reasons Sam does. More capital would be freed to expand output and lower prices to the consumer, sparking more spending.
Thank you Eric Nitschke for your comment. I think that it is an error in economic thinking to claim that pay caps will free up capital and expand output or lower prices. Check with Mr. Cooks, but I know of no studies or deductive arguments that would support this claim. If you know of some, please share with me. Your comment made me think that firing is the extreme solution to bad managers. But adjusting compensation by the company’s compensation committee is the more moderate solution. I think there were bad decisions made in the banking industry, but I don’t see many of the government officials, such as Rep. Barney Frank, Sen. Charles Shumer, or Sen. Harry Reid taking responsibility for helping to construct some poor incentives, such as no-money down mortgages, or no income verification, and interest-only mortgage payments. Government leaders helped set up some pretty perverse incentives, which bankers and lenders took and ran with and shouldn’t have. But now these government officials seem to be deflecting attention from their role in bringing this mess about. Markets punish bad decisions with low or no profit; perhaps the electorate will do the same for bad political decisions.
Barrack Obama’s plan will not promote efficiency and justice. The government should not be allowed to have a say in the wages of employees. Their wages should be based on the value of the company and its success. The government cap on bailed out companies will change the mindset of the worker, and the value of they are towards other companies.
Employees will not feel inclined to work hard if there is a cap on their wages resulting in a slip of their dedication and work ethic. Larger companies that do not have the cap will seize the opportunity to snag these experienced employees at a cheaper price. Employees with less experience will have to fill in for the job loss and will most likely not fill in the shoes of the former employees. This downward spiral will set the company back even further.
A great example would be like a cap for the starters of the brewers. If these guys are all given a $25,000 salary cap, there value will go up towards teams that do not have the cap. The starters won’t want to stay if they can be paid higher wages at a team that does not have limitations. As a result of the starters leaving, their place will be taken by a less qualified, less experienced players who will not be beneficial to the team.
Thanks Nick Vukmir for your thought. You’ve captured the probable impact of the pay cap on incentives, and the Brewers analogy is apt. Two questions: what models have you covered that would enable you to graphically make the prediction you make; what Catholic social doctrine principles are relevant in this policy issue?
During the deteriorating economic times of the present, a majority of people are now finding it increasingly difficult to sustain a job and obtain a livable income, while many executives are earning substantial 7 figure salaries. The key word is earning. Some onlookers feel executives are excessively paid for doing nothing more than overlooking a company and directing lower workers to produce a product; however, the job of an executive is quite stressful, tolling, and involved, with severe consequences as direct results of an executive’s choices. For this reason, they are and deserve to be paid more than the average worker; however, in my opinion there is little difference between earning $8 million and $6 million per year – both are large sums of money that adequately provide means to live. Often in sports, a dedicated team-player will take a pay cut to stay with the team he/she is with because success is worth more than money. Top executives should take note; taking a pay cut in the difficult times would certainly help the “team out”, and a pay cut doesn’t mean reducing their 7 figure salary to 5.
Therefore I think President Obama’s limit on executive pay will promote justice, allowing executives to relatively maintain their high salaries while spreading the wealth to other more needy sources. In regards to efficiency, I think the lack of clarity of the new limits will cause confusion and uncertainty in the job world, however, by applying the cap only to companies who have filed for aid, poor executives will be rooted out, leading to greater efficiency. In the end, the new limits on executive pay will promote justice and efficiency.
Thank you Matt B for your comment. Let me see if I have this right. The cap on pay is just because it still be comparatively well paid but have some of their pay go to spreading some wealth around to lower paid workers. And the cap on pay is efficient because it targets poor executives of firms that applied for aid. Okay. Wells Fargo Bank did not want aid but government “forced” (encouraged with extreme prejudice…) them to accept aid so other banks wouldn’t look as bad. Should Wells Fargo execs have their pay capped too? Should some of their wealth be spread around to other banks? If so, why? If not, why not? One last thought. I remember the sheepshead card games in the cafeteria. If someone lost every hand, should the winner be forced to share his winnings with the losers?
I believe that President Obama’s plan was created with hopes of promoting justice and efficiency. I do not believe, however, that in his first time at least he will be able to carry out many of the productive ideas that he has. The current bailout plan, like previous stimulus pacakges isn’t likely to have a huge effect in turning the economy around. The magnitude of government money being poured into the economy without results seems inefficient to me. Eventually this government spending which will help created justice and efficiency comes back to the people in taxes, and the economy right now will not allow Obama to raise taxes for at least a few years. I believe that Obama’s plan is intended to create justice and efficiency, but in our current recession I do not believe that he has the means to carry out his plan right now.
Thanks Nick Engel for your comment. Let me ask you this. If the recession ended Monday, would the cap on pay be just or efficient then? Looking at the issue from the newly elected President’s perspective, do you think political or economics explains the way he “sold” the policy package? If it was politics, did they meet the subsidiarity test of Catholic social doctrine? If it was economics, why would a policy be inefficient in recession but efficient during upswings?
President Obama’s limit on executive pay should promote justice and efficiency. I read that the salary limit was set at $500,000 annually. This is still a lot of money to be making each year. Since we do not know executives’ current salaries, it is hard to say how much of an effect this will have. If most executives currently earn more than the new limit, this will greatly help to promote efficiency and justice. Like Sam, I think this new lower salary is a good because it will help to eliminate people getting paid high amounts for running poor businesses.
Thank you very much David Christian for your thoughts. You say the new lower salaries would be good because they will get rid of high paid incompentence. Why? What would actually make that happen? $500,000 does sound like a lot of money on the surface, but we must ask compared to what? Bill Gates wouldn’t work for that amount, nor Tiger Woods, nor many highly compensated business leaders. I remember my Dad saying years ago that he thought FDR was for the working man until he heard him say on the radio that no man was worth $5,000 a year (or some Great Depression amount… I forget the exact amount.) Dad said he didn’t like any President putting a ceiling on what a man could earn. My Dad was right.
I also agree that there should be more of an even price distribution, but i do not think that even distributing would be the right way to go. In most cases, exectuives had to work to get to their position, and they deserve some reward for their efforts. Giving them the same amount of pay as all other workers could discourage them to the point where they would quit, and if the executives quit then there could be a lack of experienced leadership within a company, and it could lead to further losses.
Thanks Peter Heinen for this thought. I think you identify what is one problem with capping pay; namely, confusing signals. Would it make sense for the government to require the troubled firms involved to advertise $500 million for any business leader who can turn around the company in one or two years? In one sense, this issue is about who gets to decide.
I think that the limit on executive pay promotes both justic and efficiency, but I would like to see something done about the outrageous pensions former Wall Street executives receive. Many companies spent over $5 billion in 2008 alone paying retired executives. Think of all the deficits these companies could avoid or how many jobs they could save, by simply paying out much smaller pensions to men who most likely do not even need the money.
Thanks Sam Beres for your comment. Are you suggesting that these pension agreements and contracts be terminated? Is that legal? Shouldn’t the role of government be to guarantee the right to enter into voluntary contracts and that these should be enforced by the court system? Of course the parties to the contracts should be free to re-negotiate the terms, but I wouldn’t take the abrogation of contracts lightly, recession or not.
I think that Obama’s limit on executive pay plan can either promote or demote justice and efficiency. On one hand, it promotes justice because it is going to place a cap on the salaries of exectives: salaries that forced their companies to become inefficient. Executives would then be under strict pressure to try their best to restore their company to stable operating levels. The plan creates an inefficient system too though because of the way it targets executives. It could, in effect, allow companies to switch off between two highly paid groups of 25 workers, while leaving the rest of the company’s work force alone.
Well Rob Richlen, you seem to be saying it does and it doesn’t, to which I ask, which is it? Would it make sense for a student to work harder for the promise of a lower grade, ever? If not, is it reasonable to assume a pay cap would motivate business leaders to work harder?
I do not believe that this compensation cap is going to be an effective means to remove corporate greed. Despite the good intentions, it will only be effective for a short time, until loopholes are found that allow things to return to the way the have always been. These top executives deserve to be compensated well, but there can be no argument that this compensation has become excessive, especially in the light of the performance of many of these executives recently. I give Obama credit for this attempt, as it is definitely necessary, and some course of action must be pursued. It is my hope that through the analysis of the effectiveness of this bill, and the ways companies and executives respond to it can be the basis for an improved bill in the future. Also, in response to Jake’s comment, what he is talking about sounds a lot like socialism. However, I believe this country must start more towards the path of socialism, as unregulated capitalism started this mess.
Thanks John Zeidler for your comment. What is corporate greed? And moving towards socialism certainly can not be supported by reference to Catholic social doctrine, which repeatedly has condemned collectivism because it is based on a flawed understanding of human nature. I think what started this mess is government attempts to accomplish noble goals with poorly thought out policies. For example, it is a noble goal to have as many people as possible living in homes that they own in title if not in equity. That’s fancy talk for paying a mortgage while having the right to sleep under the roof that a bank owns. But the federal measures under the Federal Housing Authority, the Community Reinvestment Act, Fannie Mai, and Freddie Mac made it too easy to buy a house. Bankers used to require 20% downpayment, scrutinize the prospective borrower very thoroughly, and generally took steps to make sure the probability of the borrower paying off the loan was as high as possible. But government promoted what’s called moral hazard, big time. If I went to play the slot machines in Las Vegas, after I stopped in at the Church of the Guardian Angel (there is such a Church…) and the government said it would cover all my losses, then YEE HAA, look out, comin’ through. But if I had to cover all my losses, well then, I would limit my fun time to $25 and then I’m back to the Church of the Guardian Angel to say a few more prayers. And so it is I think with the housing trouble that set off this mess. Government guaranteed the losses of too many people and this created YEE HAA moral hazard. So, is the solution to government well-intentioned but inefficient policy more of the same?
I completely agree with my classmates’ comments above. President Obama’s salary cap on executives will promote justice and efficiency because executives will no longer be able to dodge the affects of a recession, for which they are in part to blame, and a salary cap will force them to put more of their money into the economy rather than saving it for themselves which will in affect increase efficiency.
Thank you Karl Sona for the comment here. I would think executives will not be able to escape the effects of a recession with or without the cap on pay. When people slow their buying, most businesses are affected. But I’m curious why you think a cap on pay will promote justice and efficiency. In another response I asked if it made sense for a student to work harder for the promise of a lower grade. How would the cap on pay promote efficiency if it meant executives had to work harder/smarter for the promise of less pay?
To put it bluntly, company executives should be rewarded for the work they do, similar to anyone else in the working world. The bigger the responsibility, the bigger the reward that the executives should receive. While some of these executives in the largest of corporations are earning close to $100 million a year, it is important to remember that these companies are dealing with billions of dollars in assets each year, and likewise could (like previously stated) create billions in revenue. If the executives do an excellent job at his or her respective company, they should be justly rewarded and that could mean earning $100 million plus exorbitant bonuses each year. The problem that I have is with executives of corporations currently being bailed out by the government who continue to earn ridiculous amounts. The bonus limit is a perfect idea and I fully support President Obama and Congress for the decision. The idea of a bonus is to reward someone for a good year. It is unfair to the public, the government, and especially the shareholders for the executives of these indebted companies to take home extra bonuses on top of lavish salaries. Sorry executives, but you might have to sell off one of your private jets. Maybe you might begin to feel the slightest bit of what many Americans are currently experiencing.
Thanks Josh Rose for this comment. I followed your reasoning until the part where it says the bonus limit is a perfect idea. Doesn’t the policy target base salary, not bonuses? Besides, do you think it takes the authority of two of the three branches of the national government to instruct banks not to award lavish bonuses during bad times? The first part of your comment doesn’t seem to fit with the second part. Maybe the key to consistency here is answering the crucial question, how gets to decide?
Another point to add…
As of late, it seems that everyone and their cousin has applied for federal bailout money. This limit could potentially dissuade certain companies from approaching the government for money if they do not truly need it because the ones making those types of decisions are the executives whose bonuses will be cut.
Ah, thanks Josh Rose for this additional comment. This is solid reasoning, and I hadn’t thought of this as a potential good outcome of the cap on pay. You are saying the cap might dissuade companies that otherwise would come hat in hand to the government for a bailout. Hmmm… interesting point. Let me think about that. Just off the top of my head, I’d say it seems strange to follow a bad policy (bailouts) with another bad policy (pay caps to discourage applying for bailouts), but maybe that’s good politics. But is it good economics? The first part of your first comment suggests that it is not.
President Obama’s limit on executive pay, in theory is a plan that could work and force companies towards justice and efficiency. On the other hand, unless Obama and the Treasury Department can cover every loop-hole where businesses can sneak pass and regain their outlandish salary every other year, this plan would be fruitless. In all, if Obama can somehow figure out a way to monitor the salaries and “top 25″ of each business, justice and efficiency can and will be found.
Thanks Graham Charlton for your ideas. I realized that if President Obama could monitor the salaries of the top 25 executives in each business to promote justice and efficiency, he’d need to hire a lot of new inspectors. What would their job description be? Would these people be making a productive contribution and would these positions be creating new wealth? I don’t think they would. So they’d be wasteful and inefficient, right? Think of the extreme situtation of hiring a monitor for every one of the top 25 paid executives in each company. What a terrible waste, no? How much cheaper is trust?
I, for one, think that this is a move which will ultimately help change what I see as the single most negative development in American business culture in the last fifty years. By this, I mean that it seems like the only people actively pursuing leadership positions in companies –the executives- are doing it solely for the ability to make grotesque sums of money in very short amounts of time. Executives seem to think that the most important metric for their success isn’t how well the company does, or whether the company is having a positive impact on the world and other people, but how much money they are able to make. Case in point: John Thain, CEO of Merrill Lynch, who decided to award his executives extravagant bonuses the same year their corporation lost $11.67 billion and required a merger with Bank of America to stay afloat. Thain is one of the “big name” executives on Wall Street, and his actions speak volumes about how business executives are treating their jobs- as candy jars and piggy banks full of executive cash. If Obama’s regulation can seriously change attitudes in bailed out companies, limiting executive pay may be one f the most important pieces of legislation the president has signed in his first 100 days. But in all honesty I’m not holding my breath- in this portion of the capitalistic hierarchy, at least, money is proving to be more important than ethics or ideals.
Thank you Jeb Benkowski for your thoughts. Actually, John Thain was forced to resign last month for those losses at Merrill Lynch. President Obama has certainly made Thain an example of highly compensated Wall Street executives paid handsomely despite the losses suffered elsewhere in the firm. But something I wanted to ask you about is the application of adjectives to other people’s compensation. I’ve seen “excessive”, “unseemly”, “obscene”, and your comment mentioned “grotesque.” But descriptive adjectives beg the question of who gets to decide. My opinion of the number is just that, opinion. I happen to think it is “excessive” that some professional ball players get paid millions to run and catch and hit. But that’s just someone’s opinion. More important is the value these players, or business leaders, add to the franchise. If an executive added $30 million to the net revenue side of the firm’s income statement, is a 1% “tip” too low, or 10% “totally out of line”, or 20% “grotesque?” Or is it simply 1%, or 10%, or 20%?
I have to agree with Sam and Jake that the plan will promote justice. We defined justice as each person receiving what is due to him, and the plan definitely is a step toward giving executives what they actually earn. However, I am not sure that the plan will promote efficiency. I think the limit on executive pay could turn out to be an ineffective price ceiling. These executives are not performing at the pay they currently receive, so I do not know that they will do much better for less pay.
Thanks Ryan Moesel for the comment. You say the pay cap would serve justice by giving executives what they “earn.” If they earn it, does government, or anyone really, have a right to limit it or intervene? And, on ineffective price ceilings…. if the government capped salaries at $500,000 annually, and said no one could earn more than that, and person A earned $200,000, then person A is experiencing an ineffective price ceiling, or one that doesn’t apply in this case. But do you think caps on pay are efficient in that they help get the most out of productive resources for the least amount of money? In my example I said a Harvard tuition may or may not be efficient in this sense. By that I mean if student A goes to Harvard and actually graduates knowing less than when he entered as a freshman, then the tuition paid is not efficient. So, is a cap on pay efficient?
I think that if President Obama does decide to set a cieling on the wages of corporate executives, it will be seriously detrimental to the capitalist foundation of the United States. I do not think that these corporate executives should be paid enormous sums of money that do not compensate for their work. Utilizing money from the stimulus/ bailout as salaries for these executives would be an unfair payment, however, because they are being paid instead for a failing company instead of the money being employed towards improving the company. But if the work solely done by these executives can save a company from going bankrupt, which would save many people their jobs, then I do believe they should receive a bonus due to their hard work and efficiency. I also know for a fact that many people work hard to work up in their companies to become CEO’s and CFO’s and they do make millions of dollars, but if there were not such motivation as the salary presented to them, they would not put in that effort to help the company and the new quality in management would significantly decrease. An intelligent person that has the ability to run a successful company will possibly decide to move into another field of work rather than business if there is a $500,000 salary cap, because more money could be made in other ventures. But if these high wages retract money from other hardworking employees then they are unjust and against Catholic doctrine. So in essence I think a definite price ceiling would be detrimental to capitalism, but the salaries of executives should be proportionate to their work and assistance to the company, and whatever actions they do that seriously help the company should be rewarded a just “commission” of sorts.
Thank you Joe Ripple for your comment. I like how you bring in reference to Catholic doctrine in evaluating compensation that goes to one that should go to another. But how should these issues be decided? At the firm level, the industry level, or should government have a hand in deciding? Your comment makes it clear you think pay ceilings are harmful of the capitalist foundations of the country. Why? If I pointed to a study that indicated the average Wall Street executive was paid 450 times what the highest employee in the firm earned, would that convince you that the federal government should step in? What about the principle of subsidarity? And, shouldn’t the focus be placed on the actions and decisions that lead to prosperity rather than who gets what once prosperity has been created?
I believe that President Obama’s limit on executive pay will promote justice and efficiency. If a company requests federal aid, the company is clearly struggling at various levels in their corporate structure. Obama’s limit on executive pay will allow for appropriate and just pay to be given to those executives who have pushed their business to the breaking point. Overall if a sole or group of executives needs federal aid in the first place, the have no right to be taking pay increases or bonuses.
Thanks Ben Maier for the comment. You are thinking about an effective system of reward and punishment, that serves the function of accomplishing company-wide goals. Why do you think that the system offered by the federal government, the cap on pay, would be better than the company’s own. If the system of the company was a poor one and did not accomplish its function of focusing attention on what needed to get done, wouldn’t the “reward” for that breakdown be the decline of the organization? And if this is so, why would there be a need for a government program to mirror what has already, or soon would happen?