Art Carden  

How to Fund All Your Favorite Causes--and Get Rich in the Process

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Guess Who's Second-Guessing... Nudge, Policy, and the Endowme...

I've read a few of the comments on my Forbes.com article about minimum wages, and there seems to be a lot of agreement that one of the real problems is that executives are overpaid. If that's true, then I have an amazing deal for you!

If the executives are overpaid, then these firms could get the same revenue at a lower cost. If you know that executives are overpaid, then you can correct this in one of two ways. First, you can set up a competing firm with executives who are paid what they are really worth. Since you have lower costs, you will be able to capture the market and make money hand over fist. You can take a handsome cut of the profits for yourself and still have a lot of money left over to fund your favorite progressive causes.

Second, you could recognize that starting your own firm might be really difficult and instead just decide to buy out some of the companies that are overpaying their executives. Since you know that this is going on, it should be a can't-miss deal. Assemble your gang of corporate raiders, acquire controlling interest in (say) McDonald's, fire everyone at the top, replace them with lower-paid but equally-competent executives, and watch the higher profits roll in. Once again, you can take a handsome cut of the profits for yourself and still have a lot of money left over to fund your favorite progressive causes.

Steven Landsburg once wrote that one of the great things about economics is that it forces us to be very clear about our goals. One of the benefits of a relatively simple model is that it forces us to identify and explain the important moving parts. I recognize that the market for executive talent is pretty complicated, but just as Paul Krugman wrote with respect to criticisms of free trade, most of the people claiming that executives are overpaid probably don't have in mind nuanced models of the market for executive talent. The exercise here helps us identify exactly where the competitive model breaks down (if it does at all) and therefore helps us move past assertions like "McDonald's/Walmart/Nike/whoever could afford to pay their workers a living wage if they just paid their executives less."


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COMMENTS (10 to date)
John Hall writes:

"fire everyone at the top, replace them with lower-paid but equally-competent executives, and watch the higher profits roll in."
People might have the same level of experience and education, but being an executive for a number of years gives them very localized knowledge of the businesses. Firing key executives all at once would be a terrible idea for most companies, regardless of the wages offered to the new executives. A more realistic strategy would be to tell everyone at the top level that they were getting an x% less pay and if they're not happy with it, then they can leave.

While I think there are better ways to structure CEO pay, I think you're fundamentally correct that criticism of compensation at the top level of management are often misplaced (particularly when the company underperforms the market). A different issue is compensation for the lower level employees. In your example, if you bought a firm and raised the compensation of everyone but the management level by y%, then you would likely have less profits than if you didn't. However, what if the person who is owning the firm care about more than just profits?

PT writes:

Why wouldn't an inflation model (too much money chasing too few goods) apply to executive salaries?

In other words, wouldn't it be accurate to say that executive salaries have risen not because they add more value, but because the profit previously taken up by employee salaries is now going to executives?

If we were talking about the money supply, you might say that we should stop printing too much cash or raise interest rates to reduce inflation. It seems to me that you could achieve the same affect in the executive compensation space by implementing a minimum wage. This would decrease the amount of money available for executive compensation, and companies would no longer be able to bid it up that high.

I'm sympathetic to your point that executive salaries are high because they add value to the business but I disagree. I think it's just simple supply and demand and the market right now is distorted against workers.

Floccina writes:

Much easier than your 2 options is to invest with Carl Icahn by buying IEP.

The problem with trying to drive down CEO pay is that it is a small percent of profits (I calculate less that 1 percent of profits). Therefore shareholders gain little by cutting CEO compensation.

Tim writes:

What I find amazing in the current McDonald's wage debate is that no one is pointing out the effect that doubling the wages would have for the current holders of those positions.

Raising the pay to $15/hr to man the register at a fast food restaurant will undoubtedly attract a more skilled worker than the current rate does. The unskilled workers who currently hold these positions will likely find themselves pushed out as more attractive replacements are found. These workers don't make $7.50 because that's the rate McDonald's has set, they make it because no one is willing to pay then more.

Raising the wage will, in the end, only hurt them as it will remove an employer from their set of options.

Arthur_500 writes:

First lets look at me the Owner and what I can do with my profits. McDonald's, like so many others, is a public corporation and the corporate owners vote in two ways how those profits should be spent. The first way is at an annual shareholder meeting and the other is at the brokerage firm. If my ROI sucks then I move my money and no longer am an owner.

However, what if the person who is owning the firm care about more than just profits?
There are organizations that will invest your money towards women-owned firms, green firms, etc. They underperform the market and are a niche of rich fools. Rather like purchasing a Prius.
Raising the pay to $15/hr to man the register at a fast food restaurant will undoubtedly attract a more skilled worker than the current rate does.
Not necessarily! McDonald's might realize that as their labor costs raise they need to mechanize more. $15/ hour might become the new unskilled. Look at TSA or your typical Highway Toll Booth Collector - their rate of pay vastly exceeds their skill level.

Jeremy writes:

Even easier. If you believe execs are overpaid then start a exec talent agency and find all those equally qualified people who are willing to be paid less and introduce them to the overpaying companies.

E. Barandiaran writes:

I think Jeremy's idea is better than other proposals. Indeed, it's widely used by managers of talented people to sell their services.

PT has a point but I prefer to present it differently. I think that in the past 30 years there has been a growing amount of savings to be invested but the supply of good, honest managers has not increased and therefore the excess demand has led to sharp increases in their compensation. Also, the demand for some sorts of talents has been increasing rapidly leading to excess demands for the services of some talented people and to increases in their compensation.

The problem of the past 30 years has been the large expansion of the global economy implying large increases in the demand for some goods and services that have not been matched by increases in supply. The interesting problem is why the supplies of these goods and services have been increasing too slowly.

ThomasH writes:

I have an even easier solution. I volunteer to become the CEO of any given company whose CEO is overpaid and pay myself less. This offer would include CEO's who lost jobs when their Financial sector firms had to be bailed out but got nice severance packages; I'll volunteer to receive a smaller package. :)

Lipa E writes:

Pay CEOs less may be a great concept that could be applied to many other jobs. Over-priced seats for NFL, NBA and MLB -- pay athletes less. Over-priced tickets for boring movies -- pay less to performers, directors, writers, etc.

Why does some kid out of college get paid megabucks for playing a game part-time with limited responsibilities, while a CEO has a job which makes him/her legally responsible -- twenty-four hours per day, 365 days of the year -- for products and services which affect millions of consumers, for decisions impacting tens of thousands of employees in hundreds of communities throughout the world, as well as suppliers, contractors and their employees? And how about their responsibilities to the investors -- those pension funds and the others who reduce their current consumption to save for their retirement and their small estates?

Given the responsibilities and risks in the face of constant legal, technical and economic changes,its amazing that any competent individual would even want the job of CEO.

ChrisA writes:

I am generally pretty free market but I do think that executive compensation is probably too high. The reality is that executives are in a powerful negotiating position once they are in power. Anyone purchasing the company has to pay for the disruption that firing them would cause. Essentially they can capture that rent. Further more a lot of companies have poison pill type deals, where trying to take them over is difficult and even if successful triggers golden parachutes. Your idea that you can start a new company ignores the concept of what Buffet calls moats, often regulatory, sometimes scale related, sometimes as a result of previous advertising. You can't compete with Walmart as a start up unless you are prepared to build a thousand stores of the bat. Not easy. Rightfully the rent from moats belongs to the owners, but often the management can capture this.

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