Executive Compensation, Continued

Two interesting comments from the post on CEO pay:

I think the defense of American salaries can be even more robust than that.

Ezra Klein is right on this point - the Japanese have cultural sensibilities that prevent American-level salaries. But Japanese executives are more than compensated for this in other ways - primarily social status. Japanese corporate hierarchies extend their power deep into the private domain. The wives of Japanese businessmen will define the seniority of their relationship with respect to the relative status of their husbands. A personal request from the boss cannot be easily refused. It is fairly common for a boss to have an honored position and make a toast at a subordinate's wedding. Does this sound like a leftist paradise to you?

Because much of the value of the CEO position is in the social status, it is not transferable - the innumerable favors given and debts owed to others in the company cannot come with you after you change jobs. This makes labor movement difficult. In the American style, the bulk of the compensation comes in money, with only the perfunctory social respect needed for an efficient workplace. This gives the US workplace a much more mercenary outlook. For good or bad.

Ezra Klein, be careful what you wish for.

Another reader writes:

Firstly you have to look at the degree of movement - free agency increases salaries, as demonstrated in movies, sports, and wall street. Outside of Ghosn and Stringer, hiring a CEO from outside is pretty rare in Japan, never mind hiring a foreigner. So Japanese firms generally only have to pay competitively as to the norms of their society, which has very little job mobility. Obviously you're going to pay less in that kind of a situation than in a very open, mobile society.

You then have tax and accounting implications as mentioned.

Another consideration is the prospective view of company equity - the Nikkei hasn't moved for 2 decades, so any sort of equity compensation isn't going to be very attractive, while the population of Japanese firms is fairly static. The US stock market is much more volatile, and individual stocks can make great long term gains, which increases the attractiveness of equity or equity linked rewards. The US also has many more large companies failing - Bear, Enron, CIT... - so an expenses, pension, and status deal is less desirable (seeing Jack Welch and Dick Grasso's retirement deals explode rather messily would also push US execs towards cash today rather than benefits or future promises).

My readers naturally view this as an example of Ezra being reflexively against the free market, but worries about executive pay are hardly limited ot hte left.  More than a few people think that CEO pay isn't a very good example of the free market in operation.  I myself believed for a long time that board capture--wherein CEO's appoint their own pay committees--mean that CEOs are not held accountable for performance, and grotesquely overpaid.

I was disabused of this view by Ed Carr, a brilliant business editor at the Economist who wrote a survey on the topic in 2007.  Most convincing piece of evidence:  public company CEOs are not paid more than their private counterparts.   I just can't square this with a "board capture" account where CEOs don't matter much, but manage to manipulate the boards into paying them a lot of money anyway.  If they aren't worth that much on the open market, I'm pretty sure they couldn't sweet talk the mercenary sharks who run private equity shops into overpaying them.  Everyone I know in private equity thinks that CEOs matter a lot--largely because they've watched so many run their companies into the ground.

On a side note, it's worth pointing out that even if we did manage to restrict executive pay, this wouldn't do much for inequality, since there's no reason to believe that the extra money would accrue to workers.  For one thing, executive pay, averaged over a large number of workers, is fairly trivial--Rick Wagoner's millions would have given each of GM's line workers about $60 apiece, by my (very rough) back of the envelope calculations.  Beyond that, the extra profits gained by reining in pay are at least as likely to go to the shareholders as the workers.