CdM's red post for the day

[Martinus]

The problem is that shareholders don't care about the CEO's salary. Let's say you own 1/10,000,000 of General Electric. If the CEO rises his salary by $10,000,000, that's costing you one buck. How much effort will you spend on reigning him in?

Doesn't take that much time or effort to vote on a proxy issue.  And institutional investors (and sometimes individual investors) can hold significant chunks of stock.

But institutional shareholders are mostly pension funds and the like. They usually only care about the share price.

[Admiral Yi]

But institutional shareholders are mostly pension funds and the like. They usually only care about the share price.

  Why would they not care about earnings, which are the ultimate determinate of share price?

[Zanza]

Doesn't take that much time or effort to vote on a proxy issue.

The rational thing to do is not to care because it doesn't really harm you. And at least when I get mail for the annual stockholder meetings, there is no option to tick that says "Pay the CEO 50% less". I can just generally say yea or nay on the renumeration of all board members.

And institutional investors (and sometimes individual investors) can hold significant chunks of stock.

Yes, but if they just manage their customer's wealth, you'll have agents that supervise other agents etc. so the principal agent problem gets even worse. Do you think that a normal fund manager's incentives are built in a way that he has an interest in cutting CEO pay? I doubt that.

[MadImmortalMan]

I'd give incoming CEOs a pile of common stock at the beginning on loan with the right to draw the dividends and have that be their only compensation.

[Zanza]

  Why would they not care about earnings, which are the ultimate determinate of share price?

Let's say your pension fund owns 1% of a big company. If the CEO salary rises by a million, that's still just ten thousand for your fund. How does that matter when you manage billions of dollars?

[crazy canuck]

But institutional shareholders are mostly pension funds and the like. They usually only care about the share price.

  Why would they not care about earnings, which are the ultimate determinate of share price?

Maybe in Poland there is no such thing as a dividend?

[Admiral Yi]

Let's say your pension fund owns 1% of a big company. If the CEO salary rises by a million, that's still just ten thousand for your fund. How does that matter when you manage billions of dollars?

OK, if no one directly affected cares, why should the rest of us care?

[Zanza]

Humans are wired to compare themselves with other people. Behavioral economics has shown that relative income comparisons do much more for happiness than the absolute height of salary. E.g. if you make 50k and your coworker makes 55k for the same job, you are unhappier than when you earn 48k and he earns 45k, despite being absolutely worse off. So by our nature we are unable not to care when we hear about those grotesque salaries.

[Sheilbh]

I imagine there was a time when progressives would have been ashamed of intellectual dishonesty.

If they're concerned about income distribution, by all mean they should make that case (and there are several good arguments in their favor).  But don't pretend it has anything to do with the financial crisis.

If they think corporations should pay more taxes, by all means make that case, but don't pretend Boeing only paid $13 million in federal taxes in 2010.

Lying to further a cause you believe is righteous is still lying.

Income inequality is a problem as is the fact that real income's stagnated for most people for a long time and there's an emerging super-rich that's global while not everyone else is and that's a problem.  I think it is connected to the financial crisis in that it's indicative of a far wider abdication of responsibility by shareholders.  The Treasury Select Committee had a good exchange with Bob Diamond on this and Barclays (led by Andrew Tyrie, a Tory and former banker) that indicated a wider corporate governance problem of sleeping shareholders.

I'm indifferent as to whether corporations pay more taxes, but I think our tax system should generally distort economic incentives a bit less by being simpler and generally lower.

I don't think that this sort of thing is lying when many on the left would believe it all.

Edit:  I just checked and the Vickers' Commission on Banking over here is investigating the link between the implicit subsidy provided by the state to the big banks and very high levels of renumeration.  Stephen Hester, who's now (the well-paid) CEO of RBS (now nationalised - his job is to get it fit for privatisation), has said he thinks there's a link.  Though he adds that's not all it's affected.

[crazy canuck]

Let's say your pension fund owns 1% of a big company. If the CEO salary rises by a million, that's still just ten thousand for your fund. How does that matter when you manage billions of dollars?

OK, if no one directly affected cares, why should the rest of us care?

Its not that people dont care, it is that the cost of doing something about it is disproportionate to the individual investors stake in that fight.

Things are changing a bit with larger shareholders becoming more activist but the structure of things definitely favours the CEO getting paid out of any proportion to value.

[MadImmortalMan]

Carl Icahn will save the world.   

[Admiral Yi]

I don't think that this sort of thing is lying when many on the left would believe it all.

I suppose stupidity is less of a moral failing than dishonesty.  But close-mindedness is higher than stupidity.

[Sheilbh]

I suppose stupidity is less of a moral failing than dishonesty.  But close-mindedness is higher than stupidity.

How is it close-minded?

[Admiral Yi]

How is it close-minded?

It would be close-minded if they declined to examine the evidence that their proposition is patently false.

[The Minsky Moment]

Doesn't take that much time or effort to vote on a proxy issue.  And institutional investors (and sometimes individual investors) can hold significant chunks of stock.

A lot of shares are held in street name and done get voted.  Management effectively controls the proxy and what questions are on, so while the proxy is a great tool to understand what management is being paid, it isn't really a useful tool to do anything about it.