Gruntle Enterprise

On NPR this morning:

http://www.npr.org/templates/story/story.php?storyId=100174138

"This corporate culture pays out too much for success. ... it's routine now, when you hire a CEO, you pay him ten or twenty million before he's hung up his hat and done a day's work. When Andrew Carnegie had a bad year in his steel mills, he suffered for it. That's the outrageous thing. These managers don't ride up and down with the fortunes of the people who invested the money, which is the whole idea of capitalism."

And a nice summary post at DailyKos:

Republicans have protested any limits on CEO salaries and despite an ongoing string of outrages, they still defend the astronomical figures handed out as being what it takes to get "the best." But speaking this morning on NPR, financial writer Roger Lowenstein notes what others have suggested in the past. High executive salaries aren't a problem in our economy, they're the problem.

What has caused the normal rise and fall of the business cycle to become a roller coaster of financial excess and terrifying plunges? Why were so many businesses of all sorts willing to make moves that are so obviously risky, even foolish? Why do they so often defy the "wisdom of the markets" that is supposed to prevent problems exactly like those we're facing today?

Because the incentives to run your business badly and crash the whole economy are great.

Lowenstein: We've had how many bubbles now in the last twenty years? There were junk bonds. There was a real estate crash in 1990. There were the dot coms and Enron. And now the subprimes. Why do we keep having Wall Street taking outsized risks?

One reason, a reason I think defines the culture, is that executives are paid to take these risks. If you know you're going to make ten or twenty or thirty million every year that goes okay, even if in the fourth year the firm collapses, you're just so rich by that point... you'd almost be a fool not to take these outsized risks.

Adam Smith, writing in the same year as the United States was born, said that the desires of business owners -- "the private interests and passions of men" -- would find themselves being curbed exactly by the forces that it takes to operate a business over time. They would need to offer a sound product at decent prices in order to keep their reputation in the marketplace, and in following their own interests they would by degree be end up taking the direction "which is most agreeable to the interest of the whole society."

But when executive pay becomes so great that only a few years of it are enough to make someone extremely wealthy for life, the incentive to do anything other than ride the gravy train to the next station is erased. And while it's easy to be offended by the money these guys take down when their companies are crashing, Lowenstein reminds us that the incentives paid out in good years are equally destructive.

While the right wants to scream "socialist!" at President Obama for seeking to limit executive pay, it's the out of control executive salaries that are a real break with how companies have run from Smith's time on. Paying executives millions in bad times or in good is not capitalism, it's corporate monarchy. And ending it by making executives suffer with their stockholders -- and employees -- should be a priority for everyone who truly believes in capitalism.