Posting in Energy
Purdue University researchers gave economics a scientific make over. Using mathematical equations, the researchers could show that free markets for labor can indeed pay executives more fairly.
"Fair" pay is relative, of course. It depends on who you ask.
As CEO of Berkshire Hathaway, Buffett earned $200,000 in 2008. Now, assuming his lowest paid employee made $25,000, his pay ratio was 8-to-1.
Generally, a CEO of a company should be making 8 to 16 times the amount of the lowest employee.
That would be fair.
What isn't fair is how some CEOs make 344 times the salary of their lowest employee. Perviously, Purdue researchers found that 35 top CEOs were getting paid 129 times the amount of what would be considered fair. However in the 1970s, the pay was more like 40-to-1.
In a new study, the same Purdue researchers applied the laws of nature to economic theory in a quest to find a fair way of compensating executives.
Meet Venkat Venkatasubramanian, a Purdue professor of chemical engineering. He treats the movement of people like molecules and he does a darn good job of mixing physics with economics.
Okay, so what the heck is econophysics?
It uses statistical teledynamics to suggest a new way of paying people for their labor. And all of this boils down to entropy.
In science, entropy measures disorder and uncertainty. But when applied to economics, it can also measure fairness.
When the marketplace isn't corrupt, people can operate like gases in a chemical equation. Under the most ideal situations, free markets can support fair compensation plans.
The equation known as the Boltzmann distribution for ideal gases can measure how molecules flow at different energy levels and how the molecules achieve equilibrium. But when the same principles are applied to economic theory, they can predict fairness.
"We are generalizing concepts from statistical thermodynamics - the branch of physics that describes the behavior of gases, liquids and solids under heat - to analyze how free markets should perform ideally," Venkatasubramanian said in a statement.
The study found that fairness is critical to a normal functioning free market economy — challenging conventional wisdom, which just assumed the free market only wanted efficiency and disregarded the importance of fairness.
What's more, the inflated pay for executives is an American phenomenon. In Japan, the executives get paid 11-to-1 and in Britain, they get paid 22-to-1.
Will the CEO valuation bubble continue to increase or will it go bust? Only time will tell.
But at least now, Venkatasubramanian has a formula that can make the executive pay scale a little more fair. "Well, it turns out that the same concepts and mathematics used to solve problems in statistical thermodynamics and information theory also can be applied to economic issues, such as the determination of fair CEO salaries."
The more CEOs get paid, the more mean they get!
This is a lose-lose situation for most of us. But who said life is fair, anyway?
Photo: Purdue News Service file photo/Andrew Hancock
The full research paper is here.
Jul 15, 2010
Why is a multiple even the consideration? If a CEO's decisions are responsible for creating wealth (for shareholders) why shouldn't he get part of the pie? But, what if he is just lucky? Or what if he destroys value? In the lucky case, then outrageous compensation packages are silly decisions of the board of directors not understanding their own business. IN the destroys value case, the CEO might just be unable to manage his charges to success. Take, for example, the case of Mark Hoffman, the fired CEO of Corporate Express. After presiding over the destruction of hundreds of millions in shareholder value, he received a golden parachute. But, the odd part, is that Corporate Express investors had already overlooked his frailties -- before joining, he presided over the walk up to bankruptcy of APS in Houston. Boards need to do a "bad CEO" check just as they do credit checks on new employees -- it is inexplicable how they let poor quality people repeat their destruction time after time.
consider this: "If the minimum wage had kept pace with CEO salaries since 1960, reports Executive Excess, the 1997 minimum wage would have been nearly $41 an hour."
I have not heard anyone address this issue: That is, the stockholders and bondholders and holders of commercial paper of the corporation in question are having their investment shortchanged by the exceedingly high, rapacious salaries of CEO's. They are not getting their JUST return on their investment. Besides, what can anyone do to possibly EARN 300 Million dollars. How could they possibly generate enough profit for the company to justify such a princely sum?
Well, I tried but this site also provides some weird translation for quote marks, apostrophies, and I guess tab marks as seen in my last post. Hopefully, anyone interested in reading it can see around what appears as misplaced question marks and still understand the content.
cutedeedle (or should that be cuteGreedle (though Greed is never cute)?: > It's called capitalism and free enterprise. I disagree - it's called greed. And it's cooked up in backroom negotiations with largely hand-picked, stacked Boards of Directors and Compensation Committees comprised of so few interlocking, virtually incestuous Board members committing quid pro quo on such a breathtaking scale, it would make normal people want to puke. You attempt to trivialize the issue, see what you want to see, and then make it a capitalism vs. communism/socialism argument so most people might agree with you. But if this was the case, then how do you square that with these statements?: "What?s more, the inflated pay for executives is an American phenomenon. In Japan, the executives get paid 11-to-1 and in Britain, they get paid 22-to-1." And as the study itself indicates further: "... average CEO pay ratios were about 11-to-1 in Japan, 15-to-1 in France, 20-to-1 in Canada, and 22-to-1 in Britain in 2006." Are these all "wretched socialist, communist and fascist countries", too? Why are things so out of whack in the U.S. (at 344-to-1), and not in these other capitalist countries? I think the situation is even more grave than this article suggests, mainly because it mixes almost interchangeably statements like: "Purdue researchers found that 35 top CEOs were getting paid 129 times the amount of what would be considered fair. However in the 1970s, the pay was more like 40-to-1." Those are apples and oranges because 129 x "what would be considered fair" (is defined as a CEO "should be making 8 to 16 times the amount of the lowest employee") is: 8 x 129 = 1,032-to-1 or 16 x 129 = 2,034-to-1 vs. the "40-to-1" ratio evident in the 1970's. Worse still, is that those numbers from the 1970's were the ratio to the "average" worker, not the "lowest employee". And less we think that this is just an aberration for the top 35 highest-paid CEO's, the accompanying (linked) article at: http://www.purdue.edu/uns/x/2009b/091103VenkatasubramanianCEO.html makes it clear that: "CEOs in the Standard & Poor's 500 averaged about 50 times their fair pay" (again, multiply that by 8 - 16 x that of the lowest paid employee, and you get CEO Pay with multiples of 400 - 800 times what the lowest paid employee earns. It would be one thing if this was just academic disagreement ... but the truth is, such lopsided disparities are symptomatic of very sick societies, and possibly precursors to revolution (early signs of which we are already witnessing in Europe - imagine how that might play out here with all of the guns in this country ...). Consider the following: > ?As of 2007, the top 1% of households (the upper class) owned 34.6% of all privately held wealth. In terms of financial wealth (total net worth minus the value of one's home), the top 1% of households had an even greater share: 42.7%.? (from ?Wealth, Income, and Power?, by G. William Domhoff, Sociology Dept., University of California at Santa Cruz (part of the ?Power in America? series) http://sociology.ucsc.edu/whorulesamerica/power/wealth.html ) > ?The BBC reported startling economic inequality figures in a 2008 documentary: the top 200 wealthiest people in the world control more wealth than the bottom 4 billion. But what is more striking to many is a close look at the economic inequality in the homeland of the "American Dream." The United States is one of the most economically stratified societies in the western world. As THE WALL STREET JOURNAL reported, a 2008 study found that the top .01% ? or 14,000 American families ? hold 22.2% of wealth. The bottom 90%, or over 133 million families, control just 4% of the nation's wealth.? (from Bill Moyer?s Journal of April 2, 2010 http://www.pbs.org/moyers/journal/04022010/profile4.html ) > ?Between 1983 and 2007, the top 1 percent received 35 percent of the total growth in net worth, 43 percent of the total growth in non-home wealth, and 44 percent of the total increase in income. The figures for the top 20 percent are 89 percent, 94 percent, and 87 percent, respectively.? Since 2007 the top 1 percent of the nation?s households have seen their overall share of the nation?s wealth increase from 34.6 to 37.1 percent. http://www.levyinstitute.org/publications/?docid=1235 (?The Levy Economics Institute of Bard College is a nonprofit, nonpartisan, public policy research organization. The Levy Institute is independent of any political or other affiliation, and encourages diversity of opinion in the examination of economic policy issues while striving to transform ideological arguments into informed debate.?) Consider, too, some of the consequences of such extreme inequalities: > From a transcript of Bill Moyer?s interview of Richard Wilkinson and Kate Pickett, authors of THE SPIRIT LEVEL: WHY GREATER EQUALITY MAKES SOCIETIES STRONGER as reported in his April 2, 2010 JOURNAL: http://www.pbs.org/moyers/journal/04022010/transcript_inequality.html): RICHARD WILKINSON: ?Well, what we've discovered is health is just one of many issues which are worse in more unequal societies, including violence or teenage births and all sorts of other problems. These are not just a little bit worse in more unequal societies, but are much worse.? Also among their findings: ?The most unequal countries have more homicide, more obesity, more mental illness, more teen pregnancy, more high-school dropouts, and more people in prison.? ?The more equal the society, the longer its people live.? ?The United States has the greatest inequality of income of any developed country except Singapore.? From United for a Fair Economy who compares the excessive pay of top CEOs? to average workers and exposes the estimated $20 billion tax subsidies we allow to fund it (http://www.faireconomy.org/files/executive_excess_2008.pdf): ?Our ongoing ? and deepening ? U.S. economic downturn is forcing governments at every level to make painful choices on which problems to address and which to ignore. In this political climate, taxpayer subsidies for executive excess take on an even greater significance. All subsidies involve trade-offs. Each time we allow executives and their employers to avoid paying taxes they would otherwise owe, we reduce government?s capacity to deliver needed services that taxpayers and their families would otherwise receive. Tax subsidies for excessive executive pay represent a particularly indefensible waste of government resources. At the moment, no serious observer of the American scene is arguing that top business executives, as a group, earn too little in compensation. So why then should government, in any manner, be encouraging corporations and investment firms to pay their executives even more? Those tax dollars that currently go to encouraging and rewarding corporate America?s most advantaged could, if redirected, go a long way toward addressing real problems.? > And if this is a sign of things to come, can anarchy be far behind?: ?Cops are losing their jobs because of lost tax revenue. We have lost tax revenue because of lost spendable income. We have lost spendable income because of extremely high unemployment. We have extremely high unemployment because we're import and energy dependent. We're import and energy dependent because of unfair and one-sided foreign trade agreements and policies. We have unfair and one-sided foreign trade agreements and policies because The Washington Brotherhood has sold this country out for over a half century now. The Washington Brotherhood has sold this country out because of greed, egos, the thirst for wealth, the hunger for power, and the ambitions to climb the political ladder.? (from a 9:37 a.m. comment by ?Facebook User? to CNN?s 5/26/2010 ?City budget cuts mean fewer cops on the beat? article at: http://money.cnn.com/2010/05/26/news/economy/cops_state_budget_cuts/index.htm) It all makes me have to ask: How much is enough?
Waaah, life isn't FAIR, he earns much more than I do, I can't afford to purchase a house and he can, blah blah blah. It's called capitalism and free enterprise. You don't like what execs and CEOs earn? I think there's a fine place waiting for you in Venezuela, Cuba or any of the other wretched socialist, communist and fascist countries. In the meantime, this still is not a fascist regime although they're sure trying their best.
When everyone in an organization is paid the same, people will fill positions because they want to and/or they are proficient at them?not for the pay rate. Hierarchy matched with unequal pay invites abuse.