Why Hate CEOs?

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Some dummies on the Left recently made headlines with a new charge against corporate capitalism. According to the Institute for Policy Studies in Washington, DC, CEOs who cut jobs at the firms they head are being rewarded with big compensation packages.

It is galling, the group says, "especially in this period of economic downturn as people are feeling very insecure about their jobs, to see that the guys at the top have cushioned themselves."

Catch the Marxist theory behind the rhetoric? The idea is that capital is benefitting at the expense of labor by scarfing up all the surplus value. Capitalism has been around so long it’s a wonder that workers are able to feed themselves at all!

Actually, the direct statistical (not causal) relationship between job cuts and high CEO pay isn’t surprising, especially in a downturn when maintaining profitability is a challenge. In a bull market, everyone looks like a winner. But when the bear arrives, managers who can keep a company in the black come at a premium. Companies must pay to retain those individuals who have the talent and foresight to navigate choppy market waters.

It is a special problem for companies going through very hard times. No CEO wants to preside over dramatic downsizing or bankruptcy. The temptation is to bail out as a means of preserving your own labor market value. To keep the management around, their pay must increase relative to those companies that are doing better. Thus the paradox: CEOs in downsizing companies tend to be paid more.

But this is only a short-term trend because in the long term, the highest paid CEOs are those who achieve profitability regardless of the particular mix of labor and capital that is used to achieve it. If a CEO cut workers and brought about falling profits as a result, his pay would be cut.

To observe a tendency in a bear market for job-cutting CEOs to be compensated more than others does not demonstrate that the means to high pay is to cut jobs. The only means to higher-than-average compensation in a market economy is to perform better than your fellows over the long run. Yes, mistakes in compensation are made, but only the market economy provides a mechanism for correcting mistakes.

The lefties who bewail this system don’t propose an alternative, but there are only two.

Option one is that CEOs could get lower pay for cutting workers, and pay increases for hiring workers, regardless of what market conditions require. That system would misdirect labor resources, causing a shift of workers out of small and medium-sized industries into larger industries that can pay more, again, regardless of market conditions. Big business would become undercapitalized and top heavy in its workforce.

What should the newly hired workers do? Perhaps technological development that leads to labor savings should be shelved. And to prevent cut-throat techniques from competing with Luddite Inc., new technologies should be banned across the board, so that everyone would have the same incentive to keep people employed in their current jobs, whether or not the jobs have economic merit.

To prevent perverse outcomes — inefficient, labor-heavy companies hiring more workers while efficient, labor-light companies lose workers — you would need a complicated system of cross-firm subsidies. If you follow this logic far enough, you would have to impose all-round central planning to insure that a predetermined, government-approved mix of capital, labor, and profits existed at all firms.

Option two is to fix the salaries of CEOs. This would end market competition for management once and for all. As with bureaucrats in the federal government, there would be fixed pay scales for all people designated as management. There would be rankings, M1 through M16, with pay and benefits based not on market conditions but on seniority and educational qualifications. The longer you hang around, the more you are paid, regardless of performance. Stockholders would be out of the loop altogether.

This may be what the Left has in mind. But anyone with any economic sense should know this would spell disaster. It would mean that no company would ever be downsized or go out of business. This in turn would lead to stagnation of the entire corporate sector and a secular decline in living standards, as companies became ever more bureaucratized and immune from market pressures (think Europe).

The anti-capitalist Left might respond that stockholders don’t seem to have much say over CEO pay now. In fact, that’s not entirely true. It goes without saying the stockholders would rather receive the CEO’s pay in the form of dividends than see it go to a new summer home for the head of the company. Actually, the same could be said about all labor expenses of the company.

Stockholders as owners are effectively purchasing labor services to be employed in the firms they own. As with all purchases, the buyer would rather pay $0 than $10 million. What they would like to pay and what they must pay, given the realities of competition and scarcity, are two different things. Just as everyone would like to have a Mercedes for free, reality dictates that you have to shell out.

Do stockholders want the CEO equivalent of the Mercedes, or do they want a Yugo? The choice is up to them. They buy and sell stocks, or have others do it for them, based on their evaluation of whether the management is doing the right thing. Sometimes stockholders band together to toss out the management and hire a new one — a maneuver that would be far more common if it weren’t restricted by the SEC.

Ask anyone who has ever been the head of a business whether it is easier to spend money (on labor or capital or promotion) or cut expenses. The answer should be clear. Cutting back requires deftness and sound judgment. If something goes wrong, you are held responsible. The burden is especially large these days, when every laid-off employee considers the option of cashing in via a discrimination lawsuit.

In my opinion, therefore, the CEO who cuts should earn more than those who spend. But that’s just my opinion, and it’s not up to me to determine what CEOs are paid. It is up to the forces of the market economy, which no human being on earth has yet learned to outsmart.

The signature attitude of the meddling Left is a cock-sureness that they know better than millions of consumers and stockholders how the economy should be organized. Thus they put out these silly reports, which the government and the media are glad to tout because they seem to make the case for socialism.

However, what this Beltway think-tank really opposes is policy intellectuals being paid less than private-sector capitalists, and thus do they aim their fire at those who are infinitely more valuable to society.

Llewellyn H. Rockwell, Jr. [send him mail], is president of the Ludwig von Mises Institute in Auburn, Alabama.

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