The business media routinely feature stories about employers' difficulty in getting qualified workers. These pieces often leave economists scratching their heads, since the usual way to get better workers is to offer higher pay. And, the workers are almost invariably out there, most likely working for a competitor.

This means that if there were really shortages of workers with specific skills then we should see pay for workers with these skills rising rapidly. Since there is no major segment of the labor market where we see rapidly rising real wages, it is difficult to take the story of a skills shortage seriously.

This naturally brings us to ask questions about United Airlines and CEO pay because it is always interesting to ask what justifies the high pay at the top. Ostensibly, CEOs have compensation packages that run into the tens of millions a year because that is what you have to pay to attract and keep these extraordinarily talented individuals.

United's CEO, Oscar Munoz, is targeted to receive pay of $14 million this year, with a potential $500,000 bonus depending on customer satisfaction surveys. So we should assume that United has to pay this sort of money (roughly the pay of 1000 minimum wage workers) in order to attract a person with Mr. Munoz's skills.

While it would take more work than I am going to do just now to evaluate Mr. Munoz's overall performance for the company's shareholders (I'm ignoring the issue of the sort of corporate citizen United might be to its workers, customers, and the environment), his performance surrounding the forcible removal of Dr. David Dao from a United plane earlier this week hardly seems worth $14 million a year.

 

First, it is important to be clear about the immediate cause of the incident. United decided at the last minute that it wanted to send four employees on this plane to serve as crew members on a flight out of Louisville. This seems like a case of seriously bad planning, since the flight was already completely booked and the company only made the decision after the passengers had boarded the plane. As a matter of common sense, it is better to keep people from boarding a flight rather than trying to pull them off after they have already been seated.

Then it sought volunteers with an offer of a travel voucher. It is important to note that the offers were of vouchers, which are of considerably less value to passengers than an offer of cash of the same amount. The vouchers can of course only be used on travel on United and often have serious restrictions attached.

In any case, we don't really have to debate whether the company's offer was adequate, we have a market test. On a booked flight, not a single passenger considered the company's offer adequate. Instead of raising its offer until four people accepted, United decided to force four people to give up their seats. The other three consented to get off the plane, with Dr. Dao insisting on being able to stay on the flight based on his need to see patients the next day. This led to the now famous confrontation with the airport police dragging Dr. Dao off the flight.

Incredibly, the immediate response of the airline was to indicate the support of its staff and to insist that they had been following company policy. While this is likely true (i.e. they were following policy), we might have thought that a $14 million man would recognize that this was an extremely bad move from a public relations standpoint.

We might have thought that a $14 million man would recognize that this incident was a public relations disaster for a company that depends to a very large extent on its public image for its profitability. In fact, it would have been reasonable to expect that a $14 million dollar man would have immediately done what the airline eventually did, offer an apology to Dr. Dao and the other passengers and the flight's crew and the airport police sent on board the plane, and announce that it was re-evaluating the policy that led to the incident. This is what many people who are paid far less would have done in the same circumstances.

Okay, so now let's ask why United is paying $14 million a year to a person who does not seem to have any great skills in running an airline. Suppose United was paying one half as much for its CEO, or even one-tenth as much. Is it really that hard to find competent people who are willing to work for $1.4 million a year?

Part of the answer likely lies in the fact that the board of directors, which most immediately determined CEO pay, has very little incentive to ask about the possibility of saving shareholders money by paying their CEO less. According to Glassdoor, United's directors get average compensation of almost $180,000 a year. This is very good pay for extremely part-time work. Directors might attend 8-12 meetings a year, so even assuming a full day of meeting time and preparation for each one, we're only talking about two weeks a year of work.

The main threat to a director's tenure is from within the board. More than 99 percent of directors who are nominated for reappointment are approved by shareholders. Since keeping this lucrative gig depends first and foremost on staying on good terms with the other directors and top management, what incentive would a director have to ask a question like, "could we get an equally good CEO for less money?" 

It is my guess (I'm not often invited to meetings of boards of directors) that this question is almost never asked. The other directors would likely consider it inappropriate and even rude. In this context, where there is little downward pressure on pay, and the pot of money available for salaries is enormous, it is not surprising that not especially talented individuals could get paychecks in the tens of millions.

It is an incredibly corrupt process, and it also has nothing to do with the inherent features of a capitalist economy. We could have rules of corporate governance that better position shareholders to control the pay of the people who are supposed to work for them. But as it is, we can expect that any number of people will continue to tell us about how the natural development of technology has led to great rewards for talented people like Mr. Munoz, and $7.25 an hour pay for millions of other workers.

 

Thanks to Robert Salzberg for clarifying one of the issues in this post.