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Affordable Care Act

Wall Street

Containing CEO Pay: Shareholders are Allies

Note: This post first appeared on my Patreon page.

Last week Roger Lowenstein had a piece in the Post about GE's hiring of a new CEO after the prior one served less than a year. According to Lowenstein, the new CEO's contract will give him incentives worth $300 million over the next four years if he does well by the shareholders. He will walk away with $75 million if he does poorly. This follows the hiring of an inept CEO who was dumped in less than a year and long-term CEO Jeffrey Immelt, who pocketed hundreds of millions of dollars during his tenure while giving shareholders returns averaging 1.0 percent annually, according to Lowenstein.

This raises the obvious question: What is GE's board is doing? I haven't looked at their forms, but I am quite certain these people get paid well over $100k a year and quite possibly over $200k for a job that requires perhaps 200 to 300 hours a year of work. That comes to an hourly pay rate in the $300 to $1,000 range. The primary responsibility of directors is picking top management and making sure that they don't rip off the shareholders.

How could you possibly fail worse in this job than GE's board? Yet, my guess is that there has been very little turnover in the board.

As a practical matter, it is difficult for shareholders, even large shareholders, to organize to remove board members. More than 99.0 percent of the incumbents who are nominated by the board for re-election win.

This is the classic problem of collective action. It is almost always much easier to simply exit as a shareholder and sell your stock than to organize and try to change the way the company operates. For this reason, CEOs are able to make out like bandits, getting pay in the tens of millions of dollars, even when they do poorly by shareholders.

It is common for progressives to condemn the outrageous pay of CEOs. However, they rarely move beyond condemnation to point out that the CEOs are ripping off their companies. This means first and foremost the shareholders. 

CEPR / October 22, 2018

Article Artículo

Yglesias Strikes Out in Attacking John Judis "Nationalism"

I don't especially want to defend nationalism, given the folks who wave this flag these days, but Matt Yglesias gets a few things wrong in criticizing John Judis' NYT piece earlier this week.

To start with he quotes Judis:

"As long as corporations are free to roam the globe in search of lower wages and taxes, and as long as the United States opens its borders to millions of unskilled immigrants, liberals will not able to create bountiful, equitable societies, where people are free from basic anxieties about obtaining health care, education and housing.”

...and then tells us "this is flatly untrue."

Okay, let's take a step back. Is Yglesias really arguing that if we had open borders, so that literally hundreds of millions of people from the poorest countries on the planet could come to the US, that it would not mean a decline in living standards for the workers already here? That seems more than a bit far-fetched.

Of course, we did not have open borders, so the real question is did the levels of immigration we had prevent us from having a generous welfare state? Here Yglesias would be on solid ground in saying no. Most research indicates that immigration of the level we have seen has not hurt the wages of native-born workers, although it does depress the wages of earlier immigrants, making the catch-up process longer than it otherwise would be.

CEPR / October 17, 2018

Article Artículo

Corporate Debt Scares

As we mark the 10th anniversary of the peak of the financial crisis, news outlets continue to feature pieces how another one, possibly worse, is just around the corner. This mostly shows that the folks who control these outlets learned absolutely nothing from the last crisis. As I have pointed out endlessly, the story was the collapse of the housing bubble that had been driving the economy. The financial crisis was an entertaining sideshow.

There is one story in the coming crisis picture that features prominently — the corporate debt burden, as discussed here. (This Bloomberg piece is actually well-reasoned.) The basic story is a simple one: corporate debt has risen rapidly in the recovery. This is true both in absolute terms, but even in relation to corporate profits.

The question is whether this is anything that should worry us. My answer is "no."

The key point is that we should be looking at debt service burdens, not debt, relative to after-tax corporate profits. This ratio was was 23.1 percent in 2017, before Congress approved a big corporate tax cut. By comparison, the ratio stood at more than 25 percent in the boom years of the late 1990s, not a time when people generally expressed much concern over corporate debt levels.

It is true that the burden can rise if interest rates continue to go up, but this would be a very gradual process. The vast majority of corporate debt is long-term. In fact, many companies took on large amounts of debt precisely because it was so cheap, in some cases issuing billions of dollars worth of 30-year or even 50-year bonds. These companies will not be affected by a rise in interest rates any time soon.

But clearly, there are some companies that did get in over their heads with debt. There are two points to be made here.

CEPR / October 12, 2018