I’m Philip’s Jeopardy-contestant classmate. Although my IQ scores are high (like Philip, I reached the top of the scale in the standard tests), IQ is relatively unimportant in Jeopardy — it is more relevant that I happen to have a very sticky and well-indexed memory (which is probably even more genetically based than IQ) and a lifetime of very broad reading (which I take full credit for).

The nub of the issue in the stories Philip posts is that the system is manipulated by smart but unprincipled people so that they come out with much more money than they deserve. “Deserve” is of course a loaded word, but the right one here. Technically, what the CEOs are doing is arranging appearances so that their executive activities appear to have very large and positive financial consequences for the shareholders, which they then claim a big cut of. In most cases, the decisions they made either did not really have such positive consequences, or else were decisions any decent manager would have made, but the fog they created was thick enough that this was very hard for average people to see.

Philip is wrong that it is their high IQ which allowed them to pull this off. It’s true you have to be clever to be a successfully crooked CEO, but most people who get in to MIT are smarter than these guys (in the IQ-test sense). Andy Fastow, the guy who actually came up with all the Enron scams, went to high school with my wife Lisa (who is also a classmate and friend of Philip’s). She was unsurprised by the news of his rise and fall, because in HS he was an “operator” — always trying to talk his way into better grades and full of schemes, but definitely not in the top academic rank (though if he’d been willing to work really hard he probably could have been).

Konrad: I’m not sure if you’ve been following the news but the stockholders of public companies don’t control the managers or the Board. The managers control who gets nominated for the Board and presumably would be wise to nominate only their personal friends who will understand their need for a 7th home or larger jet. Only after winning an expensive proxy fight can a group of shareholders put forward their own Board candidate.

The kind of corporate structure that you’re referring to is a PRIVATE corporation. In this case the stockholders actually do get to pick Board members. This is why you very seldom hear of a private company being looted by its management.

Konrad: I guess I do regard it inappropriate to scale linearly, given the fact that even CEOs cannot work for more than 24 hours a day, no matter how many employees they have… But that is a question of political (or social) preferences and taste.

And yes, one of the former mentioned CEOs is out of job now. But only because ‘Mannesmann’, the company of which he was the CEO, has been taken over by ‘vodafone’.

I would never want _our_ politicians to run a business of which they understand even less than of their own: I completely agree with your liberalistic approach to corporate management. It is only somewhat dubios that in some cases where a deal brings a company gains, they keep them, and otherwise tax-payers account for the losses. The question now is, why we western democracies only have federal elections every four or five years [sic!].

PS: The latter ought, of course, not to be answered with respect to pc.

Alexander: Not that I believe that anything a Roman philosopher says is right, but that range doesn’t seem too far from what we have now. In Roman times, there were no businessmen who employed several hundred thousand people, as do modern mega-corporations like GE. If we scale the compensation up linearly then it seems to be appropriate.

More importantly, if the CEOs in the case you mention did not do their duty, why didn’t the shareholders simply vote them out? If there was a problem with the company’s management, I don’t believe the goverment is better-suited to fixing it through regulation than the shareholders are through direct voting. After all, you wouldn’t trust government bureaucrats to design next year’s BMW models, why would you trust them to run any other aspect of your business?

Philip: Either way, those contracts are ultimately controlled by the shareholders (via the board). The shareholders shouldn’t have offered the CEO a contract with such a termination clause.

Now, I’m not saying the shareholders didn’t get screwed. They almost certainly did. The point is that is a self-correcting problem. If enough shareholders get screwed by these contracts they’ll vote with their feet until those companies are forced to reform their compensation.

Self-correction is in the nature of the free market. It is not (generally) in the nature of governments. The USSR didn’t change many dumb policies until it was on the brink of collapse and had no other choice.

Konrad: You prompt us to give numbers.

Giving numbers has been done before: I cannot exactly recall where I read it (Cicero?), but Roman philosophers found it appropriate for the individual and healthy for the society that what we would call top-level managers not earned more than 20 times the income of a simple worker… Without being too well informed on how much an American worker makes a year, I guess it essentially does not exceed some $30k-40k. Just do the rest of the math yourselves

Now, to continue on Philip’s “It is apparently a beautiful world out there for those who are smart enough to navigate the maze of regulations and laws,” here the very next example of an amazingly mazed maze-meandering:

Just three days ago a lawsuit ended in my homecountry, Germany that is, finding a bunch of CEOs of ‘Mannesmann-Vodafone’ and ‘Deutsche Bank’ to be morally blameworthy but legally untouchable in Germany’s most infamous case of CEO’s serving their own interest: They awarded themselves with an extra 68 Million Dollars for doing what basically is their duty in their already well paid jobs. I guess it is futile to state that they did not even do a halfway decent job at fulfilling their duty: Their proceedings costed the company, i.e. the shareholders, a rocking 60 Billion Dollars, of which according to German laws of taxation they can write off 100%. So the rest is to the tax payer.

Any questions?

Concentration of Wealth Gallery
Demonstrating how the concentration of wealth works in America today.

http://concentrationofwealth.blogspot.com
http://concentrationofwealth.blogspot.com/2004/07/shocking-executive-payouts-for-mergers.html

Konrad: The article is not about CEOs being paid to work. It is about mergers triggering termination clauses in contracts, sometimes for executives on both sides of the merger. Thus the article is actually about folks who get paid $billions not to work!

If it bothers you so much, just don’t buy stock in companies where you think the CEO’s pay is too high.

Of course, I get the feeling that your righteous indignation is not really on behalf of the shareholders but something much simpler. Yeah, everyone always thinks that someone else is getting too much money and that it’s not fair.

So what’s the “proper” amount for a CEO to make? Come on, give us a number.

Uhh, errm, aren’t we playing a little fast and loose that IQ is the same as intelligence? I’ve taken two real IQ tests in my life, one was not even within 50 points of the other. Doesn’t that indicate that it’s also highly inaccurate as a measurement, even if it were really measuring intelligence?

I have also heard that less than 1% of Fortune 500’s upper management are graduates from Ivy League Schools. Most upper management came from much less inspiring schools.

Phil:

The article noted that it management is 8% of a merger’s cost – not 8% of a merger’s value.

They can be significantly different. It depends if a company used the “pooling” or “purchase” method and how they re-jiggle their balance sheet.