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November 24, 2008 |
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If you’re so smart, goes the classic American put-down, why aren’t you rich? The most smug among our wealthy have a corollary to this: If you’re rich, you must be smart. And if you’re really rich, of course, then you must be even smarter. In this week’s Too Much, we explore this “moral equivalence” of wealth and smarts, through a look at the recent performance of some our really rich — and a glimpse at a new book that may well redefine how we think about who deserves what and why. Also this week: a little historical perspective on the Big Three Detroit auto execs who came calling on Congress last week. |
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The Lee Iacocca myth may never die. In 1978, with automaker Chrysler struggling to survive, Iacocca, then the Chrysler CEO, opted to take just a $1 annual salary. Iacocca has been billing himself as a selfless captain of industry ever since. Today all the Big Three are struggling, and last Wednesday, at a Capitol Hill hearing, Rep. Paul Kanjorski of Pennsylvania asked the CEOs of GM, Ford, and Chrysler if they would be willing to follow Iacocca’s lead. GM's Rick Wagoner and Ford's Alan Mulally sheepishly begged off. They should have just smiled and said sure — because Iacocca didn’t just get a $1 salary in 1978. The fabled CEO also pocketed a pile of stock options. Over the next nine years, after a federal bailout rescued Chrysler, Iacocca parlayed these and subsequent option grants into a personal $43 million payday. No one in Congress, Iacocca’s former pay consultant noted last week, should ever be considering his former client “a good role model.”
Today’s titans of Corporate America, unlike their predecessors a generation ago, get most of their compensation not from salary but from stock options and various other categories of “performance-based” incentives. Why do they need so much incentivizing? All those lush rewards, the argument goes, encourage top execs “to work to the best of their ability.” In reality, Duke behavioral economist Dan Ariely observed last week, “a multimillion-dollar compensation package” can “easily be counterproductive.” Ariely has conducted experiments that test how large rewards impact performance in a variety of settings. His main finding: In situations that demand “even rudimentary” thinking and reasoning skills, oversized rewards lead to “poorer performance.” Ariely’s explanation: Big rewards do generate motivation. But they also generate stress, “and at some point that stress overwhelms the motivating influence.” “Go west, young man,” a New York editor reputedly advised the ambitious back in the 1850s. Today’s New York luxury retailers are going west and then some — all the way to China. Barney’s, the New York clothier that earlier this month offered a “24-carat gold-treated chevron mink coat” for $64,300, is now “talking to architects” about opening an outlet in Beijing. Analysts expect that China, currently the world’s third-largest luxury market, will rank number two by 2015. Barney’s, the New York Post reports, can’t get loans for expanding in New York now that “demand for its high-priced fashions has fallen off a cliff.” If you followed the Presidential election closely, you may think you know a lot about Pennsylvania. Reporters from the national networks, after all, swarmed over this “battleground” state for both the primary and general elections. But you probably don’t know, despite this blanket coverage, what the Pennsylvania Budget and Policy Center revealed last week: The state boasts just about the most rich people-friendly tax system in the nation. Pennsylvania’s top 1 percent — taxpayers making over $400,000 a year — pay just 4.3 cents out of every income dollar in state and local taxes. Poor Pennsylvanians — making under $18,000 — pay state and local taxes at nearly triple that rate, 12.3 cents to the dollar. One consequence of the free ride for Pennsylvania’s rich: 46 states provide more help to local public schools than does Pennsylvania. |
Quote of the Week “Because of public pressure, Congress passed a minimum wage act in 1938. We kept a free market system, but we decided to tinker at the bottom of the wage scale. Now the abuses are at the top of the scale. We should have a maximum wage.”
New Wisdom Silvio Laccetti, When enough is too much: U.S. needs CEO pay ratio law, Worcester Teloegram & Gazette, November 18, 2008. A Stevens Institute of Technology social scientist calls for an end to the “get-it-while-you-can mentality that has spread and ruled for the last 30 years.” Gene Nichol, Ignore the Poor No More, Raleigh News & Observer, November 22, 2008. We need a major economic overhaul, suggests the former president of the College of William & Mary, when the share of income flowing to the top 1 percent has “reached its highest level since 1928.”
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Rough Times for the Really Smart This hasn’t been a great fall for the brilliant, bright shining superstars who sit at the top of America’s economic ladder. Their genius suddenly seems suspect. From Wall Street to Silicon Valley to Hedge Fund America, the smart boys are reeling. Consider, for instance, Hank Paulson, our embattled U.S. treasury secretary. Paulson came to the Treasury Department two years ago from Goldman Sachs, the nation’s most widely acclaimed investment bank. Over his years at Goldman, including eight as CEO, Paulson had amassed a stake in the company worth an estimated “$500 million when he cashed out.” No one on Wall Street begrudged Paulson a penny of that. In a “fiercely competitive market for intellectual talent,” Wall Streeters believed, Paulson’s brilliance had helped establish Goldman “as the pre-eminent firm in its class.” Revenues at Goldman, during Paulson’s wildly successful CEO stint, soared from $8.5 to $46 billion, profits from $2.4 billion to $11.6 billion. This past September, with the U.S. economy starting to sink into crisis, commentators found this track record a welcome source of comfort. The President may be clueless, went the conventional wisdom, but at least the nation had real smarts at the Treasury. “This former investment banker,” a Newsweek cover story pronounced, “may be the right man at the right time.” Now, two months later, Paulson’s reputation for brilliance has run into the same ditch as the U.S. economy. The bailout appears to have been bungled almost from the start. Last week, at a House hearing on Capitol Hill, Congressman Gary Ackerman from New York blasted Paulson for “flying a $700 billion plane by the seat of your pants.” Meanwhile, over in Silicon Valley, Jerry Yang last Monday announced he would be stepping down as the CEO of Yahoo, the now troubled Internet powerhouse. Yang, a Stanford doctoral student in electrical engineering, co-founded Yahoo in 1995, then rode the dot.com bubble to billionaire status. He personified, as much as anyone, the staggering smarts of twenty-somethings at the “wired” cutting-edge. Yang would move aside, as the Yahoo top gun, in 2001, after hand-picking his successor, Terry Semel, from the entertainment industry. Semel would go on to have a phenomenally lucrative half-dozen years. He cleared $230 million in stock option profits in 2004, then raked in $71.7 million worth of compensation in 2006, over twice the take-home of any executive that year in Silicon Valley. Unfortunately, Yahoo didn’t do nearly so well, losing market share right and left. The Yahoo board ended up showing Semel the door midway through 2007. To the rescue came Yang. Yahoo’s founding genius, observers hoped, would nobly save the company. Not quite. Over an 18-month span as CEO, the billionaire has bumbled from one ill-considered move to another. Yang, as one industry analyst explained last week to the New York Times, has spent his time “completely botching” a possible merger with Microsoft — and masterminding “multiple company restructurings that have done little to restore confidence of any of Yahoo’s shareholders, employees, or customers.” Yahoo is currently laying off 10 percent of the company’s 15,000 employees. Citigroup, the world’s largest bank just a blink ago, has just announced plans to lay off over 30 times that many employees, 20 percent of the firm’s workforce. Last week, the bank liquidated a Citi investment fund that had once managed $4.2 billion, the ninth time over recent months the bank “has had to liquidate or bail out a vehicle in its alternative investment division.” The news helped drive Citi shares down to a 16-year low. The bank, worth $180 billion a year ago, now carries just a $20 billion market value. Citi’s catastrophic plummet, the Wall Street Journal intoned last week, illustrates “what happens when the market loses all confidence in a company’s ability to do, well, anything.” That’s bad news for Citi CEO Vikram Pandit. He’s now rumored on the way out, less than a year after taking the bank's top slot. The Citi board had held enormously high hopes for the 51-year-old Pandit. How high? To bring Pandit’s smarts into the Citi fold, the bank’s board shelled out $800 million to buy the hedge fund he had started just the year before. That transaction netted Pandit $165 million. Then in January, a month after naming Pandit CEO, Citi’s board handed him a stock incentive package worth another $30 million. You have to keep smart people engaged, after all. Or so holds the boardroom wisdom of Wall Street and Corporate America. And these all must be smart people, right? How do we know? They’re all rich. |
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Why Have-It-Alls Don't Know It All Gar Alperovitz and Lew Daly, Unjust Deserts: How the Rich Are Taking Our Common Inheritance and Why We Should Take It Back. The New Press, 220 pp. Where does wealth come from? Back in the 19th century, the classical economists thought they knew. Land, labor, and capital, they told us, drive wealth creation. They don’t, not really. We actually owe our wealth, Gar Alperovitz and Lew Daly explain in this deliciously subversive new book, to what we know.
In today’s deeply unequal United States, this simple observation may well rate as our society’s most “inconvenient truth.” We have built our entire social order on the exact reverse of what Alperovitz, a political economist at the University of Maryland, and Daly, a fellow at the Demos think tank, have to tell us. Brilliantly smart people who work hard, we assume, create wealth. These brilliant people, consequently, deserve a major share of the wealth they create. But “all current economic production,” Alperovitz and Daly help us see, rests — overwhelmingly — “on a long, long prior history of socially created science, technology, and other knowledge.” The two authors, in Unjust Deserts, take us for a stroll through “the quiet revolution in our understanding of how wealth is created.” They share the careful scholarly work that is convincingly demonstrating how inherited knowledge shapes our modern world. We certainly know more than our forbears, this “quiet revolution” emphasizes, but “we cannot say that we are ‘smarter’ then they were — more intelligent in any fundamental sense.” “The average high-tech millionaire today has essentially the same basic mental capacities as his predecessors who made tools to improve the clan's living conditions at the very dawn of civilization,” Alperovitz and Daly write. “The real difference is that he (and his colleagues and rivals) inherited much, much more knowledge, and much better-organized knowledge, with which to work.” The two authors lace their narrative with fascinating asides on everything from the “invention” of the telephone to the “discovery” of aluminum. And they put before us statistics that give their story plenty of dramatic oomph. In 1650, they note, fewer than 10 scientific journals existed in the entire Western world. In 1800, about 500 such journals were circulating. In 1950: 50,000. But we don’t just owe the advances this knowledge explosion has made possible to scientists and engineers — or even craftspeople and technicians — working alone. All these contributors to knowledge have depended on a “vast number of other members of society at every stage of development.” “The miner and the farmer, the carpenter and the cleaning lady, the cook and the nurse and the ditchdigger as well,” Alperovitz and Daly point out, “all contribute to establishing the conditions (especially time free from other obligations!) required to create and pass on productive knowledge.” In short, knowledge comes to us as a social construct, a collective achievement. And that, of course, begs the ultimate $64,000 question — or maybe $64 billion, about the wealth that Bill Gates had accumulated. “How long,” Unjust Deserts asks, “can the benefits conferred by many generations of development continue to be siphoned off by elites rather than allowed to flow back to society and to the people at large?” In our fast-emerging Information Age, Alperovitz and Daly conclude, this “question of precisely why so few deserve to benefit so greatly while so many are in pain may well become impossible to evade.” Let’s hope they’re right. |
Stat of the Week Over the last five years, says a new Wall Street Journal study, executives at 120 publicly traded financial and home-building companies right in the middle of the housing and credit bubbles pulled in over $21 billion in direct compensation and personal profits from selling shares of their company stock. Fifteen execs at these firms each cleared over $100 million. |
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Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org. |
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So if Lee Iacocca doesn’t quite work as a role model for auto executive pay, who does? How about Charles Wilson, the General Motors CEO back in the automaker’s mid 20th century heyday. In 1950, Wilson took home $586,100, just under $5 million in today’s dollars. But Wilson 
And we owe what we know, the two quickly add, “not to our own efforts or genius, but to the efforts and knowledge accumulation of those who came before us.”