04 October 2006

Are executive salaries too high? (2a)

The short answer is, No.

The reason I don’t think that executive salaries are too high is just that I’m unable to find a standard to use in making such a determination. There is no objective standard for making the judgment. If you’re grilling up some hamburgers Sunday afternoon and want to guard against food-born illness, you need to cook those burgers to an internal temperature of at least 165 degrees (F, of course) for several seconds. That’s the temperature at which you kill any bacteria in the meat. It’s objective. It’s demonstrable. Less that 165 degrees is objectively too low. If someone tells you that the temperature of your hamburgers is too low, there is a standard to employ—as long as you care about killing E. coli.

No such standard exists for determining if salaries are too high. Here, it’s a matter of taste, personal preference.
According to Professor Palaima, J. P. Morgan thought that the proper ratio of pay between top people and rank and file workers in a corporation should be no more than 20:1 and that exceeding this ratio caused social tensions. On Professor Palaima’s view, if J. P. Morgan says that social tensions will result from exceeding the ratio he has in mind, we are to treat that assertion as true. But is it true? How does J. P. Morgan come to be an authority that we have to follow? If J. P. Morgan had said something different I doubt that Professor Palaima would be relying upon him for an authority. Indeed, if Morgan had said the ratio should be 50:1, but Andrew Carnegie had said 20:1, then Professor Palaima would be relying upon the latter.

That’s the trouble with appeals to authority. Certainly, appeals to authority have their place, but only when the authority is limited to his area of expertise. If three out of four dentists recommend a certain toothpaste that is something to pay attention to. But if those same dentists express an opinion about the cause of social tension, then I think we are permitted to be reluctant to accept that opinion. J. P. Morgan says that a ratio greater than 20:1 causes social tension. Neat. But does it?

J. P. Morgan was an expert on business management and finance. I am unaware of his sociologist’s credentials. His assertion about a cause of social tension, though interesting, is not dispositive of anything when it comes to the causes of social tension. Upon what sort of research was Morgan’s assertion based? I have no idea. Perhaps Palaima does. That, and not simply Morgan’s ratio, is the information we really need.

It would be very difficult, if not impossible, to avoid the fallacy of post hoc ergo propter hoc. Morgan, and anyone who agrees with him, is in the position of saying that social tension, following a ratio of higher than 20:1, must be caused by that higher ratio. I have difficulty understanding how anyone can be persuaded by such faulty reasoning. The social tension which might follow a ratio higher than 20:1 could just as easily be attributed to nothing more than envy on the part of those at the bottom. Someone has more than they, and boy are they ticked. And we are to assume, no doubt, that they are right to be ticked, that ethics is somehow on their side.

So, we are still left without a standard for determining if executive salaries are too high. People who think executive salaries are too high are only expressing a preference. These salaries are too high for them, or simply higher than they would like to see them. But they talk as if they are saying the same thing a physician means to say when he says of someone with a 104 degree fever, “His temperature’s too high.”

Of course, someone could say that even in the absence of an objective standard, we can know that executive salaries are too high when (a) hourly employees cannot pay their bills, while executives live fat and sleek, and (b) executives make those salaries while running their corporations into the ground, thus putting hourly employees out of work.


I suppose we could doubt the reasonability of these salaries on the grounds that it just isn’t possible for these corporations to be getting the appropriate bang for the bucks they shell out. I mean, really, take the Ford Motor Company, presently restructuring itself to cut salaries and houly wage expenditures in order to enhance profitability (which, sadly, it must do in order to remain in business). On 5 September of this year Alan Mulally was named Ford’s new President and CEO. In order to get him to take the job, Ford offered him—hold on to your lug nuts—$18.5 million. And that, in addition to his $2 million annual salary. This $18.5 million represents a hiring bonus of $7.5 million, and—AND!!!—$11 million to offset the compensation Mulally gave up when he left Boeing’s profitable commercial plane division. He was also granted stock options worth about $10.5 million, and $5.26 million in restricted stock grants.

That’s a pretty sweet deal. I’ll grant it. Who needs to have that sort of compensation for running a company, especially when the hourly employees are the ones who do the real work of the corporation? I’m tempted to think that I’d do the job for much less than Mulally’s package. (Ford would probably say that they wouldn’t be interested in the level of executive skill I’d be bringing to the table in exchange for that smaller compensation package.)

But here are some sweeter deals which, when reported about, are generally not accompanied by criticism, or hand-wringing about the plight of the hourly wage worker: Colin Powell’s salary of $6.7 million; Barbara Walters’ $10 million; Katie Couric’s $13.3 million; Jay Leno’s $17 million; Bill Clinton’s $17.1 million; Rosie O’Donnell’s $25 million; Ben Affleck’s $39.2 million; Tiger Woods’ $53 million; Bruce Willis’ $70 million; Steven Spielberg’s $144 million; Oprah Winfrey’s $150 million—per year. Hear any whining about these deals? I don’t. If anything, it’s the other way round, isn’t it? I guess only executives may not make ‘outrageous’ salaries.

(To be continued)

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James Frank Solís
Former soldier (USA). Graduate-level educated. Married 26 years. Texas ex-patriate. Ruling elder in the Presbyterian Church in America.
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