26 September 2006

Are executive compensation packages too high? (1)

Reader Tom Palaima, a professor of Classics at The University of Texas at Austin, graciously takes me to task on the following points in my first post on the minimum wage issue:

(1) Note that executive salaries have increased without any help from Congress.


(2) To listen to Democrats and quite a few Republicans you'd think that executives set their own salaries, or, alternatively, that executive salaries are the result of someone's greed.

Professor Palaima writes:

Indeed, they do set their own salaries, at least as a group or class. The salaries are set by corporate boards made up of executives and other professionals.

This same applies to university head football and basketball coaches salaries. There all the revenues gathered by their independent operation are left in their control. So OSU raises its coach's salary and UT Austin does likewise. It is a closed system which no outsider can penetrate and which exploits cheap labor, aka 'scholarship athlete-students' who at UT Austin generate, through their play and their work at full-time jobs of playing sports (by the AD's own admission), now ca. $95 million per year, and the coaches make high salaries while players......

I.e., it operates on the same model as CEO's and their corporations and Congress has done many things to promote 'free trade', outsourcing and so on to generate the revenues that Boards of Directors channel obscenely not to Chinese workers making 33¢ per hour but to CEO's.

On a superficial reading he seems to have me. Executives set their own salaries because their salaries are set by boards composed of other executives and professionals. This would be a devastating response but for two errors in logic on his part.

1. When I asserted, tacitly, that executives don’t set their own salaries, I was speaking of executives distributively, that is singly. In others words, I was saying that for one executive, John Doe, John Doe does not determine the salary of John Doe. Professor Palaima seems to refute my assertion, but he does so by speaking of executives collectively. He’s free to do so, of course. But if he thinks that for purposes of discussing who sets salaries we should speak of executives collectively rather than distributively he should present a separate argument justifying that move. At this point, I believe it an illegitimate move and have only his implicit say-so that we should conceive of the matter collectively rather than distributively: executives may run corporations collectively, but they do not determine their salaries so. Some executive salaries are determined by other, senior executives, whose salaries are in turn determined by boards of directors.

2. Professor Palaima’s argument that executives determine their own salaries “as a group or class” because those “salaries are set by corporate boards made up of executives and other professionals” is logically fallacious. This is as precious an example of composition as a logic teacher could ask for. He attributes to a whole (the class of all executives), the activity of a few parts (boards composed of some executives and other professionals). A class is the set of all objects which have some specified characteristic(s) in common, so he seems to be correct, doesn’t he? Those who set salaries and those who have their salaries set are executives; therefore, executives as a class set their own salaries. But for discussions such as this, surely the specified characteristic ought to be one which is relevant to the issue of salary determination. And ‘executive’ isn’t enough. I was once an executive, a very, very junior executive, but an executive nonetheless. My salary was determined by another executive, the executive vice-president of the corporation for which I worked. That executive vice-president, in turn, determined my salary from an authorized range which was determined by his superiors. The simple fact of the matter is that executives themselves fall into various sub-classes. Some executives are subordinate to other executives, who are subordinate to still other executives, who are subordinate to yet other executives, subordinate to a board composed, yes, of yet another sub-class of executives. As an executive, I most certainly did not feel as if I had a hand in determining my salary by virtue of the fact that, like the man who determined my salary, I was an executive. I certainly was not a member of the group or class which determined my salary.

Only if we allow Professor Palaima to (1) speak of executives collectively, rather than distributively, and (2) rely upon a logical fallacy, can we regard as true his assertion that executives determine their own salaries as a group or class. They don’t. It is a superficial, not to mention specious argument to assert that, because the salaries of executives are determined by boards composed of other executives and professionals, executives set their own salaries. Executives as a class or group have as much to do with salary determination as Muslims as a class or group have to do with terrorism.

Now, as for Professor Palaima’s assertions regarding the ‘cheap labor’ of college scholarship recipients. Given the fact that these athletes (in Texas public universities, anyway) are being given a college education worth tens of thousands of dollars or more, depending upon the institution, that the rest of us have to pay for, I just cannot agree with a characterization of them as ‘cheap labor.’ I should have been so abused!

However, as one who has done fairly well as both scholar and athlete (in the Army), I have never really seen the logic in providing someone a ‘free ride’ because he’s an excellent athlete. To my mind athletics are important for a myriad of reasons. Into my forties I no longer have time for competitive athletics, but I still run, eat properly, and train with weights. It’s good to do for—for life. So I’m not critical of college athletics because I’m a geek. (Well, at least I’m a geek who can run fast—relatively speaking, of course.) I’m critical of college athletics because it has so little to do with what one should rightly conceive as the university’s raison d’ etre: the advancement of knowledge. I’m an unabashed and unapologetic purist in my conception of the nature and purpose of the university. Much as I love sports; much as I admire those who are better athletes than I ever could have hoped to be—much of college athletics has no place in a university.

That being said, Professor Palaima’s characterization of scholarship athletes as exploited cheap labor is not one I can agree with. In the first place, as I’ve already mentioned, the education they receive is not cheap. In the second place, scholarship athletes compete for the ‘hardship’ of being ‘exploited’. Scholarship athletes are not drafted; they compete for these scholarships. They must want to be exploited. And they can turn down these scholarships. (Palaima may wish to assert that they don’t turn down these scholarships because they are in many cases the only hope these athletes have to receive an education. But if that truly is the case then they are not being exploited. They are in something like a work-study program, aren’t they?)

I have no idea which body at either OSU or The UT determines anyone’s salaries, so I will stipulate to Professor Palaima’s assertion’s regarding the respective coaches’ salaries. I would only observe that those universities are not private business corporations but state-owned corporations, so the comparison is interesting but in the end not relevantly similar. Corporations, though publicly held, are still owned by shareholders.

Professor Palaima goes on to characterize the situations at OSU and the UT as operating “on the same model as CEO’s and their corporations…outsourcing and so on to generate the revenues that Boards of Directors channel obscenely not to Chinese workers making 33¢ per hour but to CEO’s.” His reference to a channeling of revenues makes we wonder if he has an accurate understanding of what ‘revenue’ is. It just seems to me that he should understand that corporate boards, in order to enhance profits, have an almost equal interest in keeping executive salaries as low as possible as they do in keeping hourly wages as low as possible. The reason is just this. Revenue is the amount of money that a company receives from its activities in a given period, mostly from sales of products and/or services to customers. All revenue is ‘channeled’ to someone. And what is left after all this channeling is the net income or profit. In other words, from a corporation’s revenue are subtracted: the cost of goods sold, any sales discounts, any returns and allowances, any other expenses. Somewhere in that mix are labor expenses: hourly wages, overtime pay; executive salaries, vacation pay, bonuses; the corporation’s share of healthcare benefits; training; continuing education (if applicable), and so forth. So, those revenues that get ‘channeled’ get ‘channeled’ all over the place. Clearly, if profit is what’s left over after all that ‘channeling’—and especially for any executives who have profit-sharing and stock options as parts of their package—then contrary to Palaima’s assertions, those CEOs ought to be keeping all labor costs as low as possible. ‘Channeling’ clearly isn’t in their best interests, especially if greed is their prime motivation.

And that raises the question: If it truly is to their advantage to keep all labor costs as low as possible in order to increase profit, then why do executive salaries continue to out pace hourly wages, especially the minimum wage?

Before moving on to my discussion of executive wages I just want to point out that Professor Palaima’s comments don’t really constitute a refutation of my argument, which was that minimum wage legislation doesn’t work, and that, given how the market compensates executives, it is reasonable to suppose that the market would better compensate hourly wage employees than Congress can. Apparently, Palaima agrees with my assertion that executives are well compensated. He doesn’t deny my assertion that executives, if well compensated, are so without any legislation from Congress mandating a minimum salary. What he would say, more than likely, is that the reason for this is that greed needs no help from Congress. Greedy executives (as a class or group, no doubt) give each other hefty pay raises that they deny to hourly wage employees. If this is what he would argue then this argument will rely upon the two errors I identified above.

Even for all that, though, aren’t executive salaries a little excessive? It looks like I owe Professor Palaima at least one more post on the issue.


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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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