We Demand A Salary Cap

Once the wealthy have earned (or at least gotten) their net worth into the nine-figure league, a question arises as to what to do with it. Some turn to philanthropy, and some to purchasing or funding the arts, but many try to relive their boyhood by buying professional sports teams. These owners want to win, and if the labor market is allowed operate freely, pay such high salaries to attract the most gifted players that the teams end up operating at a loss, and become very expensive toys. Which is why wealthy sports team owners in the NFL, NBA, NHL and Major League Baseball have all come up with the same solution to restrain themselves – a salary cap to keep those labor costs down.

It seems we Americans have the same problem with our business executives. The executive pay consultants they hire to decide what to pay each other advise that they have to pay each other more and more, or the limited number of great players in business will go elsewhere. Even at financial firms whose leadership has bankrupted them, and extorted government bailouts, it seems that pay has to be kept at astronomical levels, levels that ensure that other workers, consumers, and investors will get less and less. As far as I’m concerned, the United States needs to impose on the executives, collectively, the same solution they always impose on others when they get the chance. We need an executive salary cap. Particularly since, unlike in sports, the pre-salary cap market for talent isn’t free, and most of the players earning massive salaries in business aren’t great.

Let’s take those points in order.

The market in executive pay, not the market in sport pay, is rigged. In sports, the owners who bid up the price of players are a very different group than the players themselves, and the amount the owners pay the players has nothing to do with the amount the owners are paid in their own non-sports businesses. Take Fred Wilpon, owner of the Mets, and David Wright and Jose Reyes, two high quality young players. If Wilpon pays Wright and Reyes more when their contract comes up, that doesn’t mean that players from another team, say Derek Jeter and Alex Rodriguez, will use the Wright and Reyes contracts to decide what Fred Wilpon deserves to be paid. And how little should be left for Wilpon’s investors. And it is definitely not the case that Rodriguez and Jeter get to decide Wright and Reyes’s salary, leaving Fred Wilpon with no choice but to pay. Knowing that some other players (say David Ortiz and Mike Lowell) will decide then their pay, and use the Wright and Reyes contracts to justify paying more to Jeter and Rodriguez. Instead the players are one group of people, trying to get more, and the owners are another group of people, only willing to pay what they have to. And still, the owners demand salary caps.

Now consider how executive pay works. The top executives, through the medium of executive pay consultants, sit on each other’s boards and decide each other’s pay. The shareholders whose money is being spent are represented, if at all, by other executives in on the same deal, those who work for the financial industry. Those so-called representatives, and corporate directors, keep voting the interests of those like themselves, rather than the individual savers they purportedly represent. They bid up each other’s pay, and have their own pay raised in return. It is as if the various sports player unions set pay rather than the sports team owners.

When determining executive pay, therefore, the negotiation takes place between two parties on the same side, at the expense of third parties. Like negotiations between the public employee unions and the perpetually incumbent politicians they keep in office. And top executives have formed, de facto, the most powerful and rapacious union of them all, the equivalent of a loosely organized conspiracy. A conspiracy of interests so obvious that it doesn’t really have to be organized.

In government, the result of such negotiations is richer and richer pensions for those cashing in and moving out, paid for by higher taxes for diminished services for average citizens, and lower pay and benefits for new hires. In business, the result is more and more pay for the top executives who sit on each other’s boards, paid for by lower pay and benefits for everyone else (starting with the working class and now moving up into the upper middle class), and lower returns for investors, including divided yields half or less what they were before the current era of corporate theft. To call what executives get paid the result of the free market is absurd.

It isn’t news to many that American executives are paid more than those anywhere else in the world. One look at the economic news shows that, for the most part, that money is simply taken rather than earned.

The particular gifts of most top American executives seem to be self-promotion and corporate politics. The profits of American business have, for the most part, been inflated by an American public that has been lent money they cannot afford to pay back, to allow them to spend more and more, even as they are paid less and less, a house of cards that has since collapsed, exposing the whole thing as the fraud it is. With the ability to profit from deception having run its course, the executives have turned to coercion, through the use of the government power of taxation to force people to pay in taxes what they are no longer able to pay as customers. In many cases soaring executive pay has been funded by soaring company debt, rather than actual long run actual cash earnings. Debt that is destroying companies in the long run. That has been the financial company model. That has been the private equity model.

Which top executives are earning their pay? For the most part, those who either started their own company or took a large stake in an existing one as part of a turnaround. Such executives have no incentive to loot the company, because they would be looting themselves, and much what they earn is in fact the increase in the real value of their firms as they produce actual value added. American liberals haven’t had a new idea since the 1960s, so once again we are hearing complaints about powerful corporations dominating the country. It is actually worse than that. The corporations are in fact weak, and being looted and destroyed by those who have captured control of them. Just like state and local governments are being looted by another loosely organized powerful cabal.

Is there any way to stop this? It’s a good question. It is clear that both corporate stocks and corporate bonds are a much worse investments than they used to be, but anyone who saves has much of that savings invested by intermediaries, who are part of the same executive class that is looting the corporations. And if not enough people have their funds diverted by those intermediaries, it turns out, the federal government will simply borrow money and turn it over the corporations to keep the executive pay party going. And when the federal government can no longer borrow, it will start printing money, causing the collapse of our currency. Even in the face of all that has happened, the federal executive pay Tsar says he is worried that if executives are federally controlled companies aren’t paid enough, they will simply leave for other companies where the opportunity for pillage is greater.

There should be no other companies. Instead, Americans need to impose on the executives the same remedy the executives themselves always impose. We need a salary cap on the total pay and benefits, including the deferred and hidden pay and benefits, of all exempt employees, relative to the size and profitability of the company. We need that salary cap to reflect that limited amount of the excess executive pay that has been earned, as revealed (to those who didn’t already know over the last year. Just like in the NFL, MLB, NHL and NBA. And a massive class action lawsuit against corporate directors and executive pay consultants. The plaintiffs? Everyone else.

The alternative is an institutional collapse in business to rival that coming in state and local government.