We hear complaints from the political left about inequality and wage gaps. One frequent complaint is that CEOs and other top executives of major companies are making excessive amounts of money. You may hear something such as, “A CEO shouldn’t be making 1,000 times the salary of a minimum wage worker.”
A standard response from some Republicans and libertarians is that they are earning that amount because that is what their value has been deemed to be by the open market.
This response is mostly true for founders of companies who earn tens of millions of dollars or more. I think even many on the political left will agree to a certain extent that Bill Gates and Steve Jobs deserved to be well compensated for providing value to consumers.
The problem is that there are obviously some fools who run some of the top companies in the United States. It is difficult to see how they can be making millions of dollars per year making stupid decision.
Take the recent incident involving United Airlines when a passenger was bloodied up after refusing to leave the airplane because the airline wanted four of its employees on the flight instead. When nobody was willing to accept the $800 incentive to take another flight the next day, the airline bumped people off (probably illegally because it wasn’t a case of overbooking) instead of raising its offer.
The CEOs response was one of justification and word games. He used the term “re-accommodate” to describe forcing the passenger off the plane. He thought this propaganda would somehow help ease the situation. The guy is a total idiot who is being paid millions of dollars. He is completely out of touch with reality.
He could have consulted me before he put out his stupid statements, and I could have told him not to send them out.
He should have simply stated, “We apologize for the situation that recently took place. We are doing a full investigation of the situation, and we will revise our policies as necessary to make sure such an incident does not happen again in the future.”
But the idiot multi-millionaire CEO (likely put in place by idiot multi-millionaire board members of the company) doesn’t see it.
Therefore, there is obviously something wrong with the standard response that these executives are just being paid their market value. You could have paid many people a small fraction of what the United CEO is paid to not put out an idiot statement like he did.
The problem here is that we simply do not have a fully functioning free market. There are free market elements where providing value to customers can make you rich. Again, Steve Jobs and Bill Gates brought value to hundreds of millions of people. (This is ignoring that Bill Gates likely used government copyright and other laws to his advantage.) But there are many elements of government interference that distort things, including executive pay.
In the case of United, the airline industry is heavily regulated. Foreign companies are not allowed to offer domestic flights within the United State. If Singapore Airlines and Emirates were flying within the U.S., there probably would no longer be a United Airlines.
We see the idiot bankers who helped contribute to the financial crisis that blew up in 2008. But maybe they aren’t that idiotic for the simple fact that they secured bailouts after it happened.
And that brings me to one very important point. Because government – particularly the U.S. government – so heavily regulates business, CEOs and other executives are often selected more for their political abilities than their abilities to provide value to consumers (and hence shareholders).
Also, for these publicly traded companies, there are also major distortions due to the tax code. In a true free market, companies would seek to pay out dividends to shareholders instead of trying to get big capital gains. The CEOs are often rewarded with shares of stocks that get inflated by central bank inflation and stock buyback programs.
These are just a few points. There are thousands of laws and regulations and taxes that distort the market economy and inflate the pay of CEOs. And not only do these things inflate their pay, but they also put people in these positions that shouldn’t be there. It is people who are good at politics who get these positions, unless they were a founder. In some ways, it makes sense for companies to put political figures in these positions, as political favors will be more profitable than trying extra hard to satisfy consumers. And if anything, getting political figures is important for defensive purposes just to make sure the government doesn’t pass laws against the company or industry.
In conclusion, the political left actually has a point that many CEOs and top executives are overpaid. The problem is that their solutions are often the exact opposite of what is needed. The answer isn’t for more government regulation. The answer is to free up the marketplace to make these executives and their companies more accountable to consumers.
In a true free market, the only way for a company to survive in the long run is to provide great value for consumers. If a CEO can concentrate on this and provide it, then it will benefit the shareholders in the long run. Until this situation of a real free market arises, we really don’t know what these CEO positions should be worth.