Sreenivas Ikkurty: ‘I read your article on CEO pay in PARADE this Sunday. The situation [gargantuan pay even in the face of mediocre performance] is really deplorable. My suggestion is to do as Berkshire Hathaway CEO Warren Buffett does in motivating Lou Simpson. Simpson is the CEO of GEICO, part of the Berkshire empire, and manages its investment portfolio. In those years when his portfolio does worse than S&P 500, he pays Berkshire from his personal account. His salary becomes negative (not zero). If he beats the S&P 500, he receives a bonus proportional to his gains above S&P 500. What do you think?’
☞ That Buffett is a smart cookie. He has also pointed out from time to time that ‘record earnings’ are often not the triumph they are made out to be. If one owned a company that did no more than invest all its assets in a savings account and let them compound, its earnings (assuming a constant interest rate) would rise to record heights each year. The idea is to do better than a savings account – or else why go to all that extra trouble and take all that extra risk?
I’m not sure about getting many CEOs to take negative salaries when they don’t perform well, but I think it would be healthy if it were possible to attract and motivate talented CEOs without having to dangle the prospect of $100 million pay days. You can get by on $1 million or $2 million a year, plus perks. (Can’t you?) Or at least the next generation of CEOs might be able to. Yes, incentives and an ownership stake make sense. But pride and competitive drive generally motivate quality people, too. And the lower the base salary, the more modest the incentive need be to have impact. To a guy making just $1 million a year, the prospect of an extra million is a lot more meaningful than to a guy making $5 million a year.
(Of course, this all verges on the obscene in a world where most Americans make $35,000, and most of the rest of the world would be ecstatic to make $3,500. But as I argued in PARADE, I’m all for people reaping the fruits of the free market. It’s just when the market isn’t free – when the CEOs are essentially setting their own pay with the blessing of the friends they’ve put on the board, many of them fellow CEOs – that I balk.)
Jeremy Bronson: ‘Gennady S. wrote: ‘The guy who made $100 million took a lot more chances than the guy who did not, and if his risks are not rewarded, capitalism would not work. Period.’ What kind of logic says that the guy who made $100 million took a lot more chances than the guy who did not? For one thing for every one of those so-called risk-takers who made it big, there are dozens who didn’t. Why shouldn’t the lucky (yes, lucky) one bear a reasonable tax burden for his or her success? More importantly, the odds are that any person who is in a position to make $100 million in stock options has had everything in life much easier than people at the bottom end of the tax bracket. Imagine how much easier it is to take risks when you know that you have family resources (parents, future inheritance, spousal income, equity in a nice house) and/or a good education and lots of useful connections to fall back on if the venture fails. It is this terrible misconception about the difference between what we are given and what we earn that generates such conflict between America’s increasingly stratified classes. God forbid, the children of the super rich actually go to war to defend the country that rewards them so generously!’
Jonathan Levy: ‘I really like the Democratic line I have heard that Bush’s tax cut is not a tax cut but a tax postponement – to a future generation. Given that, how about an estate tax pegged to the net budget deficit run during the dead person’s adult life? Before you can pass along wealth to your own children, you have to pay your share of the debt that would otherwise go to everyone’s children. Even those people who never voted for a winning candidate built up additional wealth by paying lower taxes than were necessary to fund the government spending that actually took place. For those who may say they did not want a lot of the spending – too bad. That’s how democracy works. It is not as if you get to duck income taxes by objecting to the spending. Obviously, this is way out there and I am not necessarily completely serious. However, I think there is a point to be made. Someone has to bear the burden of the deficits, and it seems more fair for it to be someone who was 30 in 1980 than someone who would not be born for 30 years.’
☞ Well, I have no problem with a $300 billion or $400 billion deficit in a single bad year or two. Or even – given the size of our economy – with, say, a $100 billion deficit every year. (That would be less than 2% annual growth in our national debt. If the economy were growing at a nominal 4% a year – between real growth and inflation – and our collective debt were growing at just 2%, our indebtedness would steadily shrink in proportion to our economy.) The problem is when you set yourself on a trajectory, as Bush has done, for $400 billion – and higher – deficits as far as the eye can see. Pretty soon, it mounts up . . . and the interest we have to pay mounts up with it. Indeed, the interest mounts up faster, because it mounts up two ways: first, it mounts up simply because the debt is higher; but, second, because huge deficits will lead to higher interest rates to carry that debt. We could see our annual interest burden double in just a few years – a huge burden on our national finances.
If we were doing all this deficit spending to rescue the states from their own fiscal disasters, or to accomplish some fantastic investment to make us more productive in the future, that would be scary enough. But we are doing it to reduce the tax burden on the wealthy. With the unintended result, I think, that it will make us all less wealthy. What could we be thinking?
Quote of the Day
I like to buy [stock in] a business any fool can run because eventually one will.~Peter Lynch
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