“There are two sides to a balance sheet: the Left & the Right ( Liabilities
and Assets respectively). On the Left side there is nothing right, and on the right side there is nothing left.”

Backtesting: the art of adjusting trading system parameters so as to ensure maximum profit in the past and zero profit in the future.

Cycle analysis: – a method of analysis that allows losing trades to be organised into regular patterns.

Fundamental analysis: a method of analysis that provides compelling reasons for why a stock shouldnt fall in price when it does.

Fundamentally sound: – the condition in which an economy finds itself immediately after a stock market collapse.

Live feed: – a technology that enables the instant incorporation of bad ticks into a charting program.

They: – the members of a powerful international conspiracy who target small, private traders in order to make their lives miserable. For instance, they ran the market to my stop and then turned it around.

NEW STOCK MARKET TERMS :

CEO Chief Embezzlement Officer.

CFO Corporate Fraud Officer.

BULL MARKET A random market movement causing an investor to
mistake himself for a financial genius.

BEAR MARKET A 6 to 18 month period when the kids get no
allowance, the wife gets no jewelry, and the husband gets no sex.

VALUE INVESTING The art of buying low and selling lower.
P/E RATIO The percentage of investors wetting their pants
as the market keeps crashing.

BROKER What my broker has made me.

STANDARD & POOR Your life in a nutshell.

STOCK ANALYST Idiot who just downgraded your stock.

STOCK SPLIT When your ex-wife and her lawyer split your
assets equally between themselves.

FINANCIAL PLANNER A guy whose phone has been disconnected.

MARKET CORRECTION The day after you buy stocks.

CASH FLOW The movement your money makes as it disappears
down the toilet.

YAHOO What you yell after selling it to some poor sucker
for $240 per share.

WINDOWS What you jump out of when youre the sucker who
bought Yahoo @ $240 per share.

INSTITUTIONAL INVESTOR Past year investor whos now locked
up in a nuthouse.

PROFIT An archaic word no longer in use.

Paul, clarifying our differences as you’ve done here is most helpful. I wouldn’t for a moment deny that the relationship between attitudes and the underlying reality is symbiotic; they shift and unfold in a kind of constant dance. Sometimes one appears to be taking the lead, sometimes the other. Still, I don’t agree that the underlying motives of the actors haven’t changed. While we could debate whether the underlying motives were always there, their visible expression radically changed in recent decades. The social conditioning that had held greed and self aggrandisement in check (indeed, made excess of the sort we’ve witnessed quite literally unimaginable) lost its power for a while; other standards took its place and they will in turn be dethroned. In fact, it’s happening right now.

You ask how at the local level can societal attitudes counter the laws of demand and supply to the extent necessary in this case? Consider, as an example, those 32 top executives at Toyota who last year collectively earned about the same as the CEO of General Motors did on his own (and it’s not as if GM’s been showing a clean pair of heels to Toyota). Are the Japanese uniquely unequipped with the capacity for greed? Unresponsive to those laws of supply and demand? Similarly, from what I’ve read, the pay of European executives has remained in a much more traditional relationship to that of their workers. Societal mores are very powerful, but they’re not set in cement and, in the Anglo world we seemed peculiarly willing to shrug off many of ours. We also (and not coincidentally, I think) took to debt like newly minted addicts.

In any case, as I noted earlier, the laws of supply and demand weren’t properly at work here. With effective control of the corporate treasury, CEOs and their boards (and consultants) increasingly came to control the demand side from a monetary viewpoint.

But it’s not just profit that’s foregone – it’s the opportunity to pay the rest of the staff more. You talk about “what’s a few 10s of million in extra CEO pay if the company’s profit is in the billions”, but if such a company employs 10000 workers, those millions could have just as well been divided up as pay raises for the 9999 workers under the CEO. It would be nice to think that “market forces” should be enough to encourage companies to pay their workers better, but realistically very few workers are going to leave their job for an extra thousand dollars a year they might get working elsewhere. The upshot of which means that in many (if not most) cases a board will see more benefit in paying the CEO an extra million rather than modest pay rises across the board, even though there’s good reasons to suppose that we would *all* be better off if corporations consistently agreed to moderate CEO pay increases and redirect the money to other workers.

we seem to be at loggerheads over what counts as an explanation. Where I agree with you is the basic observation that CEOs managed to get control of the ‘treasury’ of the firm and have gradually been able to overpower internal and external barriers. The question is how this happened. Call me an old-fashioned Marxist, but if we agree that the underlying motives of the actors havent changed (greed springs eternal) then the reduction in barriers to CEO greed must have come through shifts in the underlying economic structure which is where I search for explanations. The shifts in attitudes within and outside the organisations then came as a result of the shift in economic reality, not its cause. You seem to say (and forgive me if this is a misinterpretation) that the CEOs always were in control anyway (i.e. no shift in economic ‘understructure’) but that shifting societal attitudes previously constrained them in their greed, and that the shacckles have been coming off (i.e. the morality was the barrier). Hence you see the shifts in attitudes as the first mover which for me simply begs the questions I asked earlier: how at the local level can ‘societal attitudes’ counter the laws of demand and supply to the extent necessary in this case? And where then did this shift in morality, which did not occur to the same degree elsewhere, come from?

I’m sure that the last gilded age featured a bit of appropriation of the kingdom – indeed wasn’t that one of its hallmarks? Perhaps the difference was at least in part about how much bigger the kingdom had become. This may also help explain Paul’s reluctance to believe that shareholders (and boards) would willingly forego profit in order to pay CEOs exorbitantly – when the company’s profit is a couple of billion or more, a few tens of millions doesn’t seem so much after all.

Whilst I certainly think your analysis of the power imbalances has merits and is part of the answer, I just wonder how substantial a part it really is.

Another thing I’m very sceptical about is the influence of consumption inflation. Although I know that some people like to argue about it, indisputably ‘ordinary people’ are now unimaginably better off than their forerunners of even the last gilded age. And the improvements are extremely substantial – health, education, longevity, access, etc. I wonder how many beautiful cars makes you as much better off than someone with one than one makes you better off than someone with none? How big a yacht might achieve the same effect? How many mansions make you as better off than someone with a small single-fronter as five extra years of good health makes you better off than someone without them?

Call it compensation for the diminishing marginal utility of money if you like.

I’m not insisting that greed is a part of the explanation. As I thought I’d made clear, “greed’ is pretty much always there, sometimes latent, often in full swing. What can change from time to time is the degree to which societal and/or institutional constraints impede its free operation. Melaleuca made this point well.

As I see it, two primary factors unleashed the extreme relative growth in top level pay. The first is the change in attitudes I outlined in my last comment. Acquisitiveness in all its forms little by little became far more acceptable, not only because of a widespread belief the pie was growing (and so we all might get our slice) but also because the idea of “high achievers” being grandly rewarded in this life became firmly embedded. Just look at sports stars, for example.

As this shift became more pronounced, anyone in a position to capitalise on their position or skills (most aren’t, of course, hence the relative change) felt more and more free to do so. Not so much by any conscious decision, I don’t think, more through a process of slow osmosis. Since the period we’ve been living through was one of quite extraordinary all round excess, the rewards for the winners in this battle were beyond anyone’s imagination of only a generation ago. If, as I think JC believes, CEOs had simply been the beneficiaries of supply and demand forces (however much some of us might think they’ve been of the hot house variety!), this would have been largely unobjectionable. I don’t think that’s the case, or more accurately only in part.

Which brings me to what I see as the second principle factor, which I mentioned first up: . . . . its a classic case of concentrated power vs dispersed power and is a more egregious case than usual only because, rather than having to lobby for favours, top management gradually gained control of the treasury themselves. As the boom times rolled on, any resistance to disproportionate CEO pay was gradually overwhelmed: shareholder power, as we both agree, was far too dispersed to be an effective counter; performance based pay became an accepted commonplace and was, as often as not, tied to factors (like the share price) over which management had only marginal influence but which brought huge rewards as the market rose; corporate stars were lionized and the inconceivable became the new commonplace. As I said right at the start, I don’t think most CEOs (or their boards) would have seen what they were collectively doing as unfair, much less as a form of looting. It all became self-validating so long as the boom went on.

Nevertheless, this small group in effect possessed the keys to the kingdom, had in fact done so for a long time. What changed, I think, was that as the new gilded age rolled on they came to feel they had the right, indeed the obligation (Goddamn it!), to put them to full use. And, unsurprisingly, they did.

Annually boards buy up the research of the international consultancies that most times are aligned with the search firms. Boards use these stats to get an idea where the senior execs line up with the peers around the world in equal industries …..size etc….

These consultancies can earn up 30% of total comp through a successful placement. 30% of $5 million isn’t as good as 30% on $10 million.

I am afraid we are not converging. I still disagree with your insistence that greed is part of the explanation for rising CEO pay. If you agree greed has been a constant companion, how can it explain the rise?

The bull market story also sounds suspect: if people become less stroppy about other people’s pay, why has this occurred at the top of the payscale, rather than at the bottom of the payscale? Simply mentioning the trend in the market and claiming a one-sided shift in attitude doesnt strike me as an explanation at all.

The same really goes for the statement “It came to be more and more accepted that greed, properly harnessed, could bring about beneficial change. Allied to this shift was a growing consensus that good would also come from linking executive pay to performance.”
In what way would the outcome of a market negotiation depend on a general concensus in society that greed can be harnassed for good or that performance should be linked with pay? Surely the laws of demand and supply held just as well in times when it was not a concensus opinion that good could come from greed? And are you suggesting that before there was a concensus that performance would be linked to pay, that individuals were happy to be grossly underpaid? That would only work if there was a strong social norm within companies for which shareholders were willing to forego profit too. All that needs an explanation of its own.

You’ve somehow managed to draw the conclusion I was offering was a “hand waving moral explanation” as opposed to one of your hard nosed economic one[s] and then gone off on an extended riff based on that assumption. I guess it was the mention of the word greed.

What I said was that pay levels were in the past probably constrained by the sort of social factors mentioned by Melaleuca. In recent decades, the notion that greed is good and that pay should be linked to performance overwhelmed the cultural constraints. This wasn’t a moralistic judgment, simply a reference to the fact that a shift in perceptions occurred in the 1980s and onwards. It came to be more and more accepted that greed, properly harnessed, could bring about beneficial change. Allied to this shift was a growing consensus that good would also come from linking executive pay to performance. You may disagree with this analysis, of course, but you should respond to it in kind rather than misreading it and then imposing your own prejudices. (I assume, by the way, we can at least agree that cultural factors actually have some bearing on behaviour.)

I then added The greatest bull market the worlds ever seen didnt do any harm either; it made shareholders and even workers less inclined to be stroppy., a fairly obvious statement that JC clearly agrees with. This wasn’t a moralistic judgment either, just an attempt to further sketch in the outlines of the environment in which so many insanities were able to take root and, for a time, prosper.

By the way, no argument at all about greed always being a factor. As I said in another thread where JC had raised the topic, I also agree with you on greed. Citing it as a contributing factor is simply a truism. Besides, for the moment theres more reason to worry about its wobbly twin, fear.

As to what to do about it all, that’s a tough question. In pragmatic terms, much of it will probably be taken care of (for now) by the backlash in attitudes that’s already well underway. Indeed, it may all end up running too far the other way, as usually happens when markets badly overshoot. Longer term, I suspect(amongst other measures) the structural imbalance of concentrated power vs dispersed power I mentioned earlier will eventually have to be addressed.

By the way, it was JC making the argument about mobility, not me. I think there must be at least some validity in that notion, but I’m not at all sure how much.

oh, I am not suggesting anyone makes suboptimal choices here given the constraints. However, I am not sure I believe your description of the CEOs of the 60s and 70s as all being from the same school. Social mobility wasnt much different then from now. It was also the age of the engineers, i.e. more CEOs will have been experts at what their firm did rather than experts at people manipulation. You are effectively saying the latter guys are far more productive than the former. You also seem to pick the stories where CEOs appear they might actually be productive. I am sure Ingolf can give you a whole drawer full of stories of what he would call looting. Are you prepared to say that is also a big part of the current situation or is nearly all productivity in your book?

The firm has had a return on equity of 25% for the past of the 6 years the CEO has been on the job. He currently earns $6 million. He just received an offer to run a firm in the US for $10 million with a $10 million golden para. He says he’ll stay if you match the offer. Although the rest of the lower execs are good, you don’t think (as the chairman) they will be able to match the present guy’s abilities. You engage a search firm and they tell you that the going replacement rate for a second string guy is the same as the offer on the table for the current CEO. What would you advise the board to do? Honest question as these are the sorts of problems that come up.

I find it improbable that the CEOs were somehow grossly underpaid before, or that weve gone into moral decline. I want an explanation that makes economic sense.

Because the entire world is bidding up for good ceo’s or who they think will be good ceo’s. That’s one of the facets of globalization.

In the old days dickhead incompetents would sit at their jobs for decades with poor results and none could do anything about it as there wasn’t much to choose from. it was mostly a school tie thing.

Roll the tape back 25 years and take a look at the BHP executives staff and the board. They went to the same kindergarten, the same schools and uni. They were so inbred you couldn’t tell them apart as they all looked the same.

Take a look now. The board is international and the senior heads came of Sth Afr., the US, Sth Amerm, australia , the UK and Europe. Which system would you prefer? The inbreeds or the international grouping with really great credentials?

sure, shareholders dont want to rock the boat because they have asymmetric information. Other people who know far more than they do about the company are running them and the individual investor doesnt have enough of an incentive to find out what is really happening. The question is why they are now willing to put up with a whole lot more ‘not rocking the boat’ than before. I find it improbable that the CEOs were somehow grossly underpaid before, or that we’ve gone into moral decline. I want an explanation that makes economic sense.

Shareholders as a whole don’t really give a shit about CEO pay when the firm is doing well. In fact it seems to me that it’s the outsiders who do.

The average shareholder looks at the AGM resolutions/votes and throws them in the can like i do. The only time CEO comp becomes an issue to shareholders is when the firm is crapping out.

Shareholders are very much concerned not the see anything rocking the boat when the firm is doing well for fear of interfering at the wrong time and fortunes change. The last thing a shareholder wants to see is the CEO or senior people leaving when the firm is doing well. Check out the stock price when a good CEO leaves a firm and you will see it slide. CEO’s are very important to the future of the firm or at least they are perceived to be by shareholders.

The only person agititating against CEO at AGMs is Steve Mayne with his 50 dollar investment that allows him entry to the AGM and make an ass of himself. I went to one AGM where he was shouted down by the other shareholders for making a complete clown of himself. However you never read about that.

the observation on mobility goes the wrong way for you, because by implication you are suggesting people were not pait their marginal product previously but now that they move around, they do. This not only goes against the observations on the different CEO pay trajectories in different countries, but more importantly would mean that you should not want to curtail these CEO wages because there is no market imperfection underlying them: they are just paid their actual worth. Then, if you curtail them in one place, all the good ones go elsewhere and you are just hurting yourself. Indeed, if mobility is truly the smoking gun, then the call for moral rectitude is going to be resoundly ignored and laughed at.

In my story (well, not only mine, its a standard story), mobility would mainly increase CEO pay diversity (because you have more observations on their performance there is les averaging towards the mean) whilst the whole level of pay of CEOs gets increased due to the increased assymmetry of information between owners and CEOs due to the loss of middle management.

Ingolf,

for me, In recent decades, the notion that greed is good and that pay should be linked to performance overwhelmed the cultural constraints.

is not a good enough explanation. For one, I dont buy the notion that people were less greedy in previous decades.

No but you didn’t have the ease with which people can move around from center to center if the money is good. People think of nothing these days to move jobs from one continent to another. The globalized nature of the US industry to choose what they think are the best executives moved this along. This has been going on for the past 20 years and accelerated in the past decade.

Searches for CEO’s of top firms are global these days and the package is in easy to understand currency- US dollars.

for me, “In recent decades, the notion that greed is good and that pay should be linked to performance overwhelmed the cultural constraints. ”

is not a good enough explanation. For one, I dont buy the notion that people were less greedy in previous decades. Its a nice idea to think people were somehow more fuzzy and nice in decades and centuries gone by, but bogus nonetheless. On any objective front, we are now less greedy as societies then we were, say, 40 years ago. The level of transfers to the poor we keep voting for dwarfs the levels seen in the 1960s. Crime is down, volunteer work probably just as high.

So if were just as greedy previously, what made up the mythical ‘social constraints’ that prevented CEOs from giving themselves the millions they undoubtedly already wanted to give themselves? One needs a story for what constituted the culture within organisations and why that has changed. Disappearing middle management fits the bill on both counts: their disappearance means internal culture becomes more orietned towards adultation of the top, and it strengthens the bargaining power.

Why does it matter whether you have an easy hand-waving moral explanation or a hard-nosed economic one? The hand-waving moral explanation gets you into the impossible position of calling for some kind of return to moral rectitude in the hop that that will magically solve things. Worse, relying on moralising might make you actually believe you can run the economy without allowing for greed and hence wreck it. The hard-nosed economic explanation gets you into a discussion of actual regulatory actions one can take and into discussions about how you can change the operation of companies.

June 22 2007 (Bloomberg) — Toyota Motor Corp., the world’s biggest automaker by market value, will increase the total amount of executives’ bonuses by 33 percent for the year ended in March after the company posted record earnings.

The automaker will pay a total of 970.5 million yen ($7.8 million) in bonuses to its top 32 executives, including President Katsuaki Watanabe, for the previous fiscal year, it said at its shareholders’ meeting.

[ . . . ]

Toyota’s 32 top executives and auditors received 1.5 billion yen [$12.06 million] in salaries in the 12 months ended March. Nissan paid its top nine executives, including Chief Executive Officer Carlos Ghosn, 2.52 billion yen in salaries.

In comparison, General Motors Corp. Chief Executive Officer Rick Wagoner’s total compensation for last year was $10.2 million, the company said in a U.S. regulatory filing in April.

Paul, maybe I’m being too simplistic but I don’t see any real mystery in why this has happened. Dispersed ownership has, as you say, been with us for a long time but management pay levels were in the past probably constrained by the sort of social factors mentioned by Melaleuca. In recent decades, the notion that “greed is good” and that pay should be linked to performance overwhelmed the cultural constraints. The greatest bull market the world’s ever seen didn’t do any harm either; it made shareholders and even workers less inclined to be stroppy.

In this manic and star struck environment, management, in effective collusion with their boards, were free to set their own pace. I don’t think “looting” is at all too strong a word (and bear in mind I come at these things from a small “l” liberal perspective). The fact that it was in most cases “legal” doesn’t mean it wasn’t a form of theft.

Now, finally, with the end of the boom this unhappy trend is beginning to reverse. I’d imagine the backlash has a very long way to run.

I wouldnt put it as starkly as ‘looting’ but I agree with the gist of what you say. Indeed, that’s why greater concentration of ownership is mentioned as a ‘market solution’ in the post. This is also partly the explanation of why other countries have not fully followed the Anglo example. The system of strong bank control in Germany and, more or less implicit, state oversight in many other European and Asian economies have prevented the same things happening there.

However, merely noting the trend in Anglo countries is the starting point of an analysis, not the end. Why has this happened? Dispersed ownership has been with us for a long time now, so something else has happened. It is not helpful to simply say that managers have become more greedy and more powerful, because without knowing what happened it is hard to see what the optimal response should be, if indeed any response is warranted at all. My offered explanation was increased power due to IT innovations allowing top management to get rid of the internal competition (middle management). That also gives a possible market response: the re-introduction of middle management, perchance as agents directly appointed by shareholders.
The literature does give other explanations, which lead to different proposals, but the disappearance of middle management is a front runner.

Well you’ve left out the cultural component- exec salaries outside the Anglosphere apparently haven’t exploded in the same way:

” Interestingly, hyperinflating executive salaries are an English-speaking phenomenon. Elsewhere, including Japan and continental Europe, executive salaries and the overall income shares of top earners have stagnated.

While Canadian executive pay cheques have generally mirrored the American trend, in French-speaking Quebec they have not.

http://www.smh.com.au/news/business/executive-plunder–super-rich-are-back/2006/05/22/1148150186479.html?page=fullpage

Cross cultural comparisons are always useful. The so-called free market is in part a social construct. It’s much more than that of course, but buying and selling nonetheless takes place in a cultural setting.

I don’t think they’re really holding the companies to hostage, as you seem to imply, Paul; it looks more to me as if they’re simply looting them. Under the lax conditions of the last 20 years or so, the escalation of executive pay has become such a commonplace that I imagine most of them don’t even see it as such. It became self validating.

Seems to me it’s a classic case of concentrated power vs dispersed power and is a more egregious case than usual only because, rather than having to lobby for favours, top management gradually gained control of the treasury themselves.

There are, of course, many other contributing factors (the most idiotic of which may have been the idea that tying management remuneration to the share price would produce good long term results) but they all seem subsidiary to the ownwership/control conundrum.