What's Wrong
01/26/2014
A few days ago I followed a link from somewhere or other to this story about the CEO of Caterpillar. Caterpillar is a big company, with approximately 121,000 employees. In 2012 it had about $5.6 billion in profits. A very hasty search informs me the company was doing worse throughout 2013, and profits are significantly lower, probably down below $4 billion for the year, although I didn't see any fourth-quarter figures.
The yearly pay of the CEO, Doug Oberhelman, was raised earlier this year from $16 million to $22 million, despite the fact that it was clear that profits were headed down. One immediately thinks "That raise should have gone to the workers," and probably it should have--but distributing that money to the workers comes out to only about $50 per employee. Even distributing the CEO's entire salary to the workers would give each one only about $180, which would no doubt be welcomed but is not enough to make a real difference in the way one lives.
Multi-million-dollar CEO salaries are often a scandal in many ways, but they aren't the main reason for stagnant or declining wages. But use $4.5 billion, a very rough midpoint between the past two years' profits, instead of $22 million, and the picture is rather different: roughly $33,000 per employee. Even half, even a third, even a sixth of that, would make a difference.
The fundamental problem here is that the profit made by the company is assumed to be meant for everyone except the people who actually built the product. The workers are considered no more than a cost of doing business, their wages no different from the price of steel. And the company feels justified, in fact obligated, to keep those costs as low as possible.
Who is the money for? Shareholders, directly--which is fine--and the stock market, indirectly, because high profit generally means higher stock price. In my limited experience in the corporate world, it seemed that the desire to keep the stock price up and climbing was one of the major, maybe the major, drivers of the practice of many companies. Granted, that was high-tech, where people were expecting a greater than average chance of investment windfalls. But I imagine it's operative throughout the corporate world.
It's almost funny that the CEO justifies his own salary by saying that the company has to be competitive. But it's not funny, because he uses the same reason to justify reducing the wages of his employees. Clearly he thinks that he would be difficult to replace, but his workers would not; therefore he can reduce their wages, or at least keep them from rising; therefore he will do so.
I get very impatient with people who say this sort of thing is a result of an immutable law, like the law of physics that says that if you push something hard enough, it will fall over.[1] What's being described here is as much a matter of culture and ethics. There is nothing in the nature of the universe that says it should be acceptable to exclude workers from sharing in the success of the company. There is in fact a lot of common sense justification for doing otherwise, entirely from the free enterprise point of view.
The great engine and virtue of the system is supposed to be incentive: if you work hard and produce something of value to others, you'll be rewarded financially. This CEO and others like him apparently don't believe in applying that logic to workers. This one isn't even willing to offer the traditional incentive to wage-earners: the assurance that if the company does well your wages will rise. But the company was doing very well at the time of this interview, and he was in the process of trying to freeze or reduce wages, offering only the vaguest lip service to the possibility that they would ever be increased. The only incentive offered is negative: work hard and maybe if things go well you'll keep your job. But no guarantees, of course. And if you don't like it, there are many others willing to take your place.
What would be the logical end point of this? To bring the cost of labor as near as possible to zero by paying the workers just barely enough to keep them alive and able to work? No doubt Mr. Oberhelman would take exception to that, but how far from the truth is it? I wonder if he's a Christian.
[1] Fudd's First Law of Opposition; see Firesign Theatre, I Think We're All Bozos On This Bus
Wow; beautifully said, Maclin.
Posted by: Daniel Nichols | 01/26/2014 at 04:48 PM
Thanks. Thought you might like this one a little better than some of my other stuff.:-)
Posted by: Mac | 01/26/2014 at 05:25 PM
You can see the CEO's compensation is not related to performance metrics for the company. The problem here is one you see all across the corporate elite: their compensation is not the fruit of an arms length transaction; the compensation is essentially plunder.
Several reforms might assist: end the practice of putting employees of the corporation on the board of directors (a restriction which applies for philanthropies in New York, for example), end the practice of proxy voting at share-holders meetings (and certainly the practice of having management hold the proxies), end the use of board nominating committees and have all nominations made from the floor, and require the use of ordinal balloting to elect the board.
Another set of reforms might be as follows: require compensation for executives to be in the form of cash salaries, earnings derived bonuses, contributions to pensions and insurance programs, and some in-kind ancillaries; prohibit the use of stock-options as compensation elements; legal ceilings on compensation derived from the number of employees a company has; and supplementary legal limits on compensation derived from nominal per capita income. Just limiting executive compensation to 300x gross domestic product per capita (keeping in mind no corporate CEO in 1980 had a compensation package which exceeded that) would require this fellow's compensation be cut by 1/3.
Improved company performance is not 'shared' with workers. The improved performance is reflective of (in part) a more productive workforce which can be lured away absent compensation and working conditions which induce them to stay put.
I do not know what is going on with this particular company, but in general nominal wage cuts are very unusual in the economy at large and have been since the 1920s. That's a source of why economic recessions are co-incident with mass layoffs. In Japan, it has long been the mode to compensate workers with a base wage and then a supplementary bonus derived from company earnings.
The stock price merely reflects the nominal earnings trajectory.
Posted by: Art Deco | 01/26/2014 at 05:51 PM
Just to point out, returns to labor (wages and salaries, &c) are currently about 62% of gross domestic product. That metric has fluctuated between 60% and 74% of gdp for more than 80 years. It's on the low side right now, but not unprecedently low.
Posted by: Art Deco | 01/26/2014 at 05:56 PM
Yes, Maclin, refreshing to agree with you so completely.
And damn, Deco, you crack me up.
Posted by: Daniel Nichols | 01/26/2014 at 06:11 PM
Thanks for this post, Maclin. It's good to get a better sense of the actual numbers involved.
I certainly don't think the company should keep all that profit to itself and shareholders etc - give the workers at least some. Or better yet, give the workers a raise *and* a stack of shares.
No doubt Mr. Oberhelman would take exception to that, but how far from the truth is it?
Not far, I'll bet.
Posted by: Louise | 01/26/2014 at 06:57 PM
And damn, Deco, you crack me up.
Lay off the laughing gas. I did not say anything at all amusing.
Posted by: Art Deco | 01/26/2014 at 06:58 PM
I get very impatient with people who say this sort of thing is a result of an immutable law, like the law of physics that says that if you push something hard enough, it will fall over.[1] What's being described here is as much a matter of culture and ethics.
I absolutely agree.
Posted by: Louise | 01/26/2014 at 06:59 PM
Art: I didn't say that you said anything funny. I said that you crack me up. And I mean that in the nicest way possible.
And Louise, regarding your comment that "I certainly don't think the company should keep all that profit to itself and shareholders etc - give the workers at least some": It really isn't a matter of what they "should" do, it is a matter of what is required in justice. Wealth is created by the labor of the worker, a principle noted by Abraham Lincoln, Karl Marx, and every Catholic pope of the modern era. In justice, workers are owed a share of that wealth sufficient to live a comfortable life and provide for their families and futures securely. That share is theirs in strict justice.
Posted by: Daniel Nichols | 01/26/2014 at 07:40 PM
Its not for everyone, but the John Lewis model has something to be said for it. That's a department chain in GB where no one at all is paid above a certain wage and everyone who works there is a 'partner' in the company. I do say, it's not for everyone. I have known people who worked there, and there were problems with being a 'partner'. If you dropped a chandelier, or whatever, you had been 'unpartnerly'.
Posted by: Grumpy | 01/26/2014 at 08:10 PM
http://en.wikipedia.org/wiki/John_Lewis_Partnership
Posted by: Grumpy | 01/26/2014 at 08:13 PM
Wealth is created by the labor of the worker,
Uh, no. Production requires the deployment of several factors of production: land, labor, capital, and entrepreneurship.
Posted by: Art Deco | 01/26/2014 at 08:43 PM
Bottom line, though, is that without labor you cannot make a dime. I willingly grant that the one with the capital and the Big Idea deserves a greater cut of the profit than the guy sweating to make the gizmo or provide the service, but the current MO is to pay labor as little as possible, and the ethos is that the corporation owes nothing to anyone but the stockholders (thank you Milton Friedman).
Posted by: Daniel Nichols | 01/26/2014 at 10:11 PM
You cannot make a dime without the other factors of production either.
Posted by: Art Deco | 01/26/2014 at 10:52 PM
But labor- human toil- is essential. That is the concrete way that wealth is created; the rest is mere potentiality. That is what is called in Catholic Social Teaching "the primacy of labor over capital".
Posted by: Daniel Nichols | 01/26/2014 at 11:02 PM
I was away from the computer yesterday evening and am behind on the conversation. I'll catch up later today.
Posted by: Mac | 01/27/2014 at 07:00 AM
The priority of labor over capital has not so much to do with the distinction between potentiality and actuality as the distinction between things and persons. If I read Laborem Exercens 12 right, human ingenuity is on the side of labor. "All the means of production, from the most primitive to the ultramodern ones-it is man that has gradually developed them: man's experience and intellect." Capital is the fruit of labor and intellect. The problem with modern "work" is often that the work side is often dehumanized--the worker, in the eyes of "the market," becomes a commodity and a machine, rather than a living person with an intellect and a life history and human needs. The separation of work from human ingenuity is also a social injustice, just as depriving the worker a share in the fruits of his own labor. That is why the pope focuses on the "subjectivity" of labor.
Posted by: Robert Gotcher | 01/27/2014 at 07:14 AM
The problem with modern "work" is often that the work side is often dehumanized--the worker, in the eyes of "the market," becomes a commodity and a machine, rather than a living person with an intellect and a life history and human needs.
You can read some of Studs Terkel's oral histories to get a portrait of management with bad attitudes. I think you will notice, though, that it was manifest most intently in the behavior of foremen, who have the human reality of their workforce right in front of them. Also, you had critics of management practice and work rules in that era from within the skunkworks (e.g. Owen Young and Charles Dawes). I suspect you are confounding the effects of 'modern work' with more abiding human problems.
As is, the different income streams derived from the work of a company go to various stakeholders. Wages, salaries, deferred compensation, and fringes go to the employees; dividends go to the shareholders; interest goes to the creditors; and stock appreciation goes to the shareholders. Note that improved earnings to not rebound to the benefit of either the workforce or the creditors of the company, just the equity holders. You could structure compensation as they do in Japan and have a base-pay and bonus system. Keep in mind, though, that income flux will irritate a large share of the workforce.
Posted by: Art Deco | 01/27/2014 at 09:27 AM
"Keep in mind, though, that income flux will irritate a large share of the workforce."
This is the main issue for many of the worker-ownership model. There is a certain amount of greater insecurity that comes with it.
Posted by: Robert Gotcher | 01/27/2014 at 10:04 AM
I have a somewhat fatalistic view of this stuff, and can easily imagine all sorts of downsides to any possible scheme, no matter how good it seems in the abstract. For that reason I'm inclined to think it's more productive to look for ways to improve existing structures than to put a lot of hope in new ones, even aside from the practical question of how to bring the new ones into existence.
Insecurity in general is one problem in any scheme that ties compensation to the overall performance of the organization. Grumpy mentions some with the John Lewis model, which basically strikes me as a good idea. But that insecurity is an aspect of another aspect of capitalism that's supposed to make it more effective: greater risk brings greater reward. That no longer seems operative with top management; they're guaranteed their millions no matter what, and if they lose their jobs altogether they can just decide to sit around and spend their money, unless they've been amazingly foolish with it. But workers live with a lot of risk all the time, of management just deciding to dump them, either individually for whatever reason, or as a group, by shutting down whole operations.
I wonder how the problem of the bad employee is handled in worker-owned or controlled businesses. You're always going to have a certain number of people who are just incompetent or lazy or badly behaved. How do you get rid of them?
Or how do you make a decision to automate something that will render a certain number of jobs unneeded? I sometimes think technology is in the long run the biggest problem of all. Not everybody can be a computer programmer.
Posted by: Mac | 01/27/2014 at 12:54 PM
This just in: Caterpillar doing much better, cutting work force.
Posted by: Mac | 01/27/2014 at 12:59 PM
Reading that about Caterpillar's stock being set to soar makes me think Art's idea above about prohibiting the use of stock-options as elements in a CEO's compensation makes very good sense.
And Caterpillar's CEO will be doing very nicely -- his 2012 compensation, for example, included $8 million in stock options.
Posted by: Marianne | 01/27/2014 at 01:52 PM
It's partly an unintended consequences thing: supposed to be an incentive for good performance. At lower levels it can work that way, because people there don't have strategic decision-making power. They can only help the stock by doing good work. But it's probably the wrong performance measure for people at the top, as it creates an incentive for them to focus too much on doing things that will look good immediately to short-term investors i.e. speculators but not necessarily be good for the company in the long run.
Posted by: Mac | 01/27/2014 at 02:41 PM
The problem in this discussion is that several distinct issues have been conflated.
Posted by: Art Deco | 01/27/2014 at 04:25 PM
That is often the problem with these discussions.
Posted by: Robert Gotcher | 01/27/2014 at 07:51 PM
It's all but inevitable. This one is more coherent than many, I'd say.
Posted by: Mac | 01/27/2014 at 10:46 PM
You've got corporate governance issues jumbled in with secular trends in the distribution of income between factors of production with labor relations in the background. Unmentioned here is the effect of various sorts of practices on labor markets (the immigration regime, means-tested welfare, general labor law, and anti-discrimination law).
Posted by: Art Deco | 01/28/2014 at 05:53 AM
Conversation generally doesn't proceed on strict analytical lines.
I don't know that the unmentioned things you mention have a great bearing on the Caterpillar situation specifically or other similar ones, although they are certainly significant in some contexts. Immigration, meaning low-skill low-wage immigration, definitely has an influence at the lower end of the job market. Not to mention political influence, with its curious alliance of the left and big business.
Posted by: Mac | 01/28/2014 at 09:44 AM