Dan Among Den

I've read the thing, and, frankly, it makes no sense to me at all.

He says that CEO salaries have been holding steady as a percentage since the 1930s. I'll accept that--I have no data to confirm or deny it. But he doesn't explain why he thinks this is equitable, given that other corporate salaries don't follow any comparable ratio.

But regardless of the 'equity' issue, this passage just baffles me:

The usual explanation given by economists for the positive relation between compensation and firm size is that the largest companies attract the best management. Therefore, bigger companies have to pay their CEOS better in order to discourage them from going to head smaller companies. It is also socially efficient to have the best mangers[sic] run the largest companies because their greater skills then have a bigger influence since they would manage a larger amount of labor and capital. The efficient combining of better managers with larger companies in a competitive market for top managers would imply a positive relation between firm size and the total compensation package. This analysis does not explain why the 30 per cent rule holds, but it suggests that the relation between pay and size is likely to be sizable, even when top management in different sized companies do not differ greatly in skills and abilities.

What? The best managers are attracted to the top companies because of the pay, which explains why managers at bigger companies are paid more, even when their skills are comparable to managers at smaller companies? What?

I may be missing something obvious in this, but I ain't seeing what it is.

I'd have to agree about the quote. The statement that "the largest companies attract the best management." Seems not only counter intuitive, but completely without any base in reality.

While it might be "socially efficient to have the best managers run the largest companies", the comment that "even when top managment in different sized companies do not differ greatly in skills and abilities." seems to indicate the opposite.

The statement that "the largest companies attempt to attract the best management" might be true.

Fundmentally they said two reasions for compensation rise, one being historicly CEO compensation is higher for larger firms, and today there are some REALLY big companies. The second reason eludes me.

I've never figured CEO's for evil (except maybe MCI and Enron, those guys were crooks, caught in their own greed), but CEOs are paid to "increase shareholder value". Not to make widgets, or even sell ANYTHING. A simple fix to CEO compensation of publicly traded companies, base their monthly pay on the stock price of the company, no stock options, etc. Just setup an indexed fund for their salary. It should serve the shareholders quite well.

At any rate, since it seems like large corporations seem to have large effects on our economy, the logical thing to do would be to change the regulatory structure to encourage smaller companies. (Tax stock swap acquisitions to reduce "churn", or at least make it a capital gain event for the officiers of the corporations.)

There are some activities that only very large corporations can do efficiently today (Biotech research, Chip fab, etc.)
(Having essentially 100% microsoft software on the market, is very efficient from cost standpoint, but it has long term effects on innovation.)
But look at this company and just tell me *why* it should even exist:
http://www.newellco.com/

I guess I'm sympathetic to the CEO's. Most do an excellent job. Some are incompetent. A few are criminally so, and a very small portion are just plain criminal.

I think what Becker is getting at with this quote is to say we don't know why the 30% rule holds, but it certainly seems to.

To me, the key is judgement. I have personally seen from up close the virtual destruction of two companies where that destruction was caused by a bad decision by the CEO. They were decisions that had to be made, i.e. they couldn't just be put off for further analysis. Someone had to make the call. These kinds of big decisions come up several times a year in a companies life, and if your CEO chooses poorly enough, he can doom the company. In my book, a CEO who doesn't screw up like that is worth every penny. And to Becker's argument, one who has demonstrated the good judgement to not screw up can be trusted with a larger company to shepherd.

If you're not familiar with the Becker-Posner format, tune into them later in the week, where they'll post a "response to comments" entry.

As for http://www.newellco.com/, I took a quick look, and yes, they offer a diversified product mix, from pens, to mops, to baby carseats. You can say there's no reason for this to exist as one large company, but I'd say you're wrong. All those products show some core strengths of the company, namely an ability to create desireable consumer products (I use several and find them useful and of good quality), market them well in order to enjoy a greater gross margin, and since they all seem to be made out of reasonably new artificial materials, they seem to have a decent strength in material sciences. Add to that the normal economies of scale in manufacturing, distribution, and internal governance, and it makes good sense to me.

Dan, what you're missing about Newell is that they do *not* create desirable consumer products. Newell doesn't create shit--Newell buys companies that create things. Let me quote a fairly respectable source:

"Newell Rubbermaid is a manufacturer ofbranded consumer products. Through several acquisitions, Newell has assembled some of the best-known brands in storage containers, plastic specialty, hand tools, cooking ware and writing utensils. Its brands include Rubbermaid, Sharpie, Paper Mate, Parker, Roughneck, Calphalon, Little Tikes, Graco, Levolor, Vise-Grip, Quick-Grip, Brute, Stain Shield, Blue Ice, TakeAlongs, Kirsch, Shur-Line, BernzOmatic, Waterman, Colorific, Goody, Irwin, Lenox and Marathon.
In the mid-1990s the company was very successful in integrating acquisitions and realizing all the available synergies. Someone even coined the term "newellized" as a verb describing the act of making a successful acquisition and integration. Then in 1998 the company bought Rubbermaid for $5.8 billion in stock. The expected synergies were never realized and the value of the company today is just more than half what it was immediately after that merger five years ago.

In reading about Newell, you'd be hard pressed to find anything that the company has ever created. That's because it doesn't create things. The sole goal of Newell is to buy out companies that do create things and combine them under one stock listing roof.

Yes, it makes sense in terms of economics . . . for the companies involved. It makes no sense for consumers. It's downright detrimental for consumers, to have one company with so much advertising (and other) power. That's not where Adam Smith's "Invisible Hand" leads us; in fact the consolidation of so many companies ynder one roof is the opposite of what Samith envisioned.

I am not opposed to a free market, I am not opposed to a free market economy. What I am sure of is that a government controlled by the largest corporations is in no way free.

On Enron:

http://www.greythumb.org/blog/index.php?/archives/80-Eugenics-doesnt-work.-Ask-why,-asshole..html

(And I'm not sure what the second company you were talking about was.)

For the record--I went and asked my question at their (Becker's and Posner's) blog, because you mentioned that they give responses, and I got a response. Hell, I got mentioned by name.

I'm not sure whether to be insufferably proud or embarrassed in that "singled out in front of the classroom" way.

MSN recently featured an article on how high CEO pay could be partially explained by the "tournament theory" of reward - in other words, the mailroom clerk thinks it's cool that the CEO makes that much money because he hopes someday to work his way into that job and make that much money himself.

Ah. Forbes.com did the article.

and the URL got stripped. Well, search for "ceo pay" and "tournament theory" and you'll find it quickly.

Samantha,

I think what Becker repsonse is similar to my comment of seeing CEO's destroy companies with poor judgement at critical times. A good CEO and a bad CEO have very similar day-to-day skills, but the good CEO doesn't fuck up like the bad one does.