[PEN-L:11240] Re: More On CEO & Administrative Pay

["James Michael Craven" <CRAVJM@xxxxxxxxxxxxx>]

Wojtek Sokolowski wrote:

That discussion was indeed very informative and leads me to
> conclude, on the pain of oversimplification that, assuming the exec's
> rationality and decision making power -- all his salary is economic rent
> (since under "ideal conditions" he is in the position to delegate all work
> and repsonsibilities to others  for as much little pay as possible, while
> paying himself as much as possible for doing nothing)  -- unless external
> circumstances (such as pressures form lending institutions, government, or
> stiockholders) force him to assume some of the responsibilities he would
> otherwise delegate to others.  If that interpretation is correct, the
> proportion of rent in executive salery would be inversely proportional to
> the effectiveness of the outside oversight and regulations (which, BTW can
> explain the difference between executive pay in the Us and that in Japan or
> Germany, if we focus on the entire managerial class that includes middle
> management as well).


Response: In "mainstream" theory, economic rent arises out of
relative inelasticities of factor supply and demand; relative
inelasticities which are shaped by relative importance, scarcity,
mobility, complementarity with other factors, percentage of
total costs spent on the factor, information symmetry, time period
available for decision-making etc governing the factor. Economic rent
is said to be that portion of factor earnings above transfer earnings
or factor earnings necessary to bring the factor into supply.
Delegating work to subordinates who are grossly underpaid (some) by
those who are grossly overpaid is a result of the factors
contributing to economic rent not the source of economic rent per se--
according to neoclassical theory. Obviously institutions, power
relations/structures, ideologies, myths etc throughout society have
something to do with economic rent, but in neoclassical theory, such
are simply assumed as "given" if even acknowledged at all.

W.S wrote:

> As far as marginal productivity is concerned, I am somehow skeptical that it
> can be zero or even negative, as some argued.  While form a Marxist point of
> view that can be said of the owners, the same cannot be said of the
> management because the management produces and maintains technology
> (organization) that, at least in theory, increases the productivity of
> labour.  While individual managers may be quite inept producers of such
> technology, this cannot be said of the entire managerial class.  Of course
> there is the issue of the stock option that turns managers into "partial
> owners" but that, IMHO, diminishes exec's marginal productivity.  This is
> so, because the more stock in the hands of the CEO, the greater his
> capability to withstand the external pressure for other stockholders, and
> thus the fewer the constratints to prevent him from commanding pure rent for
> his "non-contributions" to the marginal product.


Response: Most large modern corporations are controlled by groups who
hold less than 5% (even less in many cases) of the voting stock. With
stock dispersion (just like vote dispersion) and stockholder apathy
(most stockholders don't known or give a whit about much more than
dividends and stock price at sale vs at purchase) a small minority of
cohesive stock/vote holders can maintain effective control; and
further, the actual managers hold very small percentages of stock--
not enough to hold off major shhareholders who have it in for them--
they maintain power through effective networking, shared interests,
"quid-pro-quoing" etc. Management "produces" very little effective
technology as their role is primarily acquisition of technologies
produced elsewhere and parisitically grafting it on; in any case, the
concept of negative MRP was said only half in jest. The fundamental
imperatives of capitalism, the bankrupt managerial paradigms
(including the neoclassical one you seem committed to remain within),
necessary conditions of labor, management policies all contribute to
chocking off productivity and MRPs relative to levels found and
demonstrated with alternative paradigms, managment policies etc) and
thus, we might speak of the MRP resulting from a marginal increment
of CEO input (or should it be increment of a marginal CEO), rembering
of course all that must be assumed ceteris paribus (reality) and then
deducting losses in MRPs as a result of clearly abusive and
dysfunctional CEOs and their bankrupt policies/paradigms.

This analysis is not anecdotal or above particular CEOs. It is about
the fundamental imperatives/constraints/contexts of capitalism and
the typical profiles/intentions/interests of CEOs generally. Again I
ask why discuss this within the parameters of a fundamentally
bankrupt/apologetic paradigm? This illustrates the tyrrany in many of
the universities etc. To discuss any serious questions, they must be
discussed/constrained/mystified within and through bankrupt paradigms
like neoclassicism. That is why I used the quote from Menninger about
"the neurotic builds castles in the sky while the psychotic moves in--
and the shrink collects the rent." This paradigm, further, forms the
foundations of many real-world policies that in turn produce effects
and forms of misery as morally and intellectually bankrupt as the
paradigm used to construct them.

W.S wrote:

> Approaching the issue form the transaction cost economics  or TCE (cf.
> Oliver Williamson, _Markets and Hierarchies_) -- the marginal productivity
> of administrative hierarchy can be conceptualised as net savings in
> transaction costs resulting from implementing the hierarchy over its
> alternative, independent agents in competitive markets.  Please note that
> this explanation does not address the issue of marginal productivity of
> individual CEOs, but of the entire managerial hierarchy.  From that
> standpoint, it matters little whether the CEO rakes in a lot and pays his
> henchmen who do the wage-slave driving for him next to nothing, or whether
> the pay is distributed more evenly across different echelons of the
> managerial hierarchy.  If we take that into account, the cross-national
> differences in remuneration  of the managerial class as the whole (rather
> than just the top layer of it) may not be as large as they seem to appear.

Response: What the hell is the "marginal productivity" of "an entire
managerial hierarchy"? What do you do, assume a change in total
revenue due to a "marginal increment" of "an entire" homogenous
hierarchy (which includes the minions and non-management types) of
course assuming everything else (all the decisive aspects of reality)
ceteris paribus? Really, this is more than moving into the castle.

W.S Wrote:

> Another point is that, from the TCE perspective, the marginal productivity
> of managerial hierarchy depends, for the most part, not on the individual
> skills of the members of that class, but on the transaction cost of the
> "next available alternative" -- individual agents in competitive markets.
> That is, the lesser the transaction cost of doing business via purely
> competitive markets (due to the bonds of trust, strength of informal social
> networks, or government oversight), the fewer the savings resulting from
> insituting the adminsitrative hierarchy, thus lower the marginal
> productivity of the managerial class, and hence lower the managerial salary.
>
> This is another possible explanation of the differences in managerial pay in
> the US and in Germany and Japan.  The latter are characterised by a
> relatively great deal of social cohesion which brings down the transaction
> cost of doing buisness via competitive markets, while in the US, where
> thanks to the suburbs and the automobile, social cohesion is low, the cost
> of market market transactions is high, and so are the savings resulting from
> implementing administrative hierarchies.

Response: What can I say to this? Fukiyama strikes again?


> To summarise, the TCE approach to managerial salary as a class can
   Any comments?
> PS. I presented some of the arguments posted on that issue to my colleague.
> He conceded that some of the exec salaries might be economic rent.  However,
> he disagreed with the proposition that the same apply to the salaries of
> university administrators.  He observed that the salaries of college
> administrators are much lower than those of corporate execs, but I do not
> think he is correct on that point, e.g. Bill Gates' salary is mere $340
> thousand + $220 thousand bonus (based on Microsoft's proxy statement); that
> is comparable to what Hopkins president got when he quit last year, a
> quarter-million-dollar  bonus from a not-for-profit instituion!  My
> colleague argued, however, that university presidents are more important
> than their corporate counterparts beacuse, unlike corporate execs, they
> raise funds for for their organizations.  Any comments?
>
> regards,
> wojtek sokolowski
> institute for policy studies
> johns hopkins university
> baltimore, md 21218
> sokol@xxxxxxxxxxxxxxxxxx
> voice: (410) 516-4056
> fax:   (410) 516-8233

                                     Jim Craven

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