Does Management Exploit Capital?

I find it fascinating how a certain strain in modern day 1 percent vs 99 percent analysis inverts what was traditionally understood as the analysis of class in terms of owners versus workers. David Grusky in the Boston Review, for example, offers the latest and clearest statement of the popular idea that CEOs exploit capitalists by overpaying themselves:

Why are CEOs paid so well? Under current pay-setting practices, an opportunity for rent arises because board members, often sitting at the behest of the CEO, effectively set the CEO’s pay. (Although shareholders of publicly owned companies can, in theory, vote against management-sponsored compensation proposals, they rarely do.) If board members are rational, they will favor ample compensation packages because their own interests, such as remaining on the board, are served by keeping the CEO happy. It’s rather like asking a professor’s students to decide on her pay in advance of receiving their grades.

Given the simple incentives at work, one would be hard pressed to represent CEO pay in pure market terms. But firms try to do so anyway by hiring outside consultants to recommend compensation terms based on what peer firms offer. The recommendation is then represented as the pay level set by a competitive market. This representation is of course wrong. The prevailing wage is just that—the prevailing one—and it reflects not the true contribution of CEOs but the common practice of allowing CEOs to appoint board members who are then beholden to them.

I think it’s important for people to understand the implications of this argument. If it’s true that the CEO community has created a cartel of interlocking insider-dominated boards that conspire to pay executives above their prevailing wage, the people being victimized are not the firm’s low level employees but the firm’s owners. You’d be looking primarily at a redistribution of wealth from one set of rich people to another set of rich people. The biggest losers here would probably be celebrity entertainers—folks like LeBron James who earns a lot of money and should be investing in equities but who doesn’t earn a living in a way that allows him to benefit from dysfunctional markets for corporate control. What’s more, I don’t even think you need to reach for the idea that board members are being actively corrupt to reach this conclusion. The incumbent managers have all the specific information about the firm. Board members have nothing to draw on to contradict incumbent executives besides generally prevailing norms. The norms are one way in continental Europe, a different way in Japan, and a different way again in the Anglophone countries and the sets of norms seem pretty sticky. The whole setup of widely held publicly traded firms has dysfunctionality built into it.

I note that contrary to the underlying logic of the view, in practice fans of Grusky-style arguments are rarely fans of private equity, and fans of private equity are rarely fans of Grusky-style arguments.