I’ve heard it said that in the 1950s and early 1960s, doctors often drove Buicks even though they could afford Cadillacs. Maybe they didn’t want to show off. Or maybe they didn’t want to be subjected to the kind of joke that Alfred Hitchcock used in “The Man Who Knew Too Much” when Jimmy Stewart (as a doctor) and Doris Day describe the medical procedures that are paying for their exotic vacation in North Africa.
I don’t know whether the doctors of my youth actually were self-restrained, but it seems that the CEOs were. According to Robert Samuelson:
What’s incontestable is that there’s been a revolution in how — and how much — top CEOs are paid. After World War II, executive pay (adjusted for inflation) barely inched ahead, according to a study by economists Carola Frydman of Boston University and Raven E. Saks of the Federal Reserve. In the 1960s and ’70s, gains averaged about 8 percent and 12 percent compared with the previous decade. Most compensation, almost 90 percent in the 1960s, was paid in cash as salary and bonuses.
The Depression-World War II era managers were generally self-restrained. They didn’t want to reignite the ideological battles of the 1930s, when business was blamed for the economic collapse.
Fifty years on, there is no evidence of such restraint. In 1965, the ratio of CEO pay to the pay of typical workers was 20 to 1, according to an estimate by Lawrence Mishel of the left-leaning Economic Policy Institute. Now it’s 300 to 1 (though not at its pre-recession peak).
There are, as Samuelson notes, good reasons why the ratio of the disparity exceeds its 1965 level. U.S. firms face much greater competition from around the world than they did in 1965. Moreover, executive compensation increasingly has taken the form of stock awards, and the stock market has done quite well.
There is also an argument that the pay model that has emerged creates incentives for executives to favor policies — reducing jobs or research and development — that boost stock prices for a few years at the expense of long-term growth. I agree with Samuelson, who says “how much of this is a real problem as opposed to a rhetorical debating point is unclear.”
There is no “correct” ratio for CEO pay to “typical worker” pay, and it would be disastrous for the government to set executive compensation. But there are correct, or let’s say generally desirable, instincts.
Self-restraint is one. The sense that one’s compensation shouldn’t become Exhibit A in class warfare is another.
Self-restraint is in short supply these days. Its absence is most noticeable on the left.
Hillary Clinton becomes wildly wealthy through an influence-peddling Foundation and then makes the wealth of CEOs and hedge fund managers an issue in her campaign. The left as a whole plays on high CEO compensation to promote class envy, even though high executive comp has little or, more likely, nothing to do with the state of the middle class.
But this is all the more reason for CEOs to exercise restraint. If, as seems likely (if not inevitable), our politics will more and more become a referendum on American capitalism, CEOs shouldn’t help the left make their pay an easy proxy for capitalism.
We shouldn’t expect CEOs to drive Buicks. But it would be nice if they could limit themselves to one Cadillac.