Corporate Spending on Perks 'Egregious'? What about the Feds?

April 7th, 2011 2:47 AM

As debate rages across the country about whether it is reasonable to reduce federal spending in light of the fact that the federal government is spending more than eight times what it takes in, the same publications willing to defend that spending often simultaneously criticize spending by businesses that make a profit. One such story ran in publications nationwide this week, including the Chicago Tribune.

In a story blaringly entitled "Eight Outrageous Executive Perks" circulated by Tribune Media Services, author Kathy Kristoff laments the compensation packages offered by varied companies to their founders and/or CEOs.

For example, Qwest CEO Ed Mueller’s family was permitted use of the company jet, an expense totaling $281,182 for the year. Occidental Petroleum served as another example; the company's CEO moved from Texas to California to do his job. Texas has no state income tax; California had a 9% state income tax at the time. Occidental agreed to pay the tax for him.

“But the problem,” according to the article, “with paying taxes for someone is that even the tax payment is taxable. There's also tax on the tax on the tax, which multiplies the actual amount that must be paid, making this one of the most egregious corporate perks in America.”

Egregious? What about the $174,000 earned by members of Congress? What about wasteful perks of the presidency?

It is problematic that the media is so busy looking for spending it deems wasteful in the private sector that it is often unable to investigate real public officials.

The article also passes judgment on companies’ boards of directors: “Indeed, while some perks are merely outrageous because they're given to executives who earn vast fortunes and are well able to pay the tab themselves, others have proved to be a sign of executive larceny and lax oversight by a company's board of directors.”

Are company stakeholders really asleep at the wheel, unable to discern the consequences of corporate decisions? Or could there be a rationale behind the economics at work?

Stephen Bainbridge, writing in a 2009 article on behalf of the Cato Institute, explores some of the mathematical reasoning behind executive perks. 

According to Bainbridge, economists “Xavier Gabaix and Augustin Landier [found] that ‘the six-fold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large U.S. companies.’ In other words, CEOs got richer because their shareholders got richer.”

The article references another study of the matter cited in The Economist in 2004.

In a recent paper, Raghuram Rajan, the IMF's chief economist, and Julie Wulf, of the Wharton School, looked at how more than 300 big companies dished out perks to their executives in 1986-99. It turns out that neither cash-rich, low-growth firms nor firms with weak governance shower their executives with unusually generous perks. The authors did, however, find evidence to support two competing explanations.

First, firms in the sample with more hierarchical organisations lavished more perks on their executives than firms with flatter structures. Why? Perks are a cheap way to demonstrate status. Just as the armed forces ration medals, firms ration the distribution of conspicuous symbols of corporate status.

Second, perks are a cheap way to boost executive productivity. Firms based in places where it takes a long time to commute are more likely to give the boss a chauffeured limousine. Firms located far from large airports are likelier to lay on a corporate jet.

More simply summarized, perks are a cheap way for successful firms able to attract the highest quality personnel.

Bainbridge points out that the reasonable conclusion of any complaint about corporate compensation -- federal regulation -- will be to end innovation by state governments. “Uniformity imposed by federal law will preclude experimentation with differing modes of regulation. As such, there will be no opportunity for new and better regulatory ideas to be developed — no ‘laboratory’ of federalism.”

The federal government’s insolvency is in many ways directly linked to its efforts to micromanage the states. That should be the story of our time, but it is absent from our media.