Why Davos is ignoring Occupy

By Felix Salmon
January 26, 2012

If you’re Europe, and your struggling people are called “Greeks”, and your rich people are called “Germans”, then the World Economic Forum will spend pretty much limitless amounts of time and effort on attempts to understand the dynamics between the two and (doomed) plans to try to prevent it from turning into a fully-blown crisis.

On the other hand, if you’re a country — the USA, say — and your struggling people call themselves “the 99%” while your rich people are called “Davos delegates”, then your fundamental asymmetries will be studiously ignored — and, indeed, encouraged.

I went to one session on executive compensation yesterday, which was filled with global CEOs of various stripes. And a couple of questions that Lance Knobel would like to ask were, amazingly, raised: should there be some kind of cap on CEO compensation? Maybe in terms of the ratio between the CEO’s pay and that of the average employee? The answer came swiftly and unanimously: no.

The problem of CEO compensation, it turns out, is not really a problem at all: if you look at most companies, the amount they spend on executive compensation is not really a big part of their revenues. Of course there shouldn’t be any kind of regulation. And capping pay only makes sense if you cap corporate size, and no one wants to do that.

That said, there is one outstanding problem with CEO pay: the time when you most need executive talent is not when things are going great, but rather when things are going badly. And often, in that case, compensation structures linked to stock options and the like turn out to be largely worthless. We’re good at paying CEOs in good times, but we should probably come up with ways of paying them more in bad times, too. After all, that’s when they really prove their mettle.

That panel really helped me understand the general Davos attitude towards Occupy. The delegates here don’t feel threatened by it, so much as they just feel a bit indignant at how misguided it is. Obviously, in a big inchoate sense, inequality is a problem. And maybe Occupy is a manifestation of that problem. But the Davos crowd is not even close to listening carefully to what Occupy has to say: they’re evidence of the problem, but they’re not remotely helpful when it comes to solutions.

As Lance says, “an organization that is at heart a grouping of the world’s largest corporations isn’t necessarily in the best position to improve the state of the world, particularly in an era of the Arab Spring and Occupy”. It’s another way in which Davos feels past its prime. It’s not helping to change the big world problems, in Europe: the best it can do is identify them. And it’s utterly divorced from the movements which really might make a difference.

But hey, at least the skiing is good this year.


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Or it is because, contrary to their claims, the “99%” are actually a miniscule number of people inflated by the media.

Posted by Danny_Black | Report as abusive

It’s actually pretty simple. ‘Taking risks’ is something that employees, stockholders, and bondholders do. CEOs, not so much.

Posted by MattF | Report as abusive

@Danny_Black: lol, I can’t get over this statement: “the “99%” are actually a miniscule number of people inflated by the media.” The media are really getting good when they can take an actual number and change its meaning.

Anyway, for once I think I sort of agree with the Davos people here. I think CEO pay isn’t so much a problem in and of itself, I think it’s the symptom of a larger problem which is the competitiveness of our population. I don’t think the value of a CEO has really changed all that much over the last 20 years, I think what has changed dramatically is that the value of a factory line worker has gone down considerably. Technology and automation have made a lot of the jobs that employ the 99% obsolete. It’s also made geographical requirements non-existent. You no longer need to work in the same building as someone to be able to communicate and collaborate with them in real time. They can literally be on the other side of the planet.

We Americans simply have to adapt to those realities. Are there things that can be done to help? Probably a little. But at the end of the day, “progress” is going to equalize the world economy and it’s going to be painful. You can’t really blame the 1% for recognizing this reality and taking advantage of it. I think that’s why Occupy doesn’t really have a mission statement. It’s because they recognize the inevitability as well and know there’s not much that can be done.

Posted by spectre855 | Report as abusive

I don’t think the value of a CEO has really changed all that much over the last 20 years, I think what has changed dramatically is that the value of a factory line worker has gone down considerably. Technology and automation have made a lot of the jobs that employ the 99% obsolete.

Couple of problems with this statement:

1. While the relative “value” of a modern CEO vs. say 40 years ago is debatable, his compensation is not. CEOs in 1965 made 24 times more than the average production worker, whereas in 2009 they made 185 times more. Has the average CEO suddenly become 8x as “productive” or smart as vs. 1965 or has the tax code and government shifted heavily in favor of the 1% and virtual monopolies, as the author is suggesting?

2. Yes, automation has eliminated many low-skill manufacturing jobs over the years, and will continue to do so. Thing is, why is it that the same process has been going in in Japan, Taiwan, France, Germany, Australia, etc., but these countries have successfully managed to hold on to their manufacturing base far more than we have?

3. You seem to be conflating automation and technological progress (good things) with outsourcing purely to exploit cheap labor (not good). Automation tends to replaces low skill jobs with high skill jobs that are often better than the old jobs it eliminated (robotic engineer vs. line worker).

We Americans simply have to adapt to those realities.

There’s nothing inevitable about tax and commerce policies that favor even greater concentration of wealth, favor passive unearned income over income earned by work, or favor outsourcing jobs. So, no, we Americans do *not* just have to accept these realities. We need to get angry and demand real change, not just populist rhetoric.

Posted by HARM2 | Report as abusive

Harm2: It’s a bit naive to say that “automation and technological progress” are unreservedly “good things”. In general, any economic change is good for some people and bad for other people. Computerization tends to reward capital owners and punish laborers.

A typical manufacturing company (specifically, the one detailed in this month’s Atlantic magazine) gradually replaced several dozen skilled machinists with one “machine operator” overseeing a dozen automated machines. The operator is not particularly well paid (IIRC mid 30,000s), and most of the factory jobs are just gone.

My first real job (ca. 2001) was in a plant that had been built in the 1940s for about 6,000 workers. When I was there about 200 were left. I’d be surprised if they’re still in triple digits.

Posted by JayCM | Report as abusive

JayCM, “automation and technological progress”, fancy giving up your car, phone, internet access? I guess we’d all be better getting out our hand plough’s and going back to the fields.

To others: CEO pay is a problem and also the manner in which the rich in general seek to avoid paying their fair portion in tax. I’m not poor myself but I guess you’d have to say its just not fair. In any case in my mind how much money do you really need anyway to give yourself a very good standard of living? Maybe some of those extra millions could be put to better use for the public good (i.e relieving in some ways the problems of those lower down the pay scale).

Posted by houghtie | Report as abusive

JayCM, change happens, get used to it. They used to used to use farm hands to cut crops, are you advocating moving back to using the sickle?

If so I think they still do in some parts of Eastern Europe, maybe you should move there. In fact I’ve seen gangs of laborers digging holes (with picks/spades) for telecoms lines in India. Do you think a digger would have done a better job?

Posted by houghtie | Report as abusive

To others: some nice charts to warm the cockles of those top earner hearts – http://www.businessinsider.com/15-charts -about-wealth-and-inequality-in-america- 2010-4#

Posted by houghtie | Report as abusive

The trend in CEO pay increasing as a multiple of average worker pay is similar to what’s happened in sports and entertainment. It may be tied to changes in sphere of influence or pace of change resulting from technology. That said, there are legitimate concerns that boards are not independent enough of management in setting pay. To that point, I’d be more interested in seeing CEO pay over time relative to net income, or revenue, or market cap. I think that also frames the debate better, because the question really is if those dollars should go to management or shareholders.

Similarly, i also believe that generous option grants and large severance packages in CEO contracts are accepted by shareholders if part of a grand bargain. The flip side is less entrenched management than in the ’60′s or 70′s – options encourage selling the company if a bidder will pay up and generous severance positions a CEO to be replaced if he or she underperforms It has worked imperfectly, but it does seem to have helped some on both counts (Studies have certainly demonstrated that average CEO tenure is shorter than it used to be.). A breakdown in this connection bothers shareholders of a large cap company more than a few million dollars per year of comp (e.g., how many Yahoo shareholders wish it had been sold to Microsoft?)

Posted by realist50 | Report as abusive

An open question to Felix, Danny Black, Kid Dyminite, TFF, and the many other inciteful commenters who regularly post:

What % of GDP should be collected in taxes and spent by all goverment (Federal+State+Local)?

No need to break it out by level, branch, or department… just looking to gage what % you think would be the right number. I think the Occupy croud would agree it’s higher than it is currenly. Much more controvercially, I think that the occupy croud would propose progressive taxes become confiscatory at some level. Lets just start with what level of GDP should be spent by goverment.

http://en.wikipedia.org/wiki/Government_ spending

The Scandnavian’s seem to hover around 50%. The Germans are somewhere near 44%, we Yanks stand around 39%, Ths Swiss seem to be quite low at 32% (I suppose it helps to be neutral so lets pad that up to 35% since we can’t rely on others to provide our defence the way they do.) The Koreans, god bless them, are so hard working that they get by on 30%. I’m quite impressed at the price/quality of the flatscreen TV they built me.

Looking at the counries below Korea I can’t find any I’d like to live in… so 30% might be the low end for me. I’d be really interested to gage the opinion of the regulars.

Posted by y2kurtus | Report as abusive

Yes, the US is right around 40% of GDP when you combine federal, state, and local taxes…

That said, I don’t think you can look at the price tag in isolation without also asking what you get for that price. If health care were nationalized, we could hit 50% and still have more money left over than we do now. Similarly, we could kill Social Security, saving a ton of money, and not be any better off as a nation.

Unfortunately, taxation and transfer programs distort the economy. Ideally you would emphasize forms of taxation that create minimal distortion (broad-based taxes with lower marginal rates) and forms of transfers that can’t be easily gamed (e.g. public education and basic health care).

I do think we could improve on current policy.

Posted by TFF | Report as abusive

“The media are really getting good when they can take an actual number and change its meaning.”

Please explain, spectre? Despite their claims, OWS does not represent 99% of the country.

Posted by TFF | Report as abusive

TFF – I agree with your general concept but can’t follow the specific math on healthcare. The figure I have (CMS, 2010 data) is that U.S. healthcare spending is 17.9% of GDP, but 45% is paid for by govt., so private healthcare spending is right at 10% of GDP. I don’t see how we would free up money.

Posted by realist50 | Report as abusive

@TFF, I was attempting to make light of the literal nature of the term “the 99%”. You know, since the term should equate to an exact figure somewhere around 297,000. You know your joke is a bomb when you have to explain it…

Posted by spectre855 | Report as abusive

“And capping pay only makes sense if you cap corporate size, and no one wants to do that.”

I’ve never quite understood this argument. The argument also seems to be couched in the negative – a lousy CEO can do more damage in a very big firm. So you have to pay lots to protect against that (at least that seems to be the argument). I see it differently – your value is not exactly your (unknowable) marginal product, it is the cost of replacing you. Even if the CEO is exceptional, how would know. The core competences are widespread – and the systems in place should protect the firm against incompetent individuals. Shouldn’t they?

Posted by jimvb | Report as abusive

“The figure I have (CMS, 2010 data) is that U.S. healthcare spending is 17.9% of GDP, but 45% is paid for by govt., so private healthcare spending is right at 10% of GDP. I don’t see how we would free up money.”

Ah. Without checking, I was operating under the assumption that only 1/3 was paid by government. From your numbers, a full nationalization wouldn’t need to take the US as high as 50%.

Whether or not it frees up money depends on whether the nationalized system would be more or less efficient than the current system. That depends primarily on the level of benefits it provides. Yet either way, I believe a nationalization would reduce the “friction” in the system. If we are going to guarantee basic health care for everybody, then we shouldn’t pass around the cost of that health care from employer to government to employer like a hot potato.

Posted by TFF | Report as abusive

Oh, but they are, indeed, in a position to improve the state of the world. They’re just so busy amassing personal fortunes that they can’t be bothered.

The fact that they’re destroying the market for their companies’ products in the process doesn’t seem to occur to these smartest guys in the room.

Carolyn Kay

Posted by CarolynKay | Report as abusive

Good post! It doesn’t surprise me that the Davos class would be reluctant to accept real critiques, because the question is not just inequality or boardroom pay but rather the power the Davos class has entrenched in its own hands. They are happy to talk about reforms but nothing that would threaten that grip on power. You can see how entrenched that power is here in these infographics: http://www.tni.org/report/state-corporat e-power-2012

Posted by vivirbien | Report as abusive

TFF, yeah I also didn’t get what spectre855 meant. The point i was trying to make is that OWS doesn’t come close to representing a signficant portion of the US population, let alone 99%. Hence why i put it in quotes. Can’t work out if he/she is agreeing or disagreeing.

y2kurtus, no idea. But I would say the question should always be, WHY is the public sector involved here. What is it trying to achieve. Singapore is a relatively nice place to live, so is Hong Kong for the moment. I would also point out that taxes will always fall on the people who are in the middle.

Posted by Danny_Black | Report as abusive

“WHY is the public sector involved here. What is it trying to achieve.”

I believe it makes sense for the public sector to get involved in providing goods/services to the extent that such goods/services are considered a basic human right. (Not intended to be a universal definition, but this would be the applicable principle here.)

Welfare programs already provide for food, shelter, and medical care. The combined cost for a family of four is on the order of $30k. (Maybe even more? Depends on the state.) Unfortunately, if these benefits are wholly phased out by the time the household hits $50k income, that implies a MINIMUM effective marginal tax rate of 60% on that segment of the income. And that doesn’t even include FICA tax on those $50k of earnings, or other welfare benefits.

Nationalizing health care costs is an effective way to smooth the cost function. Food stamps are already pegged to income. The housing subsidy is valuable, in dollar terms, but nobody with a choice WANTS to live in public housing projects. Health care is the biggest single cost of the three, and is presently withdrawn abruptly when the household “earns out” of the Medicaid benefit.

Another alternative to this dilemma is found in Romneycare, which has worked pretty well for Massachusetts. But the principle is the same. To avoid excessively high effective marginal tax rates (resulting in the “working poor” falling through a donut hole in coverage when they don’t qualify for public benefits but can’t afford private), you have to at least extend the public subsidies (on a sliding scale) to a higher income level.

Posted by TFF | Report as abusive

y2kurtus, I looked at the figures provided and at the risk of defaming Wikipedia’s accuracy, I seriously doubt some of those figures. The only way they can even remotely come close to reality is if they are not including indirect government involvement – for instance knowing where the government ends and the IRGC and clerics start in Iran is a toughie.

Apart from NZ and possibly Japan, I can’t imagine living in any of the countries over 40%. Taiwan is very nice and so is Korea. Turkey used to be very nice but i would be concerned about the direction it is taking.

Posted by Danny_Black | Report as abusive