Let’s get away from editorial nonsense and back into politics. Well, kind of into politics. And also some economics. President Obama recently proposed to limit the salaries of top executives from those firms receiving federal bailout money as a means to reign in white collar pay from the stratosphere. The limit? $500,000 (€384,166.97; £335,358.67; ¥45,713,092.62). What does this buy in New York City, the place where many of these executives reside? Not much, according to an analysis published Sunday in the New York Times.
For those of you who live in the United States, but not in New York, the after-tax net on this income may surprise you a bit, coming in at around $269,000. That is an effective tax rate (tax wedge, as I think it is called by the OECD) of around 46%. Very high New York state and local taxes are the reasons why this NYC-based tax wedge compares well with those from some of the more socialized democracies of Western Europe. Of course, in America, our sales tax is much lower than the VAT that is added on in Europe, so we save some money there. But at least places like Denmark and Sweden provide ridiculously good benefits for collecting all of that money, like free health care and higher education.
Back to the article, the author makes a compelling case for how those poor saps making only a half of a million dollars in Manhattan would not get very far on their $269,000 net income, after paying the mortgage and maintenance fees, private school, hiring a nanny, etc. The article then starts to rapidly lose its credibility when it attempts to throw in other “essential” expenses like maintaining a house in the Hamptons or hiring a personal trainer. Ahh, the burdens of big city life.
Clearly, these decadent indulgences are not necessities. Yet, if all of that “fat” is stripped away from the average NYC budget, it is quite true that $269,000 will still only go so far. Especially if one is intent to live in Manhattan (even Brooklyn, Westchester or Yonkers, these days), actually own one’s residence, maintain some of the smaller frivolous expenditures in which we all like to indulge, and still have enough leftover to save for the kids’ college education (which will likely cost more than $50,000 per year per child; remember what I said about the benefits offered by the über-taxing socialized democracies??). In fact, the article offers the following analysis by the Center for an Urban Future:
- It takes $123,322 to enjoy the same middle-class life as someone earning $50,000 in Houston, TX. -
Therefore, a six-figure salary is required to be middle-class in NYC. Actually, that’s quite depressing. If we use this absolute math, then those executives living in Houston should be required to make no more than $200,000, the equivalent of $500,000 in NYC. That level of compensation doesn’t sound like such a large number to me anymore, when put in perspective. So perhaps there is some wiggle-room on the compensation issue, as I think I am fairly comfortable with the CEO of major international corporations making more than the equivalent compensation of a physician in an east Texas trauma center.
It’s not a perfect world, those CEOs occupy pressure-filled positions, and those who do their jobs well should be appropriately compensated. But as long as firms are receiving public money, rather than requiring low compensation limits, perhaps we need to require external oversight on major financial decisions. Like giving out bonuses. Or sponsoring work retreats to Californian resorts. This external board doesn’t need to even be maintained by the government. Perhaps a board made up of those working on the inside (but not associated with those companies receiving government assistance) and outside of the financial industry could play the role of TARP ombudsman.
Don’t get me wrong, I have no sympathy for those CEOs and executives who paid themselves millions of dollars even when it was clear that the economy and financial sectors were blatantly failing. But sometimes it is too easy to overcompensate in the opposite direction, with regulations, in an attempt to punish those who are easy (and deserving) targets of our wrath. There are still good reasons to believe in a free, privatized economy, so this is no time to potentially stifle future private investment and drive away the remaining decent business talent currently trying to figure out a way to right this ship. I’m all for executive compensation limits. Just not for silly ones that could be a bit out of perspective.
Last updated:
Tuesday, 10 Feb
2009 - 20:55 UTC
Great post Noah. I recently had a first hand view of the CEO lifestyle, as I tutored the son of an investment bank exec for several weeks (I was the substitute). While I agree that their professional obligations come with some social expectations, I think there are some corners that can be cut in the expense department. I can only speak from my own personal experience, but this family was lived so extravagantly, with two live-in house keepers (4 children), a live-in butler, a live-in chef, and an elevator in the house. More importantly, the mother didn’t even work, so the amount of help they had was excessive.
However, I agree with you. While $500,000 may seem like a lot to the average American, it really doesn’t get a New York exec that far. I wonder how they would survive on my graduate stipend?
I’m prepared to find out how far $500,000 per annum will take me in this city, no matter how arduous a task it turns out to be. I’m guessing… pretty far, mostly by yacht.
as I think I am fairly comfortable with the CEO of major international corporations making more than the equivalent compensation of a physician in an east Texas trauma center
I’m not comfortable with it. IMO, CEOs of major international corporations deserve far less monetary compensation than do many other types of workers, all of whom contribute far more to society. Some of those individuals who cry foul at the idea of downsizing to a middle-class lifestyle are in part responsible for the current economic mess in the US. Many hard-working, decent people would be thrilled to secure a middle-class lifestyle, even in such undesirable locales as, well, Houston.
Obviously I’m not a socialist, and obviously, I have no say in deciding the incomes of CEOs or anyone else; rather, I might value jobs differently than do others in the blogospherz. I find myself suppressing the urge to make retching and choking noises every time an ad for Dragons Den comes on BBC America while I’m watching Dr. Who or How Clean Is Your House?
Yes Kristi, but that coin has two sides. The CEOs that actually carry out their responsibilities with respect and dignity (and a lot less greed) create lots and lots of jobs, allowing many people to enjoy a comfortable lifestyle. These private corporations obviously drive our economy and control the ability for many in the lower and middle classes to not only survive, but perhaps even thrive in their particular lifestyle.
We are seeing the consequences of what happens when CEOs don’t do their jobs; unemployment soars, destroying many, many households. The financial brains who can figure this out, and can continue to operate with more than just themselves in mind, do deserve far more monetary compensation than is on offer from the government proposal because they will touch tens of thousands of lives in the form of offering employment. But to keep these good smart people in the job, we have to pay them competitively. Just like in all forms of employment. So let’s find other ways to punish the bad CEOs and keep business in check beyond a policy that simply discourages good trustworthy white-collar people from wanting to take these upper-management jobs. Even if you don’t like them, we still need them. I’m certainly not interested in their job, but I want someone to run the complicated networks required to make my goods and offer them at prices I can afford.
Noah: If being a big CEO paid less (than needed for a household with four live-in staff etc.).. would ‘better’ people be interested? I would like to believe in the ‘CEO with ideals’, but am having a hard time. But I do get your point.
Ironic that the NYT article that Noah linked compares living expenses in Manhattan and in Houston, corporate headquarters of Enron. In case you’ve forgotten, Enron was the poster child for the absolute economic genius of extreme deregulation and excessive CEO compensation. Remember the Chief Executive Hagfishes of Enron? Kenneth “7 Houses in Aspen” Lay, and Jeffrey “I’m F#$@ing Smart” Skilling? Lay is dead, of course, and Skilling is currently doing a 24-year postbooksdoctoring “fellowship” at the FCI in Lakewood, Colorado.
In a collection of essays entitled “How to Save Capitalism” in the November 2008 issue of Harper’s Magazine (for a few of us, at least, print media are not dead), Nobel Laureate Joseph Stiglitz wrote:
Finally, we must change how financial executives are personally compensated … The present stock-option payment structure encourages CEOs to take actions that bloat the short term reported profits of the firm, thereby inflating the share price, and everybody (except the executives in the know) eventually loses as a result. Their pay must be based on long term performance, and they should share the losses, not just the gains.
Stiglitz’s view is entirely consistent with everything I have said above and I wholly agree with those comments. There are problems and risks, but generally, I believe in private innovation, and will trust the private sector to know how to invest in order to produce the most “bang for the buck” moreso than the government. There are countless examples of successful deregulation and privatization, so I’m not discouraged by the disasters of Enron and WorldCom.
A more detailed update on the Merrill Lynch bonus payout-gate…
What is wrong with these people?
Well, $500,000 doesn’t seem like so much for an exec to make when you make the comparisons you do above. But is it the case that this a temporary limit for execs in companies accepting taxpayer money from the Gov? If so these execs probably have assets and stocks…well assets anyway, to help pay the maid and see them through? But I understand their pain..it’s hard to maintain my high fallutin’ New York life style too. But is it possible this in part due to exorbitant salaries and bonuses driving the cost of living up?
It wouldn’t be enough to refurbish the average CEO office, but would be plenty to cover a cheap antique commode on legs