A New Way to Deal With Greed

2011 December 14

by Anonymous with an introduction from Roy W. Bakos

I have a friend that cares very deeply about the issues that we face in our society today.  We have talked, albeit briefly, about many of these and some solutions and I had also told him about this website.  He sent me this take on the Occupy Movement and corporate greed that lays out what he sees as the causes and offers a solution to them that is logical and makes a lot of sense.  Bear with the length of the piece…the problems were not caused in a soundbite and the solution won’t be a soundbite either.  Length and Logic might disqualify many things from being aired in the mainstream but here at the Moose, we revel in things like this.  Enjoy, reflect, and please comment and share.

The Writing:

This is a discussion about greed and its impact on the socio-economic well being of our society as a whole.  It can be argued that greed is the root cause of poverty and most other manifestations of economic instability in our country.  Webster’s defines greed as “excessive desire for getting or having, esp. wealth; desire for more than one needs or deserves; avarice; cupidity”.  This definition falls short, however, in that it does not encompass another important aspect of greed – the obstruction of opportunity for others to get or to have what those others minimally need or deserve.  The accumulation of wealth is not in and of itself evil or immoral.  It is human nature to desire to achieve the reasonable security and wellbeing that comes with a modest surplus of personal wealth, and we cannot reasonably fault those who aspire to better themselves.  Generally speaking, we all want more than we have, and few are able to fully suppress this natural inclination.  However, when the pursuit of wealth goes beyond that which is necessary to attain a reasonable level of security and wellbeing, and when the methods employed in the pursuit of excessive wealth effectively deny others the opportunity to achieve a reasonable level of security and wellbeing, the pursuit of such excessive wealth then fits the expanded definition of greed, and may rightly be viewed by society as both evil and immoral.

It is troubling to observe that our society, the most advanced, educated, and sophisticated society ever to have developed throughout the span of civilization, consistently fails to recognize, appreciate, and learn from the events leading to the demise of other societies over the course of recorded history.  How can we overlook the glaring fact that the common denominator in the collapse of those other societies has been the concentration of wealth and power in the hands of a relatively small number of “elite” individuals at the expense of a dwindling middle class, ultimately resulting in a grossly disproportionate two class socio-economic system in which the poor greatly outnumber the wealthy?  Why do we treat the historical accounts of the French Revolution, the Bolshevik Revolution, Mao Tse Tung’s Long March, and, to a lesser extent, our own American Revolution, as if they were mere stories for the entertainment of children?  These events happened.  They happened because the societies they sprang from had been allowed to deteriorate into lopsided two class socio-economic systems in which the poor grew to a critical mass, and such events can happen again whenever similar conditions are allowed to persist.  Yet there are those today who bandy about the term “Class Warfare” in an effort to ridicule attempts to rectify such dangerous imbalances, without understanding the historical nature and consequences of true “Class Warfare”.  It is not without good reason that the phrase “Those who do not learn well the lessons of history are doomed to repeat them,” was coined.

Our society was founded on the principle, among others, that we are all entitled to life, liberty, and the pursuit of happiness.  It is no coincidence that these entitlements are presented in the Declaration of Independence in this particular order, for without life there can be no liberty, and without liberty there can be no pursuit of happiness, other than the pursuit of liberty itself.  By virtue of this hierarchy, the exercise of the right of one individual to pursue happiness may not limit or impinge upon the right of another individual to enjoy life and liberty.  This principle is aptly illustrated by the old saw (paraphrased) “Your right to swing your fist ends immediately before contact with my nose begins.”  Further, our society has devised laws that forbid one individual to take the life of another, to deliberately or negligently injure another, or to imprison or otherwise constrain the liberty of another.

It can be argued that the right to life is more than merely the right to live, but, rather, the right to live and enjoy at least a certain reasonable minimum or “basic” quality of life.  It can be argued further that a basic quality of life in modern times should include, in addition to liberty and the freedom to pursue happiness, the basic essentials of life as they are currently recognized – clean air to breathe, clean water to drink, sufficient untainted food suitable for sustenance, clothing and shelter adequate to provide both privacy and protection from the elements, safe and timely disposal of wastes, and access to adequate health care – without fear that those essentials may become tainted or inaccessible.   It would be unreasonable to expect that any rational individual would knowingly and willingly forgo his own access to any one of these essentials, except in reaction to circumstances immediately threatening life and limb, either to himself or to those for whom he cares.

Unfortunately, within our society there is rampant disregard for the precedence that should rightfully be accorded to the right of an individual to enjoy a basic quality of life.  Our socio-economic system routinely fails to constrain or dissuade individuals who, in the exercise of their lesser right to pursue happiness, directly or indirectly curtail or disregard the greater right of other individuals to enjoy life and a basic quality of life.  Notwithstanding the laws we have made intending to protect these basic rights from direct infringement, we consistently tolerate, to varying degrees, actions that do not directly or immediately take life or cause injury or physically constrain liberty, but which nonetheless indirectly diminish or constrain our enjoyment of life and a basic quality of life.

Until recently, a classic example of this phenomenon could be seen in our nearly nationwide tolerance of tobacco smoking.  Smoking is a purely self-indulgent activity, performed for purposes of pleasure, vanity, rebellion against authority, or to avoid the discomfort of withdrawal.  As such, smoking cannot qualify or even remotely approach qualification as an essential of life.  Rather, in terms of rights, smoking qualifies only as a means by which happiness may be pursued.  Further, long term repetitive exposure to tobacco smoke, both primary and secondary, has been scientifically proven to be a cause of cancer and emphysema, and even a single short term exposure can trigger fatal reactions in some asthmatics.  The act of smoking in the presence of any nonsmoker clearly exposes the nonsmoking individual to risks of potentially fatal consequences, yet, until very recently, our society accepted and condoned such conduct because a single exposure rarely resulted in immediate loss of life or the onset of other symptoms.  We did not consider the separate inconsiderate acts of individual smokers, the collective acts of many, or even such acts accumulated over time, to be immediately life threatening.  Yet, we allowed smokers, as a result of their accumulated acts, to slowly kill thousands of nonsmokers annually.  An individual who eventually dies as a result of accumulated secondary exposure to tobacco smoke is no less deprived of his right to life than one who is killed instantly by an assailant, yet we did little or nothing to enjoin smokers from their inconsiderate acts so as to protect the nonsmokers’ right to life.  Effectively, the right to pursue happiness was allowed to trump not only the right to a basic quality of life, but the right to life itself.  However, within the last few years a more enlightened viewpoint has led to legislation to ban smoking in most public places, and private industry is largely following suit.

The argument condemning smoking is no less valid for many other forms of cumulatively life threatening activity.  For example, nearly all types of pollution are cumulatively life threatening, and can be traced back to pursuit of happiness as the root motivation for the acts that cause their release into the environment.  So too are starvation, exposure, and lack of access to adequate health care both life threatening and traceable to pursuit of happiness by a select group as the root cause.  The common thread here is that the decisions that result in environmental pollution, mass layoffs, foreign outsourcing, and inadequate pay and benefits for the rank and file, are almost universally made on the basis of high profit motivations which, in turn, are based on the desire to satisfy disproportionately high ambitions for the pursuit of happiness by a fortunate few.  We consistently allow a relatively small number of individuals to live like kings, while our so-called middle class shrinks and millions of individuals are forced into poverty.  In essence, we tolerate greed, and fail to recognize greed as an infringement on the right to a basic quality of life for those who are either directly or indirectly impacted by that greed.

There are those who will argue that it is not an act of greed for investors to expect a reasonable return, thus, the profits to support that return are entirely justifiable.  That argument is not disputed here, nor is the companion argument that it is necessary to compensate handsomely in order to retain the business leaders who are able to deliver the expected return.  However, it can also be argued that disproportionately high returns and compensation are not justified when they are garnered at the expense of a basic quality of life for those who do the actual work that generates the returns.  It can further be argued that the level of compensation demanded by corporate executives, sports figures, and other “superstars” is artificially high because we tolerate such demands in deference to the supply and demand nature of free enterprise, or because the well-off are simply willing and able to pay whatever price is asked.  How then can we reconcile these conflicting arguments?  On the one hand, we seek to achieve a more fair and equitable distribution of wealth, while, on the other hand, we do not wish to discourage the “superstars” from offering their services in a competitive market.  This is the dilemma that we must address.

It can be reasonably argued that greed is an integral part of human nature, that we are all in some way guilty of acts or desires that would qualify as greed, and that it is not feasible to remove greed from our nature through regulation.  However, it may be feasible to regulate the more egregious manifestations of greed.  In our pursuit of a solution, we must be vigilant in our preservation of both free enterprise and the principle of superior reward for superior value of performance.  Without them, our economy will grind to a halt for lack of incentive.  We must be careful, therefore, to avoid approaches that may result in the elimination of incentive, as well as those that may encourage those who would seek to gain reward without contributing fair value of performance in return.  However, we must also avoid approaches that offer incentives that may result in rewards that are disproportionate to value of performance.  Therefore, we must devise approaches that provide adequate but realistic incentives, and demand realistic fair value of performance in return.  The goal here is to develop a system that provides equal opportunity to earn rewards for all who are willing and able to deliver fair value of performance, while, at the same time, curbing the excesses that ultimately result in the obstruction of opportunity for many because the available reward is monopolized by a select few.

In order to effectively curb excess, it must be carefully defined.  It can be argued that, within a given organization, any individual who is willing and able to provide value of performance is, in turn, entitled to reward commensurate with the value of performance delivered.  However, reward for value of performance is typically skewed disproportionately in favor of executive management.  Further, the incentives for executive performance are typically structured to encourage executives to implement policies that diminish that portion of the available reward that represents fair compensation for the value of performance provided by their subordinates, in order to provide greater reward for themselves.  It is not uncommon to learn that an executive at the helm of a business entity is compensated at a rate that is hundreds, or even thousands of times that of his average subordinate, and that the same executive can earn bonus compensation many times that of his base by implementing policies that further reduce the total and average compensation of his subordinates.  Executives rarely include themselves among those affected by policies intended to reduce costs in an effort to boost profits.  It may be argued, therefore, that the executive’s performance is disproportionately overvalued, while the performance of his subordinates is disproportionately undervalued.

In the natural order of things, the degree of difficulty associated with achievement of objectives typically increases more rapidly in proportion to increases in the objectives themselves.  This is the law of diminishing returns.  However, the law of diminishing returns has in some way been circumvented when it comes to executive compensation.  We typically reward executives rather lavishly for achievements over which they have presided, but which were brought about not by their direct efforts, but by the efforts and sacrifices of their subordinates.  Contrary to common sense, we also reward executives for failures – there is no rational, ethical, or moral justification for paying bonuses at all, much less exorbitant bonuses, to executives presiding over failing businesses.  For the purposes of this discussion, failing businesses include not only those that lose money or fail to make a profit, but also those that fail in their responsibility to provide job security and realistic opportunity to achieve prosperity for all of their employees.  That there should be superior reward for higher responsibility and the rigors of leadership is not questioned, rather, it is the excess to which that reward is typically allowed to elevate, and the means by which it can be realized, that must be scrutinized.

How then shall we define excessive reward?  Excess could be defined as that which exceeds that which is needed to achieve the reasonable security and well being that comes with a modest surplus of personal wealth.  Excess could also be defined as that which exceeds the true value of performance associated with a given level of responsibility.  Excess could even be defined as that which is disproportionately large in comparison to the compensation assigned to others whose efforts directly cause the means to reward to be realized.  In any case, excess cannot be assigned an absolute value because the relative degree of need and the relative value of a given level of responsibility can vary widely among individuals and organizations.  There are no common reference points against which needs and values can be uniformly evaluated.  Yet, for the sake of this exercise, it may be conductive to identify some practical examples to serve as discussion reference points.  For those who are unable to afford a reasonable minimum or “basic” quality of life, it is difficult to imagine how any given individual could truly need more than one million dollars per year to achieve the reasonable security and wellbeing that comes with a modest surplus of personal wealth.  It is equally difficult to imagine anyone bearing a level of responsibility greater than that of the President of the United States, a position that pays considerably less than one million dollars per year, with no bonus incentives whatever.  It is also difficult to imagine how the true value of performance of any one individual in a given organization could possibly be more than one hundred times greater than that of any other individual in that same organization.

This line of reasoning may lead some to conclude that a hard limit on annual executive compensation is being proposed.  On the contrary, while a hard limit on executive compensation may be perceived as a potentially effective curb on excess, the imposition of hard limits on executive compensation would effectively eliminate the incentive for the executive to deliver greater value of performance once the hard limit is reached, and is therefore not an acceptable approach.  It is instead necessary to devise means by which the executive may achieve greater compensation in return for greater value of performance, while at the same time maintaining that compensation in reasonable proportion both to the value of the executive’s performance and to the value of the performance of his subordinates.  For the purposes of this discussion, the term “executive” applies to any Officer or Director of a business entity, and we will cite the CEO as the prime example.

Consider that the CEO is charged with the responsibility to operate the business profitably by leading and directing the activities of his subordinates.  Consider further that an inherent responsibility of leadership is to develop and maintain reasonable opportunity to achieve security and wellbeing for all subordinates who deliver a reasonably achievable value of performance.  It can be argued that the CEO has a responsibility to achieve prosperity not only for the business entity, but also for the people who physically perform the business of that entity and without whom the entity could not function.  It can also be reasonably argued that the executive talent, for which the entity awards the CEO the highest compensation, should be capable of achieving prosperity for all – the business entity, its employees, and the CEO, in that order.

That limits of some kind are required seems clear, since no other approach has yielded acceptable results.  The “Trickle-Down” approach has demonstrated itself to be a dismal failure, and is most unlikely to prove otherwise, not because the basic premise is flawed (under ideal circumstances “Trickle-Down” should readily achieve the desired result), but because it cannot be successfully applied in the face of uncontrolled greed.  In order for prosperity to “Trickle-Down”, those at the top must be willing to relinquish that portion of their own prosperity that represents excess.  Again, it is not feasible to remove greed from human nature, so the “Trickle-Down” theory will never work in practice because the prosperous will rarely admit to having any excess, much less relinquish it.  Instead, perhaps we can find a way to leverage greed.  What if executive incentives could be tied not only to profit objectives, but to employment and compensation levels as well?  What if the executive, in addition to achieving a reasonable return on investment, must also achieve job security and equitable compensation for his subordinates as a factor in raising the limits on his own compensation?  Instead of the “Trickle-Down” theory, what if we tried the “Buoy-Up” theory instead?  Just as a deeper layer of more dense liquid is required to float a denser object than can be floated by a shallow layer of lighter liquid, a larger, more highly compensated workforce should be required to “float” higher executive compensation than that permitted for a smaller and lower compensated workforce.  It is not unreasonable to expect corporate leadership to lead not just itself and its investors, but the entire organization to greater prosperity.  Again, the superior talent it takes to command high executive compensation should be more than capable of balancing the conflicting goals of return on investment and full, fairly compensated employment.  It follows then that it may be possible to effectively and equitably regulate executive compensation by establishing variable limits that are tied not only to business profit but also to overall, average, and lowest level compensation within the workforce employed by the business entity.

Clearly, some formula or set of rules must be devised to effectively channel executive talent to achieve the desired results.  There will undoubtedly be widely differing opinions regarding the form and function of such rules, and it is not intended that the examples presented here be considered as any direct recommendation.  Rather, these ideas are intended to be initial inputs to a dialog from which acceptable guidelines may be developed.  For the sake of the exercise, let’s start out by designating one million dollars per year, including benefits, perks, profit-sharing, stock options and bonus, as the threshold executive compensation level subject to limitation.  Next, let’s limit annual executive compensation, including benefits, perks, profit-sharing, stock options and bonus, to 100 times the annual compensation of the lowest paid full time employee in the organization.  Let’s further limit the executive’s compensation to 50 times the average compensation for all employees, and 5 percent of the total compensation for all employees.  For illustration purposes, let’s say the lowest paid full time employee earns the federally mandated minimum wage – $7.25/hr X 40hrs/week X 52 weeks/year = $15,080/year.  Add 35% for the value of benefits, and total lowest compensation comes to $20,358.  This would set the first limit on executive compensation above one million at $2,035,800.  Now let’s say the average annual compensation, including benefits, for all employees other than the CEO is $47,000.  This would set the second limit on executive compensation at $2,362,500.  Finally, let’s say the total compensation for the organization, other than the CEO, is $13,500,000, which would set the third limit on executive compensation at $675,000.  The lowest figure resulting from the three limits shall apply, except where that figure is below one million.  In this case, the $675,000 limit is raised to $1,000,000.  Raising lowest and/or average compensation without raising total compensation, which could only be accomplished by reducing the total number of employees, will not result in higher executive compensation.  Raising average and total compensation without also raising lowest compensation, the typical result of increases and bonus compensation awarded only to management, will still limit executive compensation to no more than $2,035,800.

While the compensation-based limits provide incentive to the CEO to foster a more equitable distribution of compensation, they may not do enough to encourage stability and growth of the workforce.  This can be addressed by applying another limit, not subject to the one million dollar threshold, tied to the number of full-time jobs held within the organization by US citizens.  Based on the average and total compensation figures used above to determine the compensation-based limits, our hypothetical organization has the equivalent of 286 full-time employees (for an organization with part-time employees, full-time equivalents are determined by dividing total annual part-time hours by 2080).  Let’s say all of the employees are US citizens, and that all have been employed by the organization continuously for at least one full fiscal year.  We’ll let the average number of US citizens employed by the organization simultaneously in each of the two most recently completed fiscal years serve as the basis for calculating the job-based limit on executive compensation.  That limit will be a percentage determined by dividing the average number of US citizens employed during the first basis fiscal year by the average number of US citizens employed during the second basis fiscal year, applied to the previously determined limits.

If average employment has remained stable, in this case 286 over both basis fiscal years, and average compensation remains at $47K, a factor of 100% is applied to the previously determined limit, and our CEO gets the entire $1,000,000 for which he otherwise qualifies.  If average employment increases, let’s say to 300, up from 286, a factor of 105% is applied, and our CEO gets $1,050,000, assuming average compensation remains at $47K bringing total compensation up to $14,100,000.  If average employment decreases, let’s say to 250, down from 286, a factor of 87% is applied, and our CEO gets $870,000, assuming average compensation remains at $47K bringing total compensation down to $11,750,000.  In this case, our CEO has failed to perform well enough to maintain level employment and the value of his performance to the 36 people who lost their jobs is zero.  If the remaining employees have their compensation reduced in order to keep their jobs, everyone in the organization, including the executives, should bear the same burden in proportion to his otherwise qualified compensation.  For example, if average compensation drops 10% to $42,300, the CEO now qualifies for only $783,000, down from $870,000.

If our CEO wants to make more money, as we can rest assured he does, then all he has to do is use his superior mind and business expertise to achieve the profits demanded by ownership while simultaneously maintaining or increasing employment and compensation for the workforce.  Success means achieving all of these objectives.  Failure to achieve any one of these objectives, regardless of which, is still failure, and failure should not be rewarded.  This stricture should apply to executive severance as well, and the clearly immoral and unethical practice of awarding “golden parachutes” to failed executives when they “resign” or are discharged should be brought to an end.

The beauty of this kind of system is that it is very simple, there are no absolute limits on the executive’s compensation, and he can earn as much as his investors are willing to give him, as long as the rest of the organization prospers as well.  The system encourages full and fairly compensated employment by rewarding the executive for finding ways to maintain or increase both the number of employees and their compensation, lowest, average and total, while at the same time achieving the profit goals set by the investors.  Notice that there has been no call whatsoever for higher taxes or for social programs to hand the CEO’s money over to people who are not working.  We are simply asking the CEO to use his high-priced talent to satisfy both the investors and the public interest, which is to put as many US citizens as possible to work in jobs that will provide them with the means to achieve a reasonable level of security and wellbeing.

Again, this approach places no upper limits whatsoever on potential executive compensation, a skilled executive can still earn as much as his investors are willing to pay him, provided he is successful on behalf of the entire organization.  This approach does not deny the executive the right to employ non-citizens, it merely offers him strong incentives to give employment preference to US citizens, and to pay them in fair proportion to the value of their performance.  What it does do, is to ensure that the executive is compensated in fair proportion to the value of his performance, not only to his investors, but to the people who actually perform the work that results in the achievement of that value, and to our society as a whole.

Some may argue that this approach does nothing to encourage investment, and may in fact discourage investment, as profit potential may be reduced by a full employment – fair compensation policy.  The counter-argument is that this approach supports full, fairly compensated employment which, in turn, will inject more money into the overall economic system as more people are able to spend more to achieve a reasonable minimum or “basic” quality of life and to pursue happiness.  The logical extension of the “Buoy-Up” approach is that an increase in “bottom-up” spending will result in greater business volume for all competently managed businesses, yielding greater profits for investors.

What about those who are compensated in excess of one million dollars per year, but are not executives?  Professional athletes, entertainers, licensed professionals, sole practitioners, investors who are not Officers or Directors, etc., who either have completely passive roles in the business entity, or are only marginal employers having few if any direct employees, or are directly responsible for generating their own compensation based exclusively on their own personal performance.  These individuals are paid what their investments, sponsors or clients are willing to pay, are in businesses that do not require the subordinate employees and payroll volume necessary to make “Buoy-Up” feasible, and cannot be regulated in the same way as executives.  These individuals, who generate in excess of one million dollars from investments or personal performance, without significant reliance on direct employees, require different incentives that encourage them to keep their surplus wealth in circulation through reinvestment or acquisition of American goods and services.  In this case it is the sequestration of accumulated wealth, not the means by which it is acquired, that effectively denies opportunity for others to achieve a reasonable minimum or “basic” quality of life.

It is likely that there will be those who will choose not to invest in any American enterprises because the return potential is not to their liking, or because they are opposed to the “Buoy-Up” approach on principle.  Those opposed to “Buoy-Up” might choose instead to invest in foreign enterprises or to simply “park” their cash in ordinary savings rather than support full employment at fair compensation.  To counteract that tactic, incentives must be devised that would make it more attractive to invest in American enterprises than anywhere else.  Again, the following suggestion is not intended to be a recommendation but, rather, an idea to act as a starting point for discussion.  Why not take a “use it or lose it” stance on 50% of any surplus net worth in excess of one million dollars that is not invested in American real estate, American enterprise, American Government securities, or personal property in the form of American made goods?  Further, why not encourage those who have such surplus net worth in excess of one million dollars to engage the services of American citizens and enterprises by exempting surplus net worth equal to the value of the services obtained from American sources, and by inflating their surplus net worth by adding the difference in cost between the lowest cost available American services and the actual cost of non-American services engaged?

Exemptions could be made where it can be demonstrated that the specific goods or services required, or the quality of the goods or services required, were obtained from non-American sources because they could not be obtained from American citizens or enterprises.  At the end of each fiscal year, 50% of surplus net worth, that amount in excess of one million dollars that is not invested in American endeavors or exempt foreign endeavors, must be liquidated and paid into a federally managed full & fairly compensated employment fund (FFCE), which in turn must invest in American enterprises and programs designed to increase fairly compensated employment of American citizens earning less than one million dollars per year.  Dividends realized from those investments must be paid back to the involuntary investors.  The initial investment remains an asset of the individual, and figures in the calculation of his total and exempt surplus net worth at the end of the next fiscal year.  The investment can be withdrawn by the individual when and to the extent subsequent direct investment in American enterprise, goods or services can be demonstrated.

To illustrate how this would work, let’s say an individual has a total net worth of $2 million.  Of that total, $500K is not invested in any American endeavor and is therefore not exempt.  Of that $500K, 50% or $250K must be placed in the FFCE fund.  If all other factors remain unchanged, at the next fiscal year end the individual’s total net worth is still $2 million but his exempt surplus is now $750K, leaving only $250K subject to 50% FFCE placement.  Of that $250K, 50% or $125K must be placed in the FFCE fund.  If the individual subsequently arranges to directly invest $125K of his surplus in an American endeavor, $125K is immediately released from the FFCE fund directly to the arranged investment, and if all other factors remain unchanged his exempt surplus at the next fiscal year end becomes $875K.  If the individual subsequently arranges to directly invest the $250K FFCE balance in an American endeavor, $250K is immediately released from the FFCE fund directly to the arranged investment, and if all other factors remain unchanged his exempt surplus at the next fiscal year end remains $875K, leaving $125K subject to 50% FFCE placement.  However, if the individual directly invests his remaining $125K in an American endeavor before the next fiscal year end, his exempt surplus is $1 million and he no longer has any surplus subject to 50% FFCE placement.

If that arrangement is not enough to convince investors to invest in American enterprise, goods, and services of their own volition, then perhaps they should consider the historically predictable consequences of the current downward economic spiral should we fail to break it – half a loaf is better than none.

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