February 09, 2009

Exective Pay and the Angry Public

After the American Century

The average American is furious at Wall Street firms, banks, fat-cat executives, and government bailouts, which do not seem to be helping the ordinary people. But the executives themselves appear only vaguely aware of the unjust disparities between their incomes and those of most people. President Obama has proposed that firms receiving Washington bailouts must limit executive salaries to $500,000.

There is a passage in Tom Wolfe's Bonfire of the Vanities which explains how easily a salary of $1 million a year disappears in New York City. The protagonist of that novel feels he must live in a certain part of Manhattan, send his children to private school, and drive German car, which requires a protected indoor parking space, and so on. The joke is that the monthly $80,000 always disappears before payday, and at the end of the month he feels a little pinched for spending money just like anyone else.

For an up-dated, real life estimation of the costs of being an executive in New York City, an article in the New York Times by Allen Salkin explains how difficult (read impossible) it will be to get along on an annual salary of "only" $500,000 (2.8 million kroner). The assumption is that such executives must have an armed chauffeur, a second summer house that costs $4 million (more than 20 million kroner), and so forth. Reading the piece, one is not entirely certain that the reporter can see the absurdity of these "needs."

But for the record, here are a few comparative facts and figures. Salkin reports that such an executive (defined as male with a non-working spouse) has the following expenses:

Mortgage and monthly fee for a Coop $192,000
Nanny $45,000
Private School $32,000 (per child)
Garage $8400
Driver $75,000-125,00
Personal trainer (3 times a week) $12,000
Formal gowns (for "charity balls"), $35,000

It is perfectly obvious to the 99.9% of the world that does not have an income of $1 million or more a year, that this mortgage is too expensive and that all the other items on the list are unnecessary. Indeed, in New York City even a car is unnecessary, as they have a subway and taxis there the last time I checked.

Now consider the expenditures of the average American family, from the Statistical Abstract of the United States.

Annual income: $48,000 (Black families only $30,800, single mothers, $23,000)
(one tenth the cap Obama has proposed, half what the executive pays for a chauffeur)

House: 6 rooms ( in 2006 before the economy collapsed) $404,000
(one tenth the cost of the executive's summer house)

Automobiles (including monthly payments, insurance, gasoline, etc.) $8,300
(what the executive pays for parking)

Nanny? Are you kidding?
Personal Trainer? The family dog insists on walks
Formal Gowns? Get real.

The average American has every right to be angry, especially when they learn that even as the banks were failing they granted their executives billions in bonuses, paid for by the US taxpayers. But what will be the political consequences of this anger? Will it build up pressure for Obama's programs? Or will it be channeled elsewhere?