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Posted at 2:46 PM ET, 12/17/2010

CEO pay, social norms and Nintendo

By Ezra Klein

The New Yorker's Nick Paumgarten had a tough time securing an interview with Nintendo's resident genius, Shigeru Miyamoto. Here's why:

The corporate ethos in Japan, and especially at Nintendo, is self-effacing; the humility that has kept Miyamoto at the company for three decades, rather than in, say, Silicon Valley, seeking his billions, also governs the apportionment of credit. Miyamoto has been a superstar in the gaming world for more than two decades, but neither he nor the company seems inclined to exploit his stardom. They contend that the development of a game or a game console is a collaborative effort — that it is indecorous to single out any one contributor, to the exclusion of the others.

Japan also has very low CEO pay. When we talk about inequality, and income inequality, we don't talk enough about social norms, perhaps because they present questions we don't really have answers to.

So let's talk about them a bit. The argument that holds among American elites -- in part because there's some evidence to support it, and in part because it's good for them to believe it -- is that it's inefficient for rich people to make less money, because that will reduce their incentives to employ people and create things, and that will end up making all of us worse off. The same argument is applied to taxing the money they make, of course.

The argument that appears to hold in Japan is that it's indecent for rich people to make too much money because, after all, these are collaborative endeavors. And so they don't make that much money, and they appear to be okay with that. America was also closer to this philosophy 50 years ago. In 1969, for instance, the average CEO made 26 times what the average worker made. Today, it's closer to 500 times.

Perhaps there's evidence that Japanese corporations endure much worse management than American corporations, but that's not my understanding. Rather, I wonder if the social beliefs may actually be self-fulfilling. Miyamoto isn't pissed off because Nintendo won't give him more money. The CEO of Toyota isn't furious about his pay package. But if they subscribed to the American ethos, those things would bother them, and they'd either leave their companies or retire earlier or work less hard.

I think the answer an American economist might give to this is that it'd be good if Miyamoto had gone to Silicon Valley to seek his billions, but that gets harder to prove if you imagine an equilibrium in which the best people aren't going to Silicon Valley. The Wii was pretty innovative. But that's neither here nor there: The main point is that once you've let the social norms out of the bottle, it's not clear how you get them back in. And if you can't get them back in, it's hard to imagine imposing policy that'll get you back there anyway. In other words, the norms account for the policies on pay, not the other way around.

By Ezra Klein  | December 17, 2010; 2:46 PM ET
Categories:  Inequality  
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Comments

Norms can be shaped by rhetoric and policy. Constantly trying to shame CEOs, raise issues of inequality, helps to shape norms for the future. Just as the conservative mantra of low taxes and limited government shaped today's norms.

Posted by: jfung79 | December 17, 2010 2:55 PM | Report abuse

Wow, if Japan is kicking our butts now, imagine what would happen if Japan cut taxes on their rich and started paying their executives more. They'd probably see 5% annual GDP growth for decades!

Posted by: eggnogfool | December 17, 2010 2:57 PM | Report abuse

"we don't talk enough about social norms, perhaps because they present questions we don't really have answers to."

It's not that we don't have an answer, it's that we might not like the answer. And that's that most people don't care. When I hear about that 500 gap, my thought is "good for them," not "that's unfair" or "i'm being cheated"

Posted by: NoVAHockey | December 17, 2010 3:05 PM | Report abuse

I just wonder....does Ezra think it's fair for nightly news anchors like Couric to make millions while bloggers at the WaPo make a fraction of the same? I mean, isn't journalism a noble profession that really is a collective effort of beat reporters, copy-writers, editors, camermen, and blow-dried anchors?

Many nations who have tried demonizing business leaders and profit motive lie in the brushpile of history. Why do progressives insist on trying to push America down the same class-warfare road that does zero to bring anyone up, and everything to bring everyone else down?

Posted by: dbw1 | December 17, 2010 3:15 PM | Report abuse

Keep wondering why does Ezra want to spend his brain power on these 'arts faculty Ph.D. topics'?

This whole issue does not seem to be any significant. Inequality in USA is an independent problem in itself and it does not need any comparison with Japan where there are certain social norms which are good and others are bad (though discouraging babies is really bad one which is costing that nation so much); as like any other society.

Seems like all waste here. Many solutions to American Inequality lie in American Politics and just after the 'burps' of Tax Cut Deals it is obvious that no-one in this nation is interested in those issues.

If Ezra were talking about some grass roots efforts in America where people are trying to address this inequality; then it is a different issue or highlighting our usual suspects of Politicians & Lobbyist adopting way outs in rules to give free pass at this inequality; we would like to know more about that.

What about this - one Japaneese dude needing to spend time in Silicon Valley...Sitting in Silicon Valley I just wonder why does Washington Village Brains think about these esoteric theological issues...

Posted by: umesh409 | December 17, 2010 3:25 PM | Report abuse

i agree with many on here.

Ezra,

what's your impetus for this? What's your end goal? To try to convince more that CEO's in the US should be like this CEO in Japan? I doubt you'd see that happen unless you found a way to legally (that being a VERY loose word) hold down a CEO's salary in the US. I mean you'd actually probably have to regulate how much profit a given industry could make and how much they could spend on admin expenses like salaries etc. And then you'd have to convince the populace that you're doing this as some sort of public good.

Oh wow you are good!

And then you'd end up having to find a way to blame those same private enterprises when poor old folks 401k's and pensions went down because these steps are taken.

hmmmmm.

Posted by: visionbrkr | December 17, 2010 3:37 PM | Report abuse

My understanding is that Japanese CEOs may not demand US CEO pay, but they certainly enjoy US CEO perks. And expense accounts for both looking like a CEO and gifts to other CEOs in the business "relationship".

Posted by: koalatek | December 17, 2010 3:41 PM | Report abuse

Well, when times get tough, you won't see American CEO's running to the government with their hand out. They make so much money because they bear ultimate responsibility for the health and welfare of their companies.

When markets and corporations, in particular, are given free rein, the always produce the most stable, efficient and fairest distribution of wealth and assets. I think our economy today bears out those facts.

Posted by: willows1 | December 17, 2010 3:47 PM | Report abuse

willows1

Have you already forgotten about the bank bailouts? Goldman Sachs and friends were given free reign, took unimaginable risks and then came looking to the government for a handout so they could continue to pay their employees huge bonuses for a job poorly done.

Maybe you were being sarcastic since most of what you wrote is laughable. If so, good job. If not, go read some Matt Taibbi articles to see what giving business free reign gets the middle class. Anyone who worked at Enron knows that not all businesses don't look out for the best interests of their employees.

Posted by: saratogian | December 17, 2010 4:05 PM | Report abuse

In other words, why are American CEOs such greedy, immoral, schmucks, and why don't they feel guilty? They obviously do not really believe in the teachings of the religion that many of them espouse.

Posted by: AuthorEditor | December 17, 2010 4:07 PM | Report abuse

@willows

that was pretty awesome.

Posted by: eggnogfool | December 17, 2010 4:13 PM | Report abuse

"What's your end goal?"

It's just to point out that a free market explanation of why we pay CEOs crazy salaries is totally untrue. Their worth is not measured in those dollar amounts, despite what companies say when justifying huge pay packages. The same thing happens with college presidents too, all in the name of "competitiveness."

Posted by: Chris_ | December 17, 2010 4:14 PM | Report abuse

Chris,

That's fine. Let's say a company can (and should) pay a CEO what the Ezra's of the world think they're worth. let's see all the qualified people lining up to be CEO of a billion dollar organization to get paid $100k a year.

Again its fine for liberals to use the argument of relative comparatives when talking that our deficit isn't a problem because we have a "X" Trillion dollar economy but if we pay CEO's more than what liberals think they're worth then we have to for some reason justify it with them first. You know who it should be justified through, THE SHAREHOLDERS. no one else.

Posted by: visionbrkr | December 17, 2010 4:21 PM | Report abuse

visionbrkr - Leave it to Obama to find a quasi-legal way to hold down CEO salaries. CEO's have always made lots more money in the USA because the businesses here are so much more profitable. The gap grew because the businesses became really, really profitable beginning in about 1981. And just remember that those high CEO salaries are lifting all boats in the economy right now.

Posted by: willows1 | December 17, 2010 4:22 PM | Report abuse

visionbrkr, you mean like the "qualified people" that were making millions or billions running the likes of Bear Stearns and Lehman Brothers? Geniuses!

Posted by: AuthorEditor | December 17, 2010 4:25 PM | Report abuse

It's funny that conservatives like visionbrkr appear here and invoke shareholders.

Shareholders don't have any direct say on CEO pay and Republicans blocked a bill that would have given them one.

Posted by: Hopeful9 | December 17, 2010 4:37 PM | Report abuse

AuthorEditor,

You'd call someone dumb that could dupe the government saps like those guys could? Heck they convinced the government that they needed to be saved and not fail on their own. AND they're probably working again on Wall St. Sorry but the dummies are the ones that make the rules not the ones that navigate their way through them.

Posted by: visionbrkr | December 17, 2010 4:37 PM | Report abuse

Hopeful9,


well then a board of directors, sorry I misspoke. And sorry if individual shareholders had a direct say you'd have anarchy in the system. I'd be fine with shareholders having more of a say if they held a certain amount of shares but then again you'd be opening a pandora's box to many more problems like what's incentivizing these shareholders. Many would be for valid reasons but many would not.

And its also nice that those liberals like yourself and AuthorEditor reference the individual instances of CEO's of companies that have failed and/or committed fraud like Bear Stearns and Lehmann Brothers and conveniently forget about CEO's of hundreds of thousands of other companies that have not done what these have. its like me saying I know one government employee that's a crook so they're all crooks. But I'm sure you'd NEVER say that right?


Hopeful9,

I certainly invite you to let me know what quality of CEO we'd get for a multi billion dollar multinational that would make what you'd be comfortable that he or she would make??? I'd be showing you a company going under very very soon.

Posted by: visionbrkr | December 17, 2010 4:43 PM | Report abuse

@vision
"You know who it should be justified through, THE SHAREHOLDERS. no one else."

That would be great. However, in the US executive compensation is generally approved by the Board of Directors, which is generally comprised of CEOs and other execs from other companies (generally appointed by the rest of the Board as needed). And surprise! CEOs think that CEOs deserve tons of compensation. Just ask em. However, if you polled non-executive shareholders, you would find a very different assessment of appropriate executive compensation.

Posted by: eggnogfool | December 17, 2010 4:49 PM | Report abuse

Ezra,

Regarding your "some evidence", read the first comment of that post. I'll reprint it for you:

shouldn't you have bolded this bit:

However, we find essentially no evidence at all of any responsiveness of people below the top 0.1 percent...

End Quote

What do you think, these people are going to work less hard because they make only one billion per year for their effort instead of two? The empirical evidence overwhelmingly fits the obvious answer to this question.

For more on this, see this article from Cornell economist Robert Frank:

http://www.nytimes.com/2007/04/12/business/12scene.html

And in your position I hope you're well familiar with the long established in economics income and substitution effects and backward bending labor supply curve. Why do you think that people today work less hours than 100 years ago even though they have massively greater "incentive" with a vastly higher wage per hour? Answer me that before you start giving credibility to libretarios.

Posted by: RichardHSerlin | December 17, 2010 5:11 PM | Report abuse

I do not see how it is " demonizing " CEOs to point out the obvious fact that their pay is 500 times the average worker pay today compared to how it used to be. Also it is a FACT that middle class wages are stagnant and this is the reason for the huge inequality . Americans have no problem with super wealth but the rising tide is NOT LIFTING ALL BOATS .

Posted by: sligowoman | December 17, 2010 5:13 PM | Report abuse

"Wow, if Japan is kicking our butts now, imagine what would happen if Japan cut taxes on their rich and started paying their executives more. They'd probably see 5% annual GDP growth for decades!"

Japan isn't kicking our butts now. They've been in relative decline for the last two decades.

GDP per capita in Japan back in 1991 was 88.2% that of the United States. By 2000 it was down to 73.0%, and in 2009 it was 72.0%. Calculation uses nominal GDP per capita, adjusted for purchasing power, data per IMF.

CEO pay and taxes aren't everything - Japan certainly isn't a North Korean hellhole. Lots of great products are developed there, to be sure. But the place isn't catching up to the U.S. in terms of wealth creation. State interference - broadly understood - is a part of Japan's problem.

Posted by: justin84 | December 17, 2010 5:19 PM | Report abuse

"it's hard to imagine imposing policy that'll get you back there anyway. In other words, the norms account for the policies on pay, not the other way around."

Ezra,

Think about this.

The policy of the New Deal.

After it passed, there were massive changes in norms, MASSIVE.

It completely changed society and the norms from what they were in the gilded age that preceded it. If you don't understand this because you're too young, I sure hope you do some reading and asking.

Law and government programs can easily change social morays for the better, or as we've seen over the last generation, for the worse.

Posted by: RichardHSerlin | December 17, 2010 5:28 PM | Report abuse

Ezra,

You want an awesome example of how government laws and programs CAN change norms and culture GREATLY? See this classic short piece from famed growth economist Paul Romer of Stanford:

http://chartercities.org/blog/75/rules-and-culture-corruption-in-hong-kong

Posted by: RichardHSerlin | December 17, 2010 6:57 PM | Report abuse

"That's fine. Let's say a company can (and should) pay a CEO what the Ezra's of the world think they're worth. let's see all the qualified people lining up to be CEO of a billion dollar organization to get paid $100k a year."

I know plenty of highly intelligent, highly educated, highly motivated and completely good, honest, stable people who would LOVE to be CEO for $100,000 per year. It would be both a non-trivial pay raise and a status raise for sure.

Have you actually paid attention to what "qualifies" someone to be a CEO? Do Carli Fiorna Meg Whitman seem any smarter than your doctor? Heck, does Tony Hayward seem any smarter than the guy who cleans your septic tank? Does Don Blankenship seem any less evil than the devil himself? Does Lloyd Blankfien seem any less greedy than Scrooge?

Frankly, there are plenty of people with the ability to be CEO. Unfortunately, the system is set up such than vain psychopaths usually are the ones that rise to the top, not because of their brainpower but because of their cut-throat personalities.

Posted by: brickcha | December 18, 2010 11:19 AM | Report abuse

"CEO pay and taxes aren't everything - Japan certainly isn't a North Korean hellhole. Lots of great products are developed there, to be sure. But the place isn't catching up to the U.S. in terms of wealth creation. State interference - broadly understood - is a part of Japan's problem."

I would object to this statement in two ways. First is that Japan's tax rates and policies aren't really that different than our own, except for health care where they certainly ARE kicking our butt: similar or care for more people, and far better overall results for half the price.

Second, having lived in Japan myself and knowing plenty of people with similar jobs in Japan as I have here in the US, I would say our overall well-being is pretty similar. I do, in fact, make more money, about the 25% or so that you suggest. However, my family needs one car per adult, while my Japanese friends own zero or one car per household. Public transit is far cheaper than owning a car. The cost savings on transportation, plus the cost savings on health care, pretty much offset the entire salary difference. My Japanese friends live in smaller places in more interesting surroundings, own fewer but better things, and have just as much un-delegated cash flow as I do within a pretty narrow margin.

Posted by: brickcha | December 18, 2010 12:04 PM | Report abuse

Ezra,

Here's another quote from the paper libretario cites:

"...and we find that the estimate for the top 0.1 percent can be
reduced to wrongly signed and statistically insignificant if reasonable alternative methods for address the dynamics of income are applied.This suggests that further research on this topic should emphasize better and more robust econometric modeling of the income dynamics process."

And just think about it Ezra. It's obviously not that people always work more hours when their wage per hour is higher and less hours when it's lower, otherwise we would have worked hardly at all 100 years ago, instead of MORE hours 100 years ago than today. There's the income effect, the substitution effect, positional/context/prestige factors, and psychological factors regarding what you're accustomed to and what you think you should have in wealth and consumption.

Libretario says this was a careful academic paper, but so are the ones that assume everyone in the world has perfect information, perfect expertise in everything, perfect self discipline, perfect rationality, lives forever (I kid you not), everything but the ability to fly, and then show in a CAREFUL ACADEMIC way -- i.e. all the complicated math is well checked and fits the math that's popularly accepted by the gatekeepers in top journals -- that perfect Ricardian equivilence and real business cycles hold. They do if we live in that fairy world, but not in the real world, no matter how careful, and academic, and fancy complicated your math was. And I know this math very well I've done it at the cutting edge.

Posted by: RichardHSerlin | December 18, 2010 2:14 PM | Report abuse

The main point is that once you've let the social norms out of the bottle, it's not clear how you get them back in.

Why not let the owners (shareholders) vote directly on executive compensation?

Posted by: piniella | December 18, 2010 4:06 PM | Report abuse

"CEO pay and taxes aren't everything - Japan certainly isn't a North Korean hellhole. Lots of great products are developed there, to be sure. But the place isn't catching up to the U.S. in terms of wealth creation. State interference - broadly understood - is a part of Japan's problem."

Japan isn't as good at the US at poverty creation, either, which is an implied part of Ezra's discussion.

Posted by: Jim19 | December 19, 2010 7:30 PM | Report abuse

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