Employer/Employee Relations

Washington Post business columnist Steven Pearlstein was online to discuss the death of the old social compact between companies and their workers and the trouble in coming up with a new one. In today's column , he examines the model Caterpillar has come up with for how a big American manufacturing company can not only survive, but prosper, in a highly competitive global economy.

A transcript follows.

About Pearlstein : Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

His column archive is online here

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Columbus: I don't understand....why isn't Wall Street pushing for LESS excess CEO compensation in order to buttress shareholder value even further? Yeah, right, a bonus to workers would set off catcalls, but why not trim some of those excess millions to the CEO-as a shareholder I'd benefit even more. Oh-I hear the argument coming...'we need to pay competitive rates for top talent like Owens.' No one seems to examine, who, that the amorphous analysts that comprise "Wall Street" have their own vested interests--they are the financial elite themselves with hefty pay packages light years ahead of middle class Americans. So we have the financial elites hammering for efficiencies for companies (and they don't bear the costs, but reap the benefits), CEO's hammering staff and taking excess compensation-agreed to by complacent and compliant Board committees- because they've done a stellar job becoming globally competitive. What is the tipping point for change?

Steven Pearlstein: That's better said than I said it. And to answer your question, we've reached the tipping point. The administration's ability here in the US to get a trade treaty through Congress has evaporated. The Republicans may lose control of one or both houses of Congress. The drumbeat about executive pay and income inequality is getting worse. Europe is totally rejecting European economic integration, let alone globalisation. Left wing governments are coming to power in Latin America. If the globalization party/economic elites don't get the message at this point, they're not listening.

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Chicago, Illinois: Steve,

Are you aware that Caterpillar is a leading force behind "USA-Engage," a group of multinational companies that oppose human rights sanctions on North Korea, Iran, Syria, Cuba, Sudan, Libya, Burma, China -- and apartheid South Africa. USA-Engage and Caterpillar also opposed the 1997 McCollum-Schumer amendment to sanction countries that finance terrorists, and a 2000 law to punish China if it proliferates chemical and nuclear weapons.

In addition, Caterpillar is the leading company in the US to oppose sanctions on China for undervaluing their currency, as Jim Owens' recent speech demonstrated. As long as they are doing fine, Caterpillar thinks the rest of the manufacturing supply chain can be damned. Most people, including Bob Samuelson of the Washington Post, think that ruling out sanctions is a #1 way to fail in negotiations with China. To show the monied interest impact on the Bush Administration, yesterday, Tim Adams, Undersecretary of Treasury, congratulated Caterpillar's lobbyist on his CEO's speech.

My point is Caterpillar is not only going to war with its workers, its going to war with domestic manufacturing too.

Steven Pearlstein: Some interesting factoids there. Thanks. But let's not go overboard. Caterpillar is not going to war with its employees. It has lots of employees that it treats well and it had to do what it had to do about its blue collar wages, pretty much. But now, going forward, it has to do a much better job in spreading the "winnings" more equitably through the company, while still remaining competitive. As for the currency thing, obviously it is the wrong strategy to announce to the Chinese ahead of time that you are putting away the stick. Even if you are the Bush administration, you want Schumer out there as a real threat, so you can try to quietly get the Chinese to move in the direction of a fully floating currency. In that respect, Owens is simply reflecting his company's self interest, and not the interests of the country or even the manufacturing sector as a whole.

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Kansas City: I don't get it-global CEO's don't on average make the millions that US CEO's now make. Why isn't there more pressure on CEO pay to moderate? Or, are we just going to the inexorably "winner take all" society around the world?

Steven Pearlstein: We are on the slippery slope toward winner take all, and CEO pay is a good example of it, although a somewhat unique example of it. There is winner take all pay in the movie business, for example, which is totally market driven. Certain stars attract movie goers, and others who may be nearly as good, or even just as good, get paid a lot less. That's a characteristic of a winner take all market. But int he case of CEO pay, it is not market driven purely, because the market is rigged by a group of insiders and their consultants, all of whom benefit from higher and higher CEO pay. So the competition highly imperfect.

A recent story on the excessive pay of Exxon Mobils chairman pointed out how much less the chief executives of Shell and BP get, largely because their companies are European based, where the business culture is different and they could never get away with it, even if they wanted to. And yet, they "compete" in the same market for CEOs as the former Exxon Mobil chairman. So this puts the lie to the idea that if you don't pay them these outrageous fortunes, they'll go elsewhere and there will be nobody anywhere near as good to take their place. That is the BIG LIE.

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washingtonpost.com: Robert J. Samuelson Column Archive

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Rockville, MD: Dear Sir--

I think that it is outrageous that Caterpillar's senior management would take advantage of a dysfunctional U.A.W. -- it has literally been generations since the U.A.W. has truly represented its' rank-and-file -- and screw the low-level workers.

If I recall correctly, when Ron Carey was leading the Teamsters against U.P.S. he carefully polled the rank-and-file, and based his negotiating strategy on what those polls said.

Naturally, the U.A.W.'s senior leadership would not deign to consult their rank-and-file.

I believe that the major unions would be so much more nimble if they instituted proportional representation (Don't know what P.R. is? See http://www.fairvote.org .). For that matter, major corporations as well would benefit from having a board of directors that is elected by proportional representation.....but then those damned fat cats would actually have to WORK for a living! God forbid should they actually have to do that!

--N.Bahn

Steven Pearlstein: Interesting thoughts and ideas. Not sure I agree with them, however. The leadership of the UAW is not to blame here -- they simply understood the reality and the changed (reduced) leverage that they had, and made the best deal they could under those circumstances, which was to protect the interest of their current, paying members and retirees. But now that Caterpillar is so successful, they actually have more leverage in demanding a bigger piece of the profits on some systematic basis, particularly profits above and beyond what was expected or needed to compete for capital. That leverage is that they can undercut Caterpillar's attempt to tell a "good news" story by pointing up the inequal distribution of the winnings, they can fight Caterpillar's attempt to win approval for more trade treaties, and they can even strike, which really hurts a company that has a big backlog in its order book and can't afford the disruption. But the trick this time is not to ask for big increase in fixed wages. It is to demand more profit sharing, so the company's cost structure can remain flexible and competitive in both good times and bad.

I'm not sure, by the way, what you mean by proportional representation when it comes to unions or corporate boards.

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Journalism "CEO"itis too: Steve, in your own industry, the sheer disparity between star journalists (e.g. Katie Couric and $15 million a year; or Bob Woodward) and others (especially as newspapers slash costs more in a volatile media age) is as stark as manufacturing companies. Yet it seems that everyone simply shrugs, says, that's the market, oh well; we do have a meritocracy and must pay the best for the best. It's beyond meritocracy!! Where are the stories about low level employees who will lose jobs because a few top earners come in (their corporate owners will make darn sure that overall costs stay in line, even before the promised 'revenue uptick' due to star presence).

Steven Pearlstein: Yes, the star system or winner take all dynamic is at work in news as well. As I said before, this at least has the advantage of being truly market driven. Bob Woodward, for example, makes a whole lot more from his books than our executive editor here at the Post. And there's nothing wrong with that, really. This is not a zero sum game. And in newsrooms, its really quite a meritocracy, with anyone having the ability to do the kind of work that can allow him or her to move up and leverage work for higher pay. So I'm not sure the analogy to blue collar workers at Caterpillar is a good one. Yes, there is a chance for Cat workers to acquire skills that allow them to win better paying jobs, and that happens all the time. But the funnel gets pretty narrow, I suspect and there is no chance for a blue collar worker to do the equivalent of writing a book and instantly becoming a superstar.

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Richmond, VA: You really hit the nail on the head this morning. Do you see the pendulum swinging back to support employee benefits in, say, 15 years or so? The only viable alternative to employer-provided benefits such as health care and pension plans is the federal government. Otherwise, workers will be unable to provide these benefits for themselves, and we will all pay as a society to support them.

Steven Pearlstein: Workers have to realize it is not in their best interest any more to be too dependent on their companies for their pensions and their retiree health care. Because when they get to retirement, the company may not be there. They need to get these assets moved off the company books, and into their own tax-advantaged accounts. That's just the reality we're working with.

As for health care for active workers, I think the same applies, to a lesser extent. Workers or their unions have got to take more responsibility for this, because the costs are so huge even well-meaning companies are having trouble remaining competitive in their cost structures.

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washingtonpost.com: Today's Column: After Caterpillar's Turnaround, A Chance to Reinvent Globalization

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DC: How do I prepare my kids to navigate the imbalance in employer/employee relations? My dad loved his long-time employer and did well. But the times have so sorely changed. I don't want my kids to become cynical and only out for themselves; but I want them to protect their earning ability even in a tough global economy. Any ideas?

Steven Pearlstein: Sure. We all need to start out with the idea that a career is going to be filled with ups and downs, excitements and challenges. Employees need to always keep an eye on what is the next step and figure out how to best position themselves to get there. Lifelong learning and training has to become the norm. Benefits need to be portable. And here is big one: employees have to learn, when they become really valuable to a firm, to demand pay that is commensurate with that value, rather than falling into the trap of accepting whatever is offered. If we are moving to a more market-driven labor market, which is what all the corporate types say they need and want to do, then the sword cuts both ways. When an employee has a skill or knowledge or client relationship that is crucial to the firm's success, he needs to leverage that for his or her benefit, and not be shy about that. CEO's certainly aren't. So why should a top salesman, or a key person in supply chain management?

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Washington, D.C.: The shareholders interest may be in less extravagant executive pay. If so what institutional barriers exist to prevent the shareholders from exercising their self interest? What institutional changes could bring about better alignment?

Steven Pearlstein: The rules on that matter are stacked against the shareholder and in favor of management and current directors. The only people who can change that are the members of the SEC, or the Congress. Yes, if you open things up, by requiring say, shareholder approval of executive compensation schemes, you run the risk that special interests will try to use the process in ways that are not in the longterm interest of the company. But no system is perfect, and leaving things the way they are now has an even greater risk to the society. The CEO problem is really what we call an arms race. And what we know about arms races is that they are very hard for any one company to stop. You need a form of collective action, which is what government does.

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Brooklyn, N.Y.: Short of uprooting the family and moving to China, how can blue-collar workers in the U.S. really expect to get a manufacturing company to move

By the way, I would recommend to you and your readers a book called "Capital Moves," by Jefferson Cowie, about the migration of the RCA company's labor force from Camden, NJ, to Indiana, and eventually to Mexico.

Steven Pearlstein: Not sure what you mean by that question. Why would a blue collar worker want to get a manufacturing company to move?

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Baltimore MD: Don't know if you watch The Daily Show, but on Monday night Jon Stewart did a devastating bit on retiring Exxon Mobil Chairman Lee Raymond and his $398 million retirement package. After showing a -very- unflattering picture of Mr. Raymond's blubbery face, Stewart said that Raymond's jowls were not just the result of laziness, they were a key to economic prosperity. Then the same picture was shown with a cutaway, in which Raymond had stashed valuables inside his face, including Munch's Scream and a Honus Wagner baseball card, the most valuable card of all. It was both cruel and apt.

Steven Pearlstein: Wish I had seen it. Only one little correction to your comment, which also needed to be corrected in the New York Times. The $398 was NOT a retirement package. It was his last year's compensation, plus the net present value of his pension, plus the value of stock and options he had accumulated over 40 years of service. It was what he walked away with, but it was not a retirement package in the ordinary way in which that term is used.

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Laurel, MD: Why don't people sell the stock of companies with overcompensated execs?

If excess CEO or executive pay amounts to enough to significantly affect a corporations cash flow, and the executives are not "earning" their compensation by creating similar gains for the corporation, wouldn't savvy investors know it? At least occasionally, I would think a mutual fund manager from Fidelity or Vanguard would have the resources and motivation to identify which companies are being dragged down by their leaders and sell accordingly.

A Fidelity manager's holdings eventually becomes a crib sheet for ordinary investors, who often follow suit.

If investors all want to sell, all of a sudden these execs have worthless stock options or rapidly declining holdings.

Why doesn't this happen all the time if CEO pay is indeed excessive?

Steven Pearlstein: In a business environment where the stock of the average company changes hands by 200 percent each year, clearly most investors, particularly institutional investors, are not looking toward creating long term value. And because of the compensation systems, neither are the CEOs. So there is perfect alignment. I don't claim to have all the answers on how to change that, but it is important to recognize that reality. The other problem that your comment points out is that we can't expect Fidelity and Vanguard fund managers to challenge many of the big companies when, at the same time, their colleagues in the sales department are trying to win the 401 (k) business of those same corporations.

But let's get to the real reason fund managers don't challenge successful CEOs on their pay. Its like the superstar market for doctors. If you are really sick, you want a world class doctor, and you are not going to quibble about the price. Similarly, if you are a fund manager with billions invested in a company, you are not going to quibble if a small percentage of the company's winning are siphoned off by the insiders. And if the company isn't successful, then they don't bother with corporate governance issues. They simply sell the stock. Which points up a real structural problem with corporate governance and shareholder democracy.

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Rockville, MD: Sir--

You asked about proportional representation. It seems as though -no one- has heard of it (sigh). In a traditional, winner-take-all election, only -some- of the voters are -indirectly- represented; but in P.R., -all- of the voters can be -directly- represented. Http://www.fairvote.org lists a number of different types of P.R. The type I favor is that all candidates for office get X votes -- X being the number of votes cast for them. But, you will ask, just how do you keep the number of representatives -- especially those that just got 1 vote for themselves? That is a good question; and I am so glad that you asked. There are a number of ways around the dilema; the fairest one is to rank the candidates in terms of vote totals from top to bottom. Candidates -- and their attendant votes -- would be admitted to a public legislature or private board until their attendent votes became greater than or equal to 2/3 of all legitimate votes cast. Those who are "in" would get all of the trappings of office: On office with a staff, franking priviges, the right to speak during hearings, etc. Everyone else who is "out" -- the other 1/3 -- would just have the right to vote when votes were called.

Hope this answers your question.

--N.Bahn

Steven Pearlstein: It does. Sounds a bit complicated to me.

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Silver Spring, MD: I recently read an article on the trend of the labor market moving towards contract work rather than employment. If you compare some 10 years ago with today, you see many more people contracting (although nowhere near a majority still). Do you see this as an effect of companies tightening the belt on their employees and their benefits and people wanted to watch out for themselves OR rather is it the cause?

Steven Pearlstein: It is the result of a trend in companies to reduce fixed costs and increase variable costs, to make their economic structure more robust to the business cycle. And it is probably a good thing, because it makes the economy more flexibile. The downside is that it shifts a lot of economic risks to individuals. But there are some people, particularly younger workers, who don't mind that, particularly if the tradeoff is more money, which it can be.

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Steven Pearlstein: That's about all for today folks. See you next week.

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