Salary Freeze = Longer Recession
Reading through the CNN.com homepage, a logical person can not help but be appalled. Among articles of some substance about real issues affecting Americans today, one will find articles speaking of the recessions' affect on Hip Hop stars spending. Is this the best that can be done?? Apparently not, as there is a large covering of the amount of businesses who are freezing workers salaries. Common sense, individual knowledge and any economic understanding apparently are not part of many peoples knowledge base. According to the site, "25% of companies plan a salary freeze", with the most likely to sustain a freeze in pay being the CEO's.
First, lets look at what a salary comprises. The amount some one person is paid is the direct amount of their worth to the company for which they work. If someone is paid $15 per hour, ignoring for the moment minimum wage, there is $15 per hour of value in that person at the said profession. This being said, a company freezing salaries says that the people are only as important this year as they were last year. In all reality, the exact opposite is true. Workers only have incentive to decrease their opportunity cost of working, until such a point where the pay they receive encourages them to work harder in order to create a profit for their firm. This being said, some will say that firms are freezing the pay of their workers to lower the cost of running their business in order to increase profits. This is true assuming that all workers are in the firm in the initial hopes of maximizing profits for the firm, but many workers in said firms will only be working in the firm to receive their pay and will do a moderation of work at or above the amount they have to do to keep their jobs. This being true, workers do not profit maximize for the most part, and therefore a salary freeze actually gives them less incentive to profit maximize. If no additional benefit can be gained from working harder or more efficiently, the extra work will not be undertaken.
Secondly, Chief Executive Officers are typically the top of the pyramid as far as company organization goes. This being true, they are also the closest to the owners of the company, whether those owners are stockholders or a small group of individuals. This being said, they have the closest connection to profit maximizing incentive. Very often these CEO's have direct contact with the owners and therefore have a direct responsibility for making a profit. Not always, but many times, a company will experience problems and a CEO will be the first fired. This is the case because a CEO has the greatest risk undertaken when taking the job. They are the top of the food chain, and their ability to communicate through the ranks bears a direct correlation to their success. If they are successful, they tend to get benefits, whether these benefits are a bonus or a corporate jet. If they are unsuccessful, they generally need to find another job. The high risk generates a necessity of a greater reward for these select few, which typically means higher salaries. Many people do not understand why CEO's get paid more than anyone else at the firm, and seem to revel in them losing jobs. If there was not a direct correlation between worth of CEO's and their pay, they would make considerably less.
Finally, there are certain industries in the USA where regulation has played a large part in all intermediate steps of production for the firms in that industry. An example would be the automotive industry, where regulations affect everything from the amount they pay their employees to the emission standards of their final product. All of these regulations have the unintended consequences of creating a barrier to efficiency for the firm as a whole as well as for all intermediate steps of production. If we saw less regulation and therefore less market intervention we would see greater efficiency marketwide, as well as greater profit margins for these companies.