Growth, CEO Compensation, and Savings

We wish to show, among other things, that excessive CEO compensation is deleterious to an economy.

Prove in the case of the Universal Corporation: UC produces everything. Therefore, all it buys is labor. Thus, all revenue goes either to labor compensation or to capital. We include capitals share in CEO compensation. Thus, UCs employee compensation, th minus the CEOs compensation share c, in the n cycle, is Rn(1- c), where Rn is UCs revenue. Suppose now everything UCs employees buy is produced by UC, and UC sells nothing to the CEO. Then UC gets all its revenue by selling to its employees, ( Rn (1- c) ) plus a portion, Rn e, selling to persons outside the corporation.. Therefore, Rn+1 = Rn((1c) + e); The growth in revenue, for a period n: R = e c. So, where c > e, revenue declines. The CEO is adversely effective. Done. Now we can include the CEO as an employee, ie someone who buys from UC, if we instead interpret c just as what the CEO does not spend, but saves. Indeed, this gives us the Paradox of Thrift, when c is interpreted instead as the sum of what all employees, CEO included, save. Therefore, if the portion the employees of UC save is more than the portion sold to people outside of UC, ie if c > e, revenues will decline. If instead we separate savings into components, labor savings and capital savings, (where investment is a capital expenditure,) sl and sc, then if sl + sc > e, revenues will decline. If sc > e, then sl must be negative, and of magnitude greater than sc e, in order for the

Compensation (log)

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CEO Effectiveness

Effectiveness

corporation to grow in revenue. That is, labor must dissave if capital saves at a rate greater than the rate of selling outside of UC, for UC to grow. (This can of course be forced by paying labor less than subsistence.) Note, if e is negative, eg if the employees also buy from outside UC, at a rate greater than persons outside of UC buy from UC, the employees of UC must dissave, (both c and e are negative), |c| > |e|, in order for the revenues of UC to increase. In components: we must have |sl + sc | > |e|, where if sc is positive, sl must be negative of magnitude greater than sc + |e| for there to be positive growth of revenue. If we include a third component, call it government, and call UC a nations economy, then for positive growth we must have: sg + sl + sc < e, or sg < e ( sl + sc ). If we separate e, net exports, into its components x exports and m imports, we require for growth of revenue sg < x -- m ( sl + sc ). We observe, for a system with no net trade, ( x = m ), sg < (sl + sc ). That is, for an economy with no net trade to grow, (net closed,) government expenditures must be greater than private sector savings. In general, that is, the economy as a whole must dissave. That is: 0 > sl + sc + sg .This may be made explicit: The share of growth of revenue, R = (sl + sc + sg ). What do we mean by dissave? Savings, of course, may mean putting money into mattresses. Dissaving implies there must be an input of money, such that more money is spent, by the components of an economy, than is earned. This may be money taken out of mattresses. This may be money lent by an entity outside of the economy. Where it is lent by an entity inside the economy, (finance, say, thus sf) we have the same problem: We have a change in the relative revenue collected by the components, but the revenue for the whole economy necessarily declines. With input I, we have: I > sl + sc + sg + sf as the condition for growth of revenue in a net closed economy. And in general: I + x m > sl + sc + sg + sf Explicitly, the share of growth of revenue is: R = ( sl + sc + sg + sf) + I + x m.