Building Your Own (fair) Corporation

Great Debates
1

So, you’ve decided to build a corporation[1]. And in doing so, you decide that the best way for you, personally, to make a profit is to do so in the long run. In order to do that, you think that there must be an effective pay structure that will attract employees and provide them with a stable, long-term job, as well as providing the executives with a fair amount of pay that provides incentive for them to direct the company in a profitable direction over the long term. And you know that you will not always be in charge of the company, so even if you play fair, there’s no guarantee that your successors will.

So how would you set up your corporation to meet these criteria?

Initially I thought that the executives’ pay should be tied to either the lowest paid employee’s salary or the average employee salary (whether mean or median). But I figured there are flaws in this as the company could then hire temporary/contract workers and pay them smaller amounts then their employees. Or they could artificially inflate wages above the work/production ratio to be able to inflate their own salaries. Both would cause the company increased expenses without an increase in profit and thus limit the lifespan of the company.

Then I thought that perhaps the executive salaries should be determined by the employees. However, this has flaws as well. The employees may decide to inflate the salary of executives whom they think would inflate their salaries as well without the aforementioned increase in profits.

Tying the executive salary to the profit margin of the company would also have ill-effects, as quality executives would find themselves loosing pay in face of a depressed market (i.e. they did a great job managing the company, but are paid a penalty regardless). This would encourage them to seek positions elsewhere.

The best I could come up with is a combination of that above. The executives’ salary would be tied to the average employee salary, but would be the baseline (and contract/temp workers would be figured into the equation). Their pay could be increased if company profits go up, but only if approved by a 2/3 majority of workers, and the board of directors would have some sort of veto power. Likewise, their pay could go down, but never past the baseline level, and again, approved by the employees, with veto power in the board.

Off the top of my head, the main problem I see with this is that it ends up looking like the federal government, and you know all the problems that go one there…

[1]Pardon any oversimplifications, as I’ve never tried it myself :slight_smile:

2

As strange as it may seem, I still like the idea of a combination of stock and stock options as a substantial part of the executive compensation plan. (I’m assuming the stock will be publicly traded.) With one important caveat.

If you give an exec X shares of stock in Year 0, then you tack on the stipulation that he can sell no more than, say, 5% of his holdings by the end of the first year, 10% by the end of the second year, etc. Same deal with the options. (He’s got to exercise the options before he sells, but you get the idea.)

Why a combination of the two? Because options cost nothing until the stock goes up. (And stays up, under this scenario.) So they’re cheap, which is why they saw so much use in the late 1990s. And actual stock, so that the exec has something to lose if the company’s stock price goes down (which is not true with options).

As far as employee compensation goes, let it be known that you won’t block unionization. Then they’ll be able to bargain for themselves as a group, and you won’t need some master plan to protect them.