Cap Executive Pay

Great Debates
1

Easy with those flamethrowers! Hear this out first (plus give me time to don my fire retardant suit). TL;DR version at the bottom.

Recently the public has been aghast at executive compensations. Princely sums paid to people who presided over the most colossal economic disaster. Thing is, this is not actually a new complaint. It is not hard to see serious discussions on this from several years ago.

Anecdotal? Not really. The article goes on at length about the issue and while those are held out as examples they are by no means unique.

So, there was a fuss about this in 2006 and I am sure we can find discussion on this going back even further. What came of all that discussion?

That list goes on.

What’s more, the United States far outstrips the rest of the world in executive pay compensation as compared to the average worker’s salary. There seems to be a lot of nitpicking over how you calculate that ratio but even the ones most favorable to the CEOs has them at 187:1 compared to their workers. (cite is in that CNN article linked to upthread) No other country is even close really.

Some would say they deserve the compensation they get given the job they do. Maybe and maybe not. Clearly executive pay packages are exceptionally dysfunctional and all too often are rewarding failure.
To me though this goes beyond going after some few who get paid too much. These compensation packages often see these guys making short term decisions that gain them substantial rewards but long term damage the company. Then when it all goes to hell they walk with golden parachutes on top of it all.

This is unhealthy to the economy as a whole. As such I think it merits government intervention. Like many here I am not keen on the government regulating every little thing and it should be avoided when possible. Nevertheless lack of regulation got us in the mess we are in today and I believe this is a part of it. Clearly executive pay, despite being recognized as a significant problem, never sorted itself out.

TL;DR Version

Proposal:
A flat cap would be silly. I propose that executive pay for publicly traded companies be capped at a 30:1 ratio of their salary versus the average salary of non-executives and non-managers at their own company. This cap would include all compensation, of any sort, they receive. Salary, stock options, limousine, apartment in downtown Manhattan, golden parachute, severance pay, etc…

If a CEO wants more money he/she would need to expand their company. Make it grow. Get their workers better wages. This is in the worker’s interests and in the shareholder’s interests (the CEO is actually looking to make a more profitable company rather than dodgy short bets).
Ok…flame away…

2

Every publicly traded company will have just a CEO a few top executives. Everyone else will be employed by temporary firms, which will of course all have to be private. So it took me all of thirty seconds to get around this one.

3

Your proposal doesn’t allow them to get more money by expanding the company, because expanding the company isn’t necessarily the result of increased production per employee.

4

Fine, add that anyone serving in an Executive capacity, regardless of who they work for, can only be paid at the capped rate by the public company. If that private company wants to pay the guy even more fine…that’s their own lookout.

5

Perhaps I used the wrong term or used it too loosely.

More simply stated make the company more profitable such that the workers can get paid more as a result will see the executive get paid more as a result.

6

Back when the power companies were being run by the greedy ,they broomed hundreds of workers. They showed huge profits that got the management big bonuses. Other execs saw that and followed suit. If you broom 800 workers, you can get the pay of 200 of them and still show a bottom line the board will love. I picture them getting paid in jobs. The pres gets paid 200 jobs. Of course the work does not get done and then they contract it out. That gets them a nice kickback and friends get to gouge the company. By the time the company is falling down, they are gone to another higher paying job because he has become an executive guru. Billions have gone up to the top and jobs are gone. The gap just gets bigger and bigger. In America cutting jobs is a big success. In some countries it is failure and shows bad management and planning.

7

As I understand it, current tax law only allows the corporation to deduct the first $1,000,000 of executive salary paid to an individual. They can pay them as much as they wish, but it would be taxed at the normal rate first.

That law was written to limit executive compensation. Unfortunately, what it produced was this nightmarish web of perks, bonuses, stock options, pensions, and other non-salary payments to executives. Make sure your law doesn’t have the same unintended consequences.

8

according to this cite, crazy executive pay is partly the responsibility of government, through the law of unintended consequences.

For example, in 1993 the Congress tried to limit executive compensation by allowing only the first 1 million dollars of executive pay to be tax deductible. The result was that executives increasingly were paid in stocks and options - right at the time when the share prices of many companies started going through the roof. So they made out like bandits.

Congress also passed a ‘golden parachute’ law in 1984, limiting their tax deductible amount to 3X base salary. This was seen as a government ‘sanction’ of the golden parachute, and they actually increased in number (and the value of increasing base salary went up, because that also increased the size of the parachute).

Corporations should have the right to decide what to pay their executives, because they are constrained by the market. Companies that pay their executives too much will have to lower dividends, employee pay, or other investments, making them less competitive. So the real check on CEO pay should be the board of directors and the stock holders.

The fact is, a bad CEO can run a billion dollar company into the ground, and a good CEO can create millions of dollars in new value for the company each year. That’s why they are compensated the way they are. Golden parachutes exist because they’re a safety valve for the company - if the executive becomes a major liability, they can get rid of him or her a lot easier. The cost of the parachute is a trade-off against the cost of the bad CEO doing more damage.

There’s no doubt a whole lot of them are overpaid, but then I work with people every day who I wouldn’t hire at half their salary. But limiting their pay isn’t going to change your life, or anyone else’s. The total compensation of all the CEOs of the Fortune 500 in 2005 was about 5 billion dollars. But the vast majority of that was due to stocks and options, because the market was booming. This year, CEO pay is already down dramatically, and will fall further (public outrage helps make it more of a liability to companies as well).

But in the end, if you paid them zero, you could pay for about 0.5% of the stimulus package. So other than populist outrage, it doesn’t have much to do with where the economy is at.

9

The issue is there’s no way anyone can measure a CEOs real worth. How can a CEO be CEO at two bankrupt companies then STILL get yet ANOTHER job as a CEO? But it happens all the time.

The issue is at the top level there is no accountablity. People tend to see what they want to. Just because a CEO is good at one time doesn’t mean he’s good. A company’s progress is almost always the result of being able to capitalize off a current trend. Once that trend fades you have to be able to flex or fire that CEO.

The easiest way is to make your CEO salary standard then employ a bonus based on

  1. The overall company’s profit
  2. The CEOs measurable goals
  3. The teamwork of ALL the employees

Thus the bonus has three components and you needn’t get all three to get a bonus.

Also having a RIGID standard of accounting for publicly traded companies would easily end all this. Too often accountants just think of ways to get around things. Have a RIGID “This is the way it’s done PERIOD” standard and make the publicly traded companies stick to it.

10

The private companies would be employing the worker bees, not the executives. The executives would be the only employees of the public companies. Or have you now moved on to restricting the pay of the worker bees. How the fuck are you going to calculate the capped rate for the public companies when they have no non-executive employees. Zero divided by zero does not equal zero. So you would have to prohibit my scenario somehow. You would have to force companies to have employees, and not hire contractors. How about if the only employee is an Admin Assistant who is paid $3 million. Can the CEO now get $90 million?

You will come up with a way to close these loopholes and they will come up with a way to get around them. Is that why you are using the handle “Whack-a-Mole”? Am I being whooshed?

11

Part of the reason for starting this thread is to identify possible unintended consequences or dodges to evade the overall goal.

Note I made my proposal to cover overall compensation. I did it for precisely that reason. The total value of all compensation to the executives must fall under the 30:1 ratio. Period.

In theory I agree with you. It’s just that theory fails at the door of reality. As noted there have been attempts to rein this in and there has been serious discussion, even among CEOs who agree it has gotten out of hand, yet nothing changes. If anything it has gotten worse.

Joe Stockholder is swamped by institutional investors. Institutional investors, as the largest stock holders, obviously have been letting compensation skyrocket.

Your faith in market forces provably does not work in this case. I wish it did, but it doesn’t.

I do not get this. Why should it be hard to oust a CEO? He is an employee and can be fired by his/her Board.

My reason for this proposal is not that I think their salaries, in and of themselves, will make a significant dent in the overall economy. It is to change the focus of the guys steering the ship to care more about the ship and less about themselves.

The incentives are all skewed. It is like getting paid to lose 20 pounds. You could lose 20 pounds by dehydrating and taking laxatives in a day or two but it is not real weight loss, at least not the kind likely envisaged, and it is not healthy. Nevertheless you get a fat wad of cash for excellent performance for doing it and never mind the damage you have done or the fact that all that weight and more will come right back in short order. The proper way to lose weight is a pound or two per week by healthy eating and exercise.

So, get these guys focusing on the health of the company. Long term health at that. The CEO benefits only when everyone else has benefited (shareholders and employees and a bit more remotely the economy as a whole).

12

I like the idea of tying the highest salary in a company with the lowest, so that the CEO can only earn X times as much as the janitor. That way, there’s no absolute cap on executive salary, but if the CEO feels like bumping up his salary, he’ll have to give raises to a lot of other people first.

13

Huh…a global company with no employees? Neat trick.

FedEx for example has over 200,000 employees. Kinda curious how you outsource all that.

Not only that but how the Board of Directors, not to mention shareholders, will view the company as well run and profitable by relying exclusively on very expensive outsourced people so the executive can collect a hefty salary.

Payments to contractors do not get averaged in to the calculation of payments to employees when determining the Executive salary.

As for being whoosed note I have been posting here for 9 years. I did not choose my screen name with this post in mind.

14

I like the idea of all shareholders, not just the Board of Directors determining executive pay.

15

This is bizzarre. If I operate one restaurant, and pay my employees $10 per hour. I am so successful I open nine more branches. I cannot get paid one penny more for managing ten restaurants than one, because the employees are still paid $10 per hour. The company is massively more profitable, but unless I pay the employees $20 per hour, I can’t get paid twice as much for having ten times the responsibilty. But if I double everyones wages, the company will not be profitable. In fact it will go bankrupt. But I can double my CEO pay.

There has to be some provision for proportionality and you have to take into consideration the nature of the industry. A biotech company CEO should not get paid five times Walmart’s CEO, just because they employ mostly high skilled workers who get paid five times as much. 30 times Wal-Marts average employees wages may not even be $1m, while the Biotech firms CEO might make off with $5m for running a much smaller and less complex organization. But this is all fair right? How difficult is it to run Wal-Mart anyway? It is just retailing. Illiterate people in Bangladesh are doing it. Just multiply the same thing 100,000 times an voila, Wal-Mart.

I am sure that in your world the solution to these knotty problems is to make the biotech researchers pay much close to the WalMart greeters.

16

This is the way to do it. Require that all compensation given to company officers must be approved by a majority of stockholders, every year.

17

First off private companies can do as they like.

Second, there is nothing that says the executives must get paid at the 30:1 ratio. The Board can set it at, say, 20:1 and then include incentives to raise it to 22:1 (or whatever) if you grow the company.

Third, it is the average salary of all employees. Presumably if you are growing so much you now have rather more expensive accountants and managers and such working for you thus raising your salary.

Fourth, if you started with one restaurant and grew it to nine (or whatever) you still benefit when you take it public. As the only shareholder initially the value of your stock will rise when it goes public. You can cash that out. Or sell the company which will be worth a lot more with nine restaurants than one.

There are plenty of reasons for you to grow the company that benefit you directly.

18

I think the problem here is most individual shareholders either are invested in a fund and the fund as a single entity votes or the shareholders individually do not know enough or bother to know enough and give their vote to someone else to cast. Or they are just plain overwhelmed and outvoted by those huge funds and such.

Presumably these shareholders all along could have insisted on more rational compensation. They haven’t succeeded much in that to date.

19

You mean they can receive less than your cap allows? Gee, you’re too kind. :rolleyes:

Didn’t you quite explicitly state that managers didn’t count? Besides, that only helps if you are increasing your number of accountants and lawyers by a greater percentage than for the general workers, which isn’t likely to still be happening once your company is big enough to go public. It punishes you, personally, if you can take advantage of economies of scale.

20

Thinking about this more I am not so sure that their pay is as insignificant as you’d have it.

I read somewhere the average salary in the US is around $40,000/year (if not let’s use it as an example).

That $5 billion is enough to employ 125,000 people. Maybe not a huge impact on the overall economy but not insignificant either.

Of course the CEOs will not get paid zero but I think that puts a different perspective on things.