I disagree. If the standard was set industry-wide, the ‘best’ CEOs would still be incentivized to perform well, even with a cap on their earnings. There would be no ship to jump to for a higher wage. It worked in the past in the U.S., and works in other countries.
The US pays CEOs more in equity than other nations.
Equity obviously gives an incentive to drive up the stock price. While that’s not a perfect proxy for company performance, it’s usually at least correlated with revenue, income, and other positive metrics.
Capping CEO pay necessarily means breaking this link. It’s not even clear how this would work–if a CEO receives some stock options, and then the price goes way up so that it exceeds the pay threshold–do you just take those options away? It’s not just a matter of the CEO jumping ship–it’s that if there’s a hard cap, then after their stock reaches a certain level the incentive disappears.
Isn’t the objective to increase workers’ wages? Do laws that limit the ratio of worker-to-CEO wages accomplish that? I have no expectation that such a law would lead to the reduction in CEO pay being redistributed.
And also stock buybacks which take money which could be reinvested (or paid in higher wages) and use it to increase the stock price. Often buying high. That was one of the reasons GE went to hell. So maybe decoupling CEO pay from stock prices and using more useful metrics could help.
Stock buybacks are weird. On one hand, they obviously exert upward stock price pressure by increasing demand. But on the other, they’re a clear signal that a company is totally out of ideas–that they can’t come up with a new product or division to invest in. And that’s a strong negative signal.
The market as a whole seems to be increasingly driven more toward signalling than raw financial performance. Valuations are based on growth prospects, not current income. So possibly stock buybacks are less effective now at pumping up the stock price. Unless a company is already expanding as fast as they reasonably could, a buyback is a signal that the company is coasting and can’t be expected to grow.
I question that math.
Not always. A company I follow closely just had a $25 million stock buyback while also spending just under $40 million on capital expenditures to expand capacity and product lines. As I understand it, the repurchased stock is then used for an ESPP for employees. Since the company has authority to issue new shares for the ESPP, I suppose they opt for the buyback to avoid dilution.
Edit: I see that you addressed this in the last sentence of your post. Sorry
Sure–there might be some administrative reasons for a buyback. I was referring mainly to the case where a company is performing a buyback explicitly for the purpose of pumping the stock price. (And yeah, as you note I’d mentioned earlier the case of companies that are already expanding as quickly as is reasonable.)
At the beginning of 2024 California minimum wage increased 3.5%, and prices at my local fast food restaurant went up around 2%. In April 2024 Calfornia fast food minimum wage went up another 25%. At that time the prices at my local restaurant did not increase at all, but they went out of business in June after being there 20+ years.
I keep reading that fast food prices went up around 7 to 15% as a result of the 25% increase in fast food minimum wage. But in a high inflation environment it is difficult to judge how much of the price increase id due to the wage increase. Also, many fast food restaurants raised prices a few months ago in anticipation of the wage increase, and prices at those places did not change on the date of the wage increase.
My problem with California is the turnaround time. A story went viral about an ice cream shop closing the same day the new minimum started - how’d they go under before labor costs increased? There seemed to be quite a few stories like that, where small businesses basically seemed to be closing in protest, rather than going bankrupt.
I doubt anyone closed in protest. If they closed it was because they were already losing money and were only going to lose more if they had to increase pay. They weren’t viable businesses before the increase.
Stores don’t close only because of going bankrupt. Even a profitable business might close, when better alternatives become available. An instantaneous large increase in employee wages could suddenly make some alternatives better. There was plenty of notice of the Calfornia wage incease, giving businesses a chance to prepare. Some of my local fast food restaurants closed, some installed self serve kiosks and raised prices.
From an employer’s perspective in a company with many minimum-wage employees, there’s sometimes thinking that goes, “How many workers can I afford?”
1000 workers on $10/hr costs me $20.8m in wages per year. If I’m forced to raise wages by 50c an hour then my total wage bill will increase by $1.04m if I keep all those workers.
But if I can find some productivity gains then I might be able to run the company equally well on 950 employees for roughly the same $20.8m.
There’s an argument that minimum wage increases have the effect of encouraging productivity gains (generally good), but at the expense of the 5% who lose their job as a result.
You don’t have to wait for your business to literally run out of money before you close it.
It’s entirely possible they ran their financial projections for the proposed minimum wage and realized they wouldn’t be profitable. So the owners decided to shut their doors and keep the money instead,
Just to add to the state comparisons, Idaho and Washington have gone opposite ways on wages and this has created an interesting situation at towns right across the border from each other. And it’s not the side with the higher minimum wage that has the struggling businesses.
Basically, none of this happens in a vacuum. We have 50 states, some of which border each other yet have different conditions that offer natural experiments in the sorts of things being argued in this thread.
There’s this (very old) NYTimes article from 2007 back when the minimum was $5.15:
And lest we think that more recent times might produce different results, wages have to keep up on the Idaho side. People may choose to live in a lower cost area but they much prefer working for higher wages (of course). Businesses can’t dictate both: