It’s very simple really to most people and that’s why its such a complex problem. The problem of executive pay (lets just take CEO pay as a proxy to make it easier to analyse).
For the left, CEOs are greedy bastards who make too much money, when lower level staff in the company can barely make ends meet. Income equality is one the biggest issues facing society. Therefore the answer has to be to curb CEO pay. Preferably by law. Where is the problem ?
For the right, who is anybody to say what somebody else earns. It’s a free market and CEOs perform one of the most difficult jobs of all. When a CEO can increase shareholder value by $10 bn, why should he not get $10 m. Where is the problem ?
In the US, this issue has got into prominence because companies are now required to report how much their Chief Executives make in comparison to the median paid worker. This was opposed tooth and nail by industry, but now the law has come into effect. And the first reports are starting to come in – In Marathon Petroleum it was 935 times, in Del Monte produce it was 1465 times, in Manpower, a temp agency, it was 2483 times. In Berkshire Hathaway it was 2 times.
Governments are starting to act. In the great state of Oregon, where a couple of readers of this blog live, the city of Portland has levied a 10% tax on companies where the ratio is more than 100 times. Many other states and cities are planning a similar levy. I don’t think that is right.
Remember, just because something is popular does not make it right. If you held a referendum that the state must burn down the house of every billionaire, it’s quite likely to pass with a 75% majority. That won’t make it right.
This is not as easy a problem to solve as it seems to the extremists. First to take on the left.
If you extend the same principle to every other domain – no film star should get more than 100 times the salary of an extra. Ditto music star. Ditto sportsman. For that matter why should the mutual fund where your pensions come from, make 100 times more than the janitor who cleans the stock market building. If you sell your property and make a fortune, then of course you shouldn’t be doing that as its 100 times more than what the majority of us who have no property to sell are making. We can go on and on. Its been proven time and again that arbitrary wage equations for everybody will only create a Soviet Union. And why should 100 be some golden number simply because it satisfies somebody’s sensibilities.
Now to take on the right.
Is anybody really worth $98 million ? Really ? That’s what Thomas Rutledge took in 2016. The median CEO salary is some $ 11m, but there are also wild outliers. But more than the absolute quantum, the real problem with executive pay is the reward that even poor performers get. Like golden parachutes if you are sacked. Like pay rises when your company results go down. Like bonuses which don’t get returned even though the results are later proved to have been fiddled and overstated. Like backdated stock options. Like saying you have to honour bonus contracts even though your company has just been bailed out by the government.
And then there is certainly the reality that CEO pay has risen far more dramatically in the last 20 years than the pay of others working in the company. It is therefore natural that there is a societal backlash. No society can live with wild inequalities, whatever be the justification.
Companies must be seen to behave sensibly, else regulation is inevitable. A formula could be to more tightly link to company performance, something that’s happening anyway. No contractual sweetners that would not be in any other employee’s contract. In good years, distribute the bonus pool more widely. Take pay rises only when company performs very well – employees won’t grudge your pay rise then. Maybe CEO’s can think of contributing 1% to a staff welfare fund. Its all optics. If you not only are fair, but seen to be fair, people won’t grudge your pay.
As we began the post, its not an easy problem to solve. So sit back an enjoy how a problem like Maria was solved !