GuidoWorld

CEO Pay Regulation

June 16, 2009 on 7:06 pm | In General |

There has been some talk recently that President Obama would like to put a cap on pay for executives of US corporations. Support and pressure to enact such measures come from many sources. Many tax payers are angry that the stimulus programs and bailouts have been funneled to the wealthiest of people. Laid off workers are upset at the reported bonuses, salaries and raises being doled out to executives of major corporations. Economists and financial historians point to the destructive role that salary imbalances have played in previous depressions and economic crisis in the US and other nations since the middle ages.

Yet, there are plenty of voices out there that look at any cap placed upon CEO’s pay as being anti-capitalisitic and potentially very harmful to any chance our economy has of recovering. Some financial historians will cite previous governmental regualtions and interventions as reasons why previous economic depressions have been so severe and lasted so long.

I personally have been opposed to the growing gap in wealth during the entire expansion period since 1980. The increasing percentage of wealth in a decreasing percentage of the population has always seemed cruel and counterproductive to me. More and more wealth into fewer and fewer hands has been with us during our entire economic roller coaster ride.

My thoughts and solutions to this situation have remained the same over the last couple of decades. Rather than place a specific monetary cap on CEO’s I would suggest we put in place a limit in the relationship of a CEO’s pay with the lowest paid workers in the company. In this way CEO’s are free to make as much as they can inside the system, and their pay raises are based on and reflect the pay raises of their workers.

I’m not able to say what the exact relationship should be, but I’m sure a task force comprised of economists, sociologists and international relations experts could come up with a workable scale. Especially if this pay scale was going to be reviewed every few years.

Such a pay scale would look something like the following. A corporation CEO’s total pay and compensation cannot be more than 300 times the pay of the least payed employee. Now, even though 300 times sounds like a huge differential and it is, the pay of our current CEO’s eclipses this by many times.

In the above example a corporation that paid its entry level workers 20,000 a year would only be able to make 6 million per year in salary, bonuses and other compensation. Obviously the CEO could make much more money if his entry level workers made more. A CEO paying his lowliest employees 40,000 could take in 12 million a year.

Now, I just picked the 300:1 ratio out of thin air. A economic task force could better determine a functional and fair CEO to worker ratio which probably would be different for companies of varied sizes and with varied work forces.

Yet, the benefit of the ratio would be two fold. First it would prevent the gaps between workers and management from spiraling out of control. And second it would give management sufficient incentive to improve the pay of their workers. Workers making more pay would have more disposable income to spend on the economy and CEO’s making more money would be doing so only when the company and its workers are succeeding.

A CEO in this type of structure would be highly rewarded for improving the standard of living of his workers, and these richer workers would be better able to spend, save and invest in an expanding economy than in our current system. In our current system workers pay has not kept up with inflation and the pay increase rate of management and executives.

I believe this system is not only fair, but more functional and sustainable than our current format. This same system for business could also be used for government. While pay raises for executives is dependent on pay increases for workers, likewise pay increases for pubic servants could be made dependent on monetary improvements for the lowest 10% of the populace. If a pubic official knew that his potential pay raise was dependent on the monetary improvement of the bottom 10% of citizens in his district, state or nation, then he would make it his main priority to improve their lot in life.

The above suggestion could be played out in the following manner. Let’s say the bottom 10% of the nation was averaging making $10,000 then a senator would only be able to get a 10% raise when the bottom 10% was averaging $11,000 per year. Once again these numbers were pulled out of nowhere and a competent task force could best decide if the ratio would be 1:1 or if a pubic servant would be available for a 1% raise for every 3% gain realized by the bottom 5% of the populace.

The goal would be for politicians to become more invested in the economic improvement of their constituents,

I know these are rough ideas, and there would need to be much dialogue and discussion to prevent these ideas from being abused and worked around. Yet, the potential abuses are not too difficult to imagine and successfully address especially if these pay ratios were reviewed often in a public format in which the public had the power to replace any task force members who appear to be acting in ways which are against the public interests.

Jim Guido