Executive Pay As Maximum of Proportion

When the controversy over executive pay erupted and some talking heads considering this one of the instigating factors in the financial disaster, I pondered on it a few days.   Suddenly a simple solution came to me.  Just allow the executive compensation level be related to other compensations in the same company.   The easiest formula is to allow executive pay to be a maximum multiple of the lowest earning pay level in the company.  Thus, C = bL, where C is maximum compensation, L is lowest level, and b is a scale factor.  This applies to bonuses, stock options, and free saunas in the company jet.  This factor can be fixed, per industry, or legislated.

How would this work compared to the current ratios?  The table below shows a best case scenario (from the standpoint of the CEO).  I got the pay values from this article, “Top Five Highest-Paid, Worst-Performing CEOs” that has data for 2008.  I used $15K as the lowest pay rate.  See how the multiplier is now in the thousands!  But, in the fifth column I put in what the other employees should have made at a more sane multiplier of 40.

Company Employee CEO Multiplier If multiplier were 40
Oracle $15,000 $557M 37133 $600,000
Blackstone Group $15,000 $702M 46800 $600,000

If we were using a multiplier of 40x, then each employee should have minimally made $14 million so that the CEO was justified in his salary. Obviously each wage or salaried employee cannot each make 14 million; what if there are thousands of them, as in multinational companies.  Thus, starting the other way, using the lowest wage, the CEO would be capped at $600,000, as shown in column 5.

That is a big problem with such simplistic approaches as mine.   What happens to the other levels of compensation, the middle managers?  Seems that to re-balance the low/high compensation proportion all pay “grades” must be adjusted.  How?  Also, if CEO have an effective cap, does that reduce CEO effort? On the other hand, just thinking of the problems on how to balance such a high executive pay is itself an indication of how unreal corporate capitalism has become and the size of companies has become behemoths.

Any advantages to this alternative?

  • No cap on pay.  Want to earn more, pay the ones who do the real work more.
  • Not based on financial voodoo such as stock ownership timing and recalls.
  • Would even satisfy some pinko leftist extremists.
  • Sounds moral.  Even Jesus would run his conglomerate this way.
  • If the robber baron at the top makes a killing so do the people stoking the steam furnaces in the basement.
  • Etc.

Of course, what the heck do I know.   If I was CEO of a company I would want big bucks too.  So, I was reluctant to post this on my blog.  Then this morning while listening to the radio on this topic, somebody in Canada, Michael, called in to give just this very idea.  He sounded like he knew a thing or two.  He said that thirty years ago, the multiple was like 40 times minimum wage.  The radio show was:  On Point with Tom Ashbrook.

In a free capitalist economy should government have a say in big pay?  Well, we have laws against child labor, have a minimum wage, and plenty of laws to safeguard employees.  If you don’t think there should be limits, just read “The Jungle” by Upton Sinclair or many of Charles Dickins’ books,  or visit a  sweatshop in any big city.   We may not have many inhumane deplorable work conditions, but normal people are not living large; some may see the income extremes as another form of exploitation.

Some links I found easily.  I notice most references talk of income caps.  That’s not what I advocated above.

Disclaimer:  None of the above represents the views of current or future employers of mine or my attitudes about employers.  It won’t represent my view either in a few days.  Live and learn.

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