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Paying People Too Much

In 1991, Neva Goodwin, the co-director of the Global Development and Environment Institute at Tufts University, wanted to write a book on “Dumb Things We Could Stop Doing”. I thought it was a great idea, and drafted an article on “Paying People Too Much.” The book was never written and the article never published. But I recently read over the article, and the issue is as relevant today as it was back then.
 
Below, I have updated the article with current data.
 
Paying People Too Much
 
by Elliott R. Morss, Ph.D.
 
Introduction
 
In 1990, Donald Pels, the chief executive officer of LIN Broadcasting, made $186.2 million by cashing in stock options when LIN was bought by another firm. Steven Ross, the head of Warner Communications, walked away with a $74.9 million cash "bonus" when his firm merged with Time Magazine. Stephen Wolf of United Airlines was at the top of the "regular" compensation list when he took home $18.3 million (1990 was a year in which UAL profits fell by 71%). 
 
Business Week reported that chief executive officers of large U.S. firms were paid an average of $1.9 million in 1991 ("The Flap Over Business Pay", Business Week. This grew to $10.9 million in 2008 (http://www.aflcio.org/corporatewatch/paywatch/pay/) Another study estimated the average chief executive officer of a major U.S. firm makes 160 times what the average American makes (Graef S. Crystal, In Search of Excess: The Overcompensation of American Executives, New York: W.W. Norton & Company, 1991), May 6, 1991)
 
Let’s look in more detail at 2008. Table 1 provides compensation data for the executives who made more than $20 million that year. It is a long list. A number of names have been in the news recently as a result of the US banking collapse and the TARP bailout – Blankfein (Goldman) took home $43 million, Pandit (Citigroup) collected $38 million, Dimon (JP Morgan) got almost $36 million and Fuld of failed Lehman got $22 million. They were paid these amounts for one year of work.
 
Table 1. – 2008 Executive Compensation
Company
CEO Name
Compensation ($)
Lazard Ltd
Bruce Wasserstein
133,708,650
Nabors Industries Ltd.
Eugene M. Isenberg
116,652,816
Chesapeake Energy Corporation
Aubrey K. McClendon
112,464,517
Oracle Corporation
Lawrence J. Ellison
84,598,700
Freeport-McMoRan Copper & Gold Inc.
Richard C. Adkerson
77,085,387
XTO Energy Inc.
Bob R. Simpson
53,482,631
Walt Disney Company
Robert A. Iger
51,229,341
Axis Capital Holdings Limited
John R. Charman
46,770,492
GAMCO Investors, Inc.
Mario J. Gabelli
45,927,900
Federal-Mogul Corporation
Jose Maria Alapont Ph.D.
43,878,871
American Express Company
Kenneth I. Chenault
43,393,172
Philip Morris International Inc.
Louis C. Camilleri
43,229,587
Goldman Sachs Group, Inc.
Lloyd C. Blankfein
42,946,801
Activision Blizzard, Inc.
Robert A. Kotick
41,243,860
Citigroup Inc.
Vikram S. Pandit
38,237,437
Massey Energy Company
Don L. Blankenship
37,201,341
Eagle Bulk Shipping Inc.
Sophocles Zoullas
35,788,323
JPMorgan Chase & Co.
James Dimon
35,764,557
Calpine Corporation
Robert P. May
35,143,178
Hewlett-Packard Company
Mark V. Hurd
34,031,021
McKesson Corporation
John H. Hammergren
33,554,015
Roper Industries, Inc.
Brian D. Jellison
33,318,262
Iconix Brand Group, Inc.
Neil Cole
32,453,264
Exxon Mobil Corporation
Rex W. Tillerson
32,211,079
Harman International Industries, Incorporated
Dinesh C. Paliwal
31,914,693
Honeywell International Inc.
David M. Cote
30,829,513
Occidental Petroleum Corporation
Ray R. Irani
30,401,622
News Corporation
Keith Rupert Murdoch
30,053,157
Coca-Cola Company (The)
E. Neville Isdell
29,713,057
Johnson & Johnson
William C. Weldon
29,127,432
Seagate Technology
William D. Watkins
28,329,065
Abbott Laboratories
Miles D. White
28,253,387
Viacom Inc.
Philippe P. Dauman
27,994,832
Yum! Brands, Inc.
David C. Novak
27,949,368
Herbalife Ltd.
Michael O. Johnson
27,659,552
VMware, Inc.
Diane B. Greene
26,839,850
BMC Software, Inc.
Robert E. Beauchamp
26,467,125
Hess Corporation
John B. Hess
26,334,067
Comcast Corporation
Brian L. Roberts
26,240,363
Wyeth
Bernard Poussot
25,845,593
Procter & Gamble Company (The)
Robert A. McDonald
25,568,212
Lockheed Martin Corporation
Robert J. Stevens
25,551,586
Merck & Co., Inc.
Richard T. Clark
25,073,555
IBM
Samuel J. Palmisano
24,965,547
Marsh & McLennan Companies, Inc.
Brian Duperreault
24,962,204
State Street Corporation
Ronald E. Logue
24,517,276
Integra LifeSciences Holdings Corporation
Stuart M. Essig
24,504,288
ConocoPhillips
James J. Mulva
24,402,520
Motorola, Inc.
Sanjay Jha
24,236,930
Omnicare, Inc.
Joel F. Gemunder
23,847,016
Anadarko Petroleum Corporation
James T. Hackett
23,835,714
United Technologies Corporation
Louis R. Chenevert
23,575,769
WellCare Health Plans, Inc.
Heath Schiesser
23,467,591
Abercrombie & Fitch Co.
Michael S. Jeffries
23,198,271
ProLogis
Jeffrey H. Schwartz
23,176,089
Bristol-Myers Squibb Company
James M. Cornelius
23,150,236
eBay Inc.
John J. Donahoe
22,462,893
MetLife, Inc.
C. Robert Henrikson
22,456,244
Liberty Media Corporation
Gregory B. Maffei
22,286,303
CVS Caremark Corporation
Thomas M. Ryan
22,116,260
Lehman Brothers Holdings Inc.
Richard S. Fuld
22,052,273
Polo Ralph Lauren Corporation
Ralph Lauren
22,039,181
Deere & Company
Robert W. Lane
21,830,483
TD Ameritrade Holding Corporation
Joseph H. Moglia
21,745,211
General Dynamics Corporation
Jay L. Johnson
21,724,967
Northrop Grumman Corporation
Ronald D. Sugar
21,658,718
Avon Products, Inc.
Andrea Jung
21,622,451
Time Warner Inc.
Jeffrey L. Bewkes
21,617,867
Prudential Financial, Inc.
John R. Strangfeld
21,584,843
ACE Limited
Evan G. Greenberg
21,482,013
CBS Corporation
Leslie Moonves
21,167,470
H. J. Heinz Company (The)
William R. Johnson
21,080,265
Weatherford International Ltd.
Bernard J. Duroc-Danner
20,930,309
Knight Capital Group, Inc.
Thomas M. Joyce
20,862,388
BlackRock, Inc.
Laurence D. Fink
20,641,331
Foster Wheeler AG
Raymond J. Milchovich
20,576,993
Raytheon Company
William H. Swanson
20,567,134
Verizon Communications Inc.
Ivan G. Seidenberg
20,333,127
Valeant Pharmaceuticals International
J. Michael Pearson
20,172,115
 
Executives make a lot, but so do entertainers. Today, the average major league baseball player makes $3.3 million a year, while the average NBA player makes $5.6 million. Tiger Woods has been making $100 million per year, Oprah Winfrey takes home about $225 million annually, while the leading movie stars regularly get $20 million for each movie.
 
Is it not dumb for us to tolerate a system that allows people to make these amounts when:
 
·        engineers average less than $95,000 annually;
·        secondary school teachers earn $51,000;
·        General Norman Schwarzkopf's annual salary for managing 250,000 military; personnel in Desert Storm was $103,927.60, and
·        In 2009, General Peteus made $180,000.
  
Capitalism or Socialism?
 
In a capitalist society, people are paid in accordance with their contribution. In a socialist society, people are paid in accordance with their needs. As an economic system, capitalism works while socialism does not. History has shown that whether it is a kibbutz in Israel, or collective farming in China, people don’t work as hard when they are just paid what they need.
 
But the numbers cited above do raise questions. Should we be concerned enough to take action? Many thoughtful people are disturbed by the size of these payments. Professor Edward E. Lawler of the University of Southern California's Graduate School of Business says: "It seems to get more absurd each year. What is outrageous is that one year becomes the standard for the next. And no one is in a position to say no." Graef Crystal, an Adjunct Professor of Business at the University of California, Berkeley and a longtime business consultant, calls the executive pay system "rotten to the core".
 
The standard Chamber of Commerce reply is that we should not "mess with the market" because whatever its weaknesses, it is a better overall allocator of resources than any other system ever devised by man.
 
Certainly, the issue warrants further investigation. Two criteria come immediately to mind that can be used to determine whether people are overpaid:
 
·        The market test: is there competition, and if so, is the person earning his or her marginal value product? In less technical terms, is a person getting compensated in a manner that reflects his or her contribution to the profits of an enterprise? If the person provides services to a non-profit organization or a government, the question is how much higher are the additional social benefits provided by the entity as a result of the person's services;
·        Social: There is a point at which a large segment of society views the amount paid to an individual for services rendered so large as to be obscene, outrageous and simply not to be tolerated. This feeling might be caught in a quote such as the following: "I don't care if the market is working; from a societal standpoint, those payments are obscene; there is something wrong with the market mechanism if it allows somebody to make that sort of money when a school teacher only makes $32,000". 
 
Such payments can cause anger and envy that can generate further social costs.In the following sections, we will apply these criteria to two groups, senior executives and media performers, and investigate their consequences.
 
Senior Executives
 
i. The Market Test
           
Mark Farmer has reviewed the literature on executive compensation and finds a very weak positive relationship between executive pay and company performance. This is troubling inasmuch as if the market is working as it should in a capitalist society, there should be a strong positive correlation between pay and performance, It is clear that by the market test, a large number of senior executives are overpaid.
 
But on this subject, consider also Table 2. While admittedly a small sample, it does offer some troubling evidence. It lists bank executives earning more than $1 million in 2008 who took TARP money. Certainly these executives did not “earn” their money in 2008: in many cases, their banks would have collapsed without TARP bailout money.
 
Table 2. – 2008 Executive Compensation of TARP Recipients
 
 
 
TARP
Company
Recipient
Compensation
Payment
American Express Company
Kenneth I. Chenault
43,393,172
3,388,890,000
Goldman Sachs Group, Inc.
Lloyd C. Blankfein
42,946,801
10,000,000,000
Citigroup Inc.
Vikram S. Pandit
38,237,437
50,000,000,000
JPMorgan Chase & Co.
James Dimon
35,764,557
25,000,000,000
State Street Corporation
Ronald E. Logue
24,517,276
2,000,000,000
American International Group, Inc.
Martin J. Sullivan
17,073,478
98,935,000,000
Bank of New York Mellon Corporation
Robert P. Kelly
14,183,633
3,000,000,000
South Financial Group, Inc.
Mack I. Whittle
12,406,428
347,000,000
PNC Financial Services Group, Inc.
James E. Rohr
11,958,853
7,579,200,000
Bank of America Corporation
Kenneth D. Lewis
9,857,723
45,000,000,000
Lincoln National Corporation
Dennis R. Glass
9,059,351
950,000,000
Wells Fargo & Company
John Stumpf
8,768,935
25,000,000,000
Northern Trust Corporation
Frederick H. Waddell
8,379,651
1,576,000,000
SunTrust Banks, Inc.
James M. Wells III
8,091,887
4,850,000,000
Hartford Financial Services Group, Inc.
Ramani Ayer
7,283,943
3,400,000,000
U.S. Bancorp
Richard K. Davis
6,987,092
6,599,000,000
Regions Financial Corporation
C. Dowd Ritter
6,807,662
3,500,000,000
KeyCorp
Henry L. Meyer III
6,727,671
2,500,000,000
BB&T Corporation
John A. Allison
6,478,689
3,133,640,000
Comerica Incorporated
Ralph W. Babb Jr.
5,947,475
2,250,000,000
CIT Group Inc.
Jeffrey M. Peek
5,383,517
2,330,000,000
TCF Financial Corporation
Lynn A. Nagorske
5,165,471
361,172,000
Central Pacific Financial Corp.
Clint Arnoldus
5,042,745
135,000,000
FirstMerit Corporation
Paul G. Greig
4,875,261
41,500,000
City National Corporation
Russell Goldsmith
4,150,608
400,000,000
East West Bancorp, Inc.
Dominic Ng
4,063,319
306,546,000
UCBH Holdings, Inc.
Thomas S. Wu
3,619,608
298,737,000
Marshall & Ilsley Corporation
Mark F. Furlong
3,449,755
1,715,000,000
Wilmington Trust Corporation
Ted T. Cecala
3,348,030
330,000,000
First Horizon National Corporation
Gerald L. Baker
3,323,284
866,540,000
Sterling Bancorp
Louis J. Cappelli
3,294,011
42,000,000
Signature Bank
Joseph J. DePaolo
3,169,037
120,000,000
Synovus Financial Corporation
Richard E. Anthony
3,057,187
967,870,000
Webster Financial Corporation
James C. Smith
3,000,939
400,000,000
Fifth Third Bancorp
Kevin T. Kabat
2,980,259
3,408,000,000
Royal Bancshares of Pennsylvania, Inc.
Joseph P. Campbell
2,892,005
30,407,000
Associated Banc-Corp
Paul S. Beideman
2,776,841
525,000,000
Cathay General Bancorp
Dunson K. Cheng
2,771,032
258,000,000
Boston Private Financial Holdings, Inc.
Timothy L. Vaill
2,722,076
154,000,000
Umpqua Holdings Corporation
Raymond P. Davis
2,615,010
214,181,000
Flagstar Bancorp, Inc.
Mark T. Hammond
2,506,900
266,657,000
Discover Financial Services
David W. Nelms
2,431,100
1,224,558,000
Trustmark Corporation
Richard G. Hickson
2,230,868
215,000,000
Valley National Bancorp
Gerald H. Lipkin
2,085,773
225,000,000
Whitney Holding Corporation
William C. Marks
2,084,389
300,000,000
First BanCorp Holding Company
Luis M. Beauchamp
2,057,905
400,000,000
Sun Bancorp, Inc.
Thomas X. Geisel
2,033,417
89,310,000
International Bancshares Corporation
Dennis E. Nixon
1,906,875
216,000,000
Huntington Bancshares Incorporated
Stephen D. Steinour
1,884,117
1,398,071,000
First Niagara Financial Group, Inc.
John R. Koelmel
1,738,847
184,011,000
SCBT Financial Corporation
Robert R. Hill Jr.
1,610,736
64,779,000
First Midwest Bancorp, Inc.
Michael L. Scudder
1,600,487
193,000,000
F.N.B. Corporation
Robert V. New
1,520,354
100,000,000
Zions Bancorporation
Harris H. Simmons
1,499,926
1,400,000,000
Pinnacle Financial Partners, Inc.
M. Terry Turner
1,493,862
95,000,000
MB Financial, Inc.
Mitchell Feiger
1,474,217
196,000,000
PrivateBancorp, Inc.
Larry D. Richman
1,461,666
243,815,000
National Penn Bancshares Inc.
Glenn E. Moyer
1,445,647
150,000,000
First Financial Bancorp.
Claude E. Davis
1,412,088
80,000,000
Old National Bancorp
Robert G. Jones
1,408,464
100,000,000
Popular, Inc.
Richard L. Carrion
1,395,622
935,000,000
OceanFirst Financial Corp., Inc.
John R. Garbarino
1,360,415
38,263,000
Susquehanna Bancshares, Inc.
William J. Reuter
1,352,659
300,000,000
Flushing Financial Corporation
John R. Buran
1,316,171
70,000,000
Midwest Banc Holdings, Inc.
Jerome J. Fritz
1,306,880
84,784,000
Morgan Stanley
John J. Mack
1,235,097
10,000,000,000
Citizens Republic Bancorp, Inc.
William R. Hartman
1,212,611
300,000,000
Westamerica Bancorporation
David L. Payne
1,209,466
83,726,000
CVB Financial Corp.
Christopher D. Myers
1,187,958
130,000,000
First Bancorp
Jerry L. Ocheltree
1,155,422
65,000,000
SVB Financial Group
Kenneth P. Wilcox
1,121,251
235,000,000
Lakeland Bancorp, Inc.
Thomas J. Shara
1,105,240
59,000,000
Independent Bank Corp.
Christopher Oddleifson
1,086,855
78,158,000
Berkshire Hills Bancorp, Inc.
Michael P. Daly
1,076,348
40,000,000
1st Source Corporation
Christopher J. Murphy III
1,066,327
111,000,000
Columbia Banking System, Inc.
Melanie J. Dressel
1,053,087
76,898,000
Intervest Bancshares Corporation
Lowell S. Dansker
1,020,169
25,000,000
CoBiz Financial Inc.
Steven Bangert
1,012,037
64,450,000
Pacific Capital Bancorp
George S. Leis
1,002,428
180,634,000
 
There is one more table relevant here. It provides exit pay (golden handshakes) for a certain executives. Look at the companies – they all failed shortly after these executives got paid off! And look at the amounts these people received! A late Palm Beach friend of mine once said the churches are always full on Sundays with repentant sinners!
 
Table 3. – Exit Pay for Executives
Company
Individual
Date
Total
Merrill Lynch
Stanley O'Neal
Oct. 28, 2007
$161,000,000
Citigroup
Charles Prince
Nov. 4, 2007
$105,000,000
Washington Mutual
Kerry Killinger
Sept. 8, 2008
$44,000,000
Wachovia
Ken Thompson
June 1, 2008
$42,000,000
Lehman Bros.
Richard Fuld
Sept. 17, 2008
$24,000,000
Washington Mutual
Alan Fishman
Sept. 25, 2008
$19,000,000
Freddie Mac
Richard Syron
Sept. 8, 2008
$16,000,000
Bear Stearns
James Cayne
Jan. 8, 2008
$13,000,000
Merrill Lynch
John Thain
Sept. 14, 2008
$9,000,000
Fannie Mae
Daniel Mudd
Sept. 8, 2008
$8,000,000
Source: James F. Reda & Associates                                           
 
Why has the market broken down? There are many reasons for market imperfections. Here, we will focus on two. First, there are certain "assets" one must have to be considered for the senior executive "club" by large corporations and the "headhunter" firms that work for them. Social and professional networks are two of the more important assets given consideration. By limiting searches to persons turned up by the head hunting consulting firms. And the “compensation tables” developed by these firms are very difficult to challenge. Unfortunately for stockholders, the executives selected and what they get paid is part of a very imperfect market.
 
Second, collusion between the senior executive and the firm's board of directors occurs. Board members remain loyal to the CEO because they make good money by being a Board member. Back in 1990, Business Week reported that in a survey by Korn/Ferry International of 352 companies, the average director of these companies collected retainer and meeting fees of $32,352. Back then, paid much more: Pepsico, Philip Morris, and Coca-Cola paid $78,000, $54,675, and $53,400, respectively. In 2006, the New York Times reported on a survey indicating that directors now get paid between $52, 000 and $165,000.
 
 In theory, these directors represent the interests of shareholders. In fact, these directors are normally selected by the Chief Executive and are likely to support his or her recommendations on most matters. And even if the Chief Executive does not make a recommendation on what his or her compensation should be, it is reasonable to think that under current arrangements, directors will make quite generous offers.
 
ii. Social
 
But even if the market were working properly in awarding senior executives "what they were worth", are there not some longer-term social costs that should be considered? In 1990, the heads of the "big three" American auto companies took home between $8 and $12 million, and there were numerous others operating out of the executive suites of these companies that took home considerably more than $1 million. It is hard to believe that such compensation does not have a damaging effect on company morale. Consider two cases: a senior engineer and a production worker:
 
  • A senior engineer is critical to the success of an automobile company because s/he is responsible for the mechanical design of the company's vehicles, and s/he knows it; s/he might make as much as $300,000; how must he or she feel about having to report to a group in the executive suite making ten times more? A production worker with seniority knows a lot about the automobile industry. Can s/he be expected to believe there is someone in the executive suite who is more than 100 times as productive as s/he? 
 
Is it reasonable to expect that the senior executives, technicians, and production workers in a firm with such differentials will be disposed to work together as a tightly knit team?
Another important social question warrants attention: Should anyone get paid these amounts? Do we want anyone in our society to receive so much more than they will ever be able to use in a reasonable manner? We are concerned about destroying incentives to work and make risky investments. Perhaps $10 million is okay; but how about the $186.2 million payment to Donald Pels or $78.2 million to Steven Ross?
 
Media Performers
 
i. The Market Test
           
On first blush, sports and other media people seem to get paid "what they are worth" by the market. After all, the public pays fairly directly to enjoy their performances. But is the market really working properly? How about the argument that the media makes stars out of not-too-exceptional people. If that is the case, stars are overpaid in the sense that their intrinsic qualities do not exceed those of others who cannot charge as much for their services. This would not be possible if the market was working. Why? Because through the competitive process, all performers would be judged and paid in accordance with their talents. But is the media competitive? 
 
We know the broadcast media cannot be completely competitive because the number of airwaves is limited and because of the high costs of getting into the business. However, it is still possible that the best get to the top if the process of sorting that takes place before media involvement is competitive. Let us consider a concrete example drawn from heavyweight boxing: most of the money made from big-time boxing events comes through pay-TV. Mechanisms have been developed for cable-TV by which the audience can be charged on a per event basis, but only a few cable-TV stations are set up to employ them. The Time-Warner conglomerate owns one of the biggest. They have an audience of 20 million sets hooked up. To give some sense of the numbers, when Holifield fought Foreman (Holifield was the heavyweight champ while Foreman was a popular contender), they had an audience of 7% that got charged $35 to watch the fight, generating a gross of $49 million. The rule of thumb is that the boxers get 50% of the gross with the remainder going to the promoters, out of which they have to pay all costs. For a Holifield-Tyson match, estimates are they would get a 20% audience, generating a $140 million gross.
 
Time-Warner has effectively "bought" Holifield in that it gets to show any of his fights on their pay-TV system. Time-Warner tried to "buy" King and all of his fighters, including Tyson, but King chose to set up his own pay-TV network. While everything is at some level negotiable, the tradition is that the Champion's promoter gets to produce the fight. Consequently, with Holifield the champion, the fight will go out over the Time-Warner system; if Tyson beats him, the next fight will be shown on the King system.
 
What does all this mean? In a nutshell, the promoter is earning an excessive profit because s/he has access to the airwaves that are in limited supply. If competition was introduced among promoters, their payments would come down dramatically, and some of that would probably go to the performers in even higher payments.
 
The Unique Performer: Myth and/or Reality?
 
The question now becomes whether we have two performers who are intrinsically so unique that the public is willing to pay a huge amount to see them perform. Incidentally, this question can be generalized across all performers. Consider two possibilities:
 
  • there is a small group of performers that are simply better at what they do than any others in their field; the public knows this and is willing to pay a substantial premium to see the very best perform; the electronic media allows them to register this demand by paying for these performers to come into their living rooms;
 
  • the media operates as an oligopoly and limits competition: it chooses individuals that are not uniquely endowed and convinces the public that they are simply better at what they do than any others in their field; in short, it creates these people: Krugman is made a superstar in economics (because the New York Times regularly quotes his opinions) just as perhaps Holifield, Tyson, Pavarotti, Roger Clements, Frank Sinatra, Madonna, and Tom Brokaw are media creations.
 
Knowing which possibility fits the facts is important: if the first is correct, the market is functioning properly and our dislike of what media performers they are getting paid has to be registered on social grounds; if the second is possibility is the correct one, their high pay results from a market imperfection.
           
My conclusion is that there is an element of each (uniqueness and fabrication) associated with most highly-paid performers. Regarding the former, there are more and less competitive review processes that performers must go through before the media is interested in promoting them into something "bigger-than-life". In sports, the processes are quite competitive: Tyson must be a good boxer, Tiger Woods has to be a good golfer, and Clements must have been a good baseball player to get to where they are today. At the other extreme, there are people who are almost completely media creations: Hollywood does create mystical superstars out of some pretty ordinary people.
           
Solutions
 
Let's start by considering suggestions to deal with the breakdown in accountability between the senior executives and their shareholders which permits the former to pay themselves excessively and get away with it.
 
Here are the suggestions I made nearly 20 years ago:
 
  • strengthen stockholder representation in compensation decisions. There are several actions needed here: first, get the Securities and Exchange Commission (SEC) to allow stockholders to have a say in senior executive compensation decisions: under present regulations, the SEC does not permit stockholders to determine executive remuneration on grounds that it constitutes "ordinary business";
  • there is need for stronger public interest stockholder associations; recently, the United Shareholders Association put out a study that identifies "black-hat" CEOs who collect too much pay for too little performance; perhaps a regular publication is needed having the same format as Consumer Reports to report on matters of interest to stockholders (Stockholder Reports;
  • third, major investors, such as government retirement funds, should be pressed to play a stronger role in corporate decisions; already, the California Public Employees Retirement System is questioning executive pay;
  • fourth, corporations should be pressed to consider establishing ratios between their highest and lowest paid employees; Plato suggested a 5 to 1 ratio; Peter Drucker proposed 20 to 1; in Germany, the average rate is 21 to 1; in Japan the average is 17 to 1 whereas in the United States, the average is a mind-boggling 85 to 1!
  • get shareholders to determine directors' pay, rather than having directors themselves or senior executives making these decisions;
 
The above suggestions were hardly original. Many people were making them. They have not worked.
 
The Ultimate Solution
 
Let us get beyond these executive compensation outrages to a broader point: should there be an upper limit on what any individual should earn in any one year? And I ask this believing in capitalism and concerned about destroying work incentives.
 
Back in 1991, I suggested we consider an annual compensation limit of $7.5 million adjusted annually for increases in living costs. Correcting for cost of living adjustments since then, this would be $11.8 million today. Can anyone claim that this does not provide adequate incentives for executives to work and performers to perform? And even if, as an athlete or other type of performer, your professional life is extremely short, you can live reasonably well on the annual interest and dividends provided by one year's work at an $11.8 million rate.
 
If society could agree on an upper limit, it would be reasonably easy to implement. The personal income tax was instituted because it was seen as the best measure of taxpayer's ability to pay. To implement my suggestion would involve imposing a 100% marginal rate on any annual earnings that exceeded society's upper limit. Introducing this rate would mean:
 
  • either the government would collect all of a person's annual payments in excess of that amount in taxes, or
  • the individual would put his or her excess income in a charitable organization.
 
Is this so unreasonable? Think about it.
 


Disclosure: No Positions