This Does Seem Problematic

business, lessons learned, social justice 2 Minutes

Adam Grant, best-selling author and professor at the Wharton School of Business, posted the following tweet earlier this week:

That seems to be a pretty big discrepancy. But I have to admit, I don’t know what the differential should be. Was 21X the right number, or was that too high, or even too low?

Also, it should be pointed out that the organization that posted this study, the Economic Policy Institute is a pro-labor lobbying group, so of course it is likely to be biased in favor of workers and against CEOs. Here is a brief description of the EPI from Wikipedia:

The Economic Policy Institute (EPI) is a 501(c)(3) non-profit American think tank based in Washington, D.C., that carries out economic research and analyzes the economic impact of policies and proposals. The EPI describes itself as a non-partisan think tank that “seeks to include the needs of low- and middle-income workers in economic policy discussions”. It is affiliated with the labor movement and is usually described as presenting a left-leaning and pro-union viewpoint on public policy issues. The EPI has a sister organization, the EPI Policy Center, which is a 501(c)(4) organization for advocacy and education. The EPI advocates for policies they say are favorable for low- to moderate-income families in the United States.

Here are some of the recommendations from the EPI on how to deal with this discrepancy:

We need to enact policy solutions that would both reduce incentives for CEOs to extract economic concessions and limit their ability to do so. Such policies could include reinstating higher marginal income tax rates at the very top; setting corporate tax rates higher for firms that have higher ratios of CEO-to-worker compensation; establishing a luxury tax on compensation such that for every dollar in compensation over a set cap, a firm must pay a dollar in taxes; reforming corporate governance to give other stakeholders better tools to exercise countervailing power against CEOs’ pay demands; and allowing greater use of “say on pay,” which allows a firm’s shareholders to vote on top executives’ compensation.

I highlighted the higher marginal tax rates, since that is something I have talked about before, and I am in complete agreement with. High earning individuals have the ability to pay more in taxes; they have reaped the benefits of living in a society that has rewarded them quite generously for their talents; what’s wrong with expecting them to generously share that wealth with society?

The Gates Foundation was started on two basic premises:

  • All lives—no matter where they are lived—have equal value.
  • To whom much has been given, much is expected.

The second point seems relevant here; what should the proper differential be between top executives and workers?

Again, I don’t know what it is, but 320X seems a bit high; perhaps it’s time for a serious discussion to be had to address such an issue.

Published by Jim Borden

A 60-something guy trying to figure out the world, and his place in it. Happily married for 40-plus years, three wonderful sons. Accounting teacher, fitness enthusiast, blogger, reader.

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27 thoughts on “This Does Seem Problematic”

  2. I have no idea what is right or wrong. But I will say that back in 1965, the economy and stock market was poised for a long-standing stagflation that would not end until 1982. Perhaps compensating CEOs better than 1965 levels, provides them with enough incentive to keep their businesses profitable, and keep their stock prices rising.

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      3. What I don’t like about corporate governance is that when corporate elections are held, the candidates almost always run unopposed. The laws make it very prohibitive to run against someone for director, or CEO. I think if you want to see salary decreases, this problem must be addressed, so that shareholders can have more choice as to who they elect.

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  3. How do you quantify a CEO’s value to the company? I would think it would vary quite a bit, depending on the CEO. Interestingly, there was a slow and steady progression from 1970 to 1990 where it took a massive increase. You follow this much more closely than me, but why the ups and downs from 2000 on? Are years of economic downturns related to the shifts?

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    1. I don’t follow it that closely, but the disparity did jump out at me. I had thought of comparing it baseball player salaries which have also jumped significantly over the past 50 years, and to me that is even harder to justify…

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  4. Higher marginal tax rates, salary caps, incentivized earning, yes there are likely a number of ways that this issue could be addressed. However, stock holders whose wallets grow fat with the success of a company don’t really care how much you pay the CEO as long as it does not eat into their dividends. And no matter the stipulations or restrictions set forth, they can always find a way to funnel income to the people they prize. Ask any premier college football player. This is a serious issue, but our lawmakers get re-elected on the money from the overpaid few, so I don’t think any answers will be coming from there. Until “cost-to-hire” expenses reach the same notable size as CEO salaries, it is likely nothing will change. Sad as it is to say that, as I think income inequality is the root of many of our evils. And, no, I am not a socialist, just a realist!

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  6. Hey, here is a thought. What if they were paid as a percentage of the company’s overall payroll? Then the more people they employ and the better those workers are paid, the more money they would make. Could it be as simple as that sounds?

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  7. An interesting and complex question. CEO pay is skyrocketing because they basically set their own pay. Boards of directors control CEO compensation. They are made up largely of other CEOs and CEO wanna bes. There is no incentive to control the pay of peers who their own compensation committees look to in setting their own pay. CEOs have a lot of say in who is on the board, and just being a board member can be lucrative at large companies.

    Look at how much top athletes are paid. Some CEOs with big egos can’t stand it when folks who have less education, are presumably not as smart (and are Black) are making $20, $30, even $40 million a year for playing a game. The “shut up and dribble” crowd surely thinks CEOs deserve as much if not more.

    The “widows and orphans” and other groups who have an interest in controlling CEO pay are almost always out voted. For many reasons average shareholders can’t even get their resolutions relating to CEO compensation on the ballot at annual meetings and when they do corporations (the CEO, officers, directors, employees, and proxies) and greed-is-good institutional investors out vote them.

    Equally or perhaps more outrageous than annual compensation are the golden parachutes in the tens of millions of dollars many CEOs get when they leave and get another CEO job.

    CEOs and their lawyers are very creative when it comes to compensation. Restraining their compensation will be hard. Globalization and expanding markets can support expanding CEO pay but international competition is often used as a reason for limiting the pay of average workers.

    Politicians think they create jobs. CEOs think they create value.

    Everybody thinks they should be paid more. So far, CEOs are getting away with it.

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    1. wow, John, it looks like you have given this issue some thought. I appreciate your insights. I had thought about comparing CEO compensation to star athletes, bit it was going to be hard comparing apples to apples. Needless to say, I think both groups are highly overpaid. And you are right, it is a rigged system, the good old boy network at play. I don’t know what it will take to fix it…

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  9. I worked in legal and Human Resources at a large company and was an assistant corporate secretary. I forget many of the details but believe me the system is rigged. Brad’s idea of a percentage of total pay sounds interesting.

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  10. Have you checked out statista.com which shares stats from around the world? Over the last two decades differentials have got out of hand. I’ll go with Sweden, which pays middle management much better and limits the differential between CEO and average employees.

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