A Call for Pay Caps

http://www.futureofcapitalism.com/2009/06/a-call-for-pay-caps

Steve Brill and Gordon Crovitz's partner in Journalism Online, Leo Hindery, has an op-ed in the Financial Times headlined "Obama Must Act to Curb Executive Greed." He calls for "permanent limits" on executive compensation at "all regulated financial institutions and all public companies." The limits he proposes might drive companies to organize themselves in other jurisdictions (offshore) or in other forms (privately held) so as to avoid the rules.

Mr. Hindery writes: "Congress should establish, for all public companies, a ceiling on individual executive compensation as a reasonable multiple of average employee compensation – say, 35 times – and then penalise through tax policies those companies that elect to pay anyone in excess of this multiple." But different companies may have different average compensation structures depending on their functions. An accounting or management consulting firm or a law firm, for example, has many highly trained and paid professionals along with some lower-paid support staff. Mr. Hindery's proposed rule could incentivize companies to turn lower-paid employees into outside contractors so that they don't count toward the averages. If it's inequality that Mr. Hindery is concerned about, as he says it is, he might consider not an average pay, but the ratio from lowest to highest pay. But that has its own problems. Ben and Jerry's tried and abandoned this policy, as this Ben and Jerry's SEC filing explains:

In 1994 the Company's compensation policy changed. Historically, the Company paid its highest paid executive officer a base salary, including benefits, of no more than a certain multiple (seven to one in 1994) of the base salary, including benefits, of its lowest paid full-time employee at the Company's plants with over one year of service. Items not included in this calculation were stock awards or options granted under the Company' Restricted Stock Plan or Stock Option Plan.

After careful consideration, the Board of Directors concluded that the seven-to-one salary ratio needed to be replaced; in particular the ratio had become a barrier to recruiting experienced people who can keep the Company true to, and successful at, realizing all three parts of its corporate mission statement.

More broadly, the richest corporate executives -- Microsoft's Bill Gates, Berkshire Hathaway's Warren Buffett, Google's founders -- are widely admired in America. A lot of people wish that more executives would create shareholder value the way those executives did, and think that what would be best for the country would be to figure out how more executives could get that rich (and help shareholders and customers and employees along the way). It seems a weird moment to be scrambling around focusing on how to prevent successful executives from getting too rich. The problem we have in America right now is not enough wealth creation, not an excess of it.

by Editor  |  Jun 25, 2009 at 11:40 am Related Topics:  Capital Markets Regulation, Compensation, Corporate Governance, SEC, Taxes receive the latest by email: subscribe to the free futureofcapitalism.com mailing list