In the first of this two-part series, CE-Oh My Goodness, Look at That Compensation, we saw how CEO pay has skyrocketed during the past four decades, in a way that outpaces every other measurement of corporate growth. Extraordinary CEO compensation can contribute to low worker morale, potential dishonesty in the form of false reporting for short-term gain, and the loss of tax revenue when executives’ assets are hidden and workers are underpaid. In addition, overly high CEO compensation is a hidden reason why in 2022, America is experiencing 7% plus inflation, as companies increase prices to boost profits and ensure even greater earnings for their CEOs.
If these high CEO compensation packages have a detrimental effect on individual workers, the company, and society as a whole, what can be done to remedy the situation? There is currently a lot of conversation about how to do this, and there seems to be consensus in several key areas.
Image Credit: Damir Kopezhanov | Unsplash.com
First, shareholders need to keep their board of directors accountable. After all, the board serves at the shareholders' pleasure. It is one of the anomalies of the modern world that our leaders, at least in theory, are actually the servants of those whom they lead. The president of the United States, arguably the most powerful person in the world is, in actuality, an employee of the most ordinary citizen. So too, the board and the CEO are employed by the humblest stockholder. We seem to forget that's the theory and structure, but it is.
In this sense, our modern democratic system follows along the lines of Jesus’ admonition that “anyone who wants to be first must be last, and the servant of all.” Unfortunately, this idealized servant-leader does not emerge very often. Instead, the board of directors tends to be a elite club from which it is difficult to be booted. Directors too often protect each other and tend to act in their own interest, rather than that of the shareholders. They may look at curbing costs, but not by lowering their own pay.
There are a few ways to corral this kind of self-indulged fraternity. For example, executive salaries should be regularly voted on by the shareholders. A raise in compensation would be tied to performance and only given when stocks rise more than that of competitors; it can also be based on a set ratio of CEO-to-worker pay. If the board decides to ignore the will of the majority, they themselves could be subject to losing their stipend that year. Another, and possibly more effective measure, would be to mandate that a percentage of the board comes from the firm’s workers. Legislation, such as the Accountable Capitalism Act, could enable this kind of direct representation and give workers a much needed voice in the decision-making of their company.
Second, using a different metric than EPS (earnings per share) may be a much more valid way of assessing a CEO’s performance. The EPS measurement can be influenced by stock buybacks, which many companies utilize in order to raise the price of shares. This practice can not only give the appearance of good management when it is not necessarily the case, it can also greatly increase the executives’ personal worth. This situation, in effect, is a manipulation of metrics in favor of corporate leadership. If a CEO’s compensation package were based on targets such as gross profit and revenue goals, the shareholders would have a much better idea of how the company was faring, because those metrics cannot be so easily manipulated or exploited.
Third, the makeup and taxation of CEO pay could be restructured. Currently, CEOs are largely compensated with stock options, which allow executives to purchase future stock at today’s prices. The end result is that these executives can purchase stocks at a discounted price and then sell them at the higher future one, thus making an instant profit. If this practice were eliminated, CEOs would be on the same playing field as everyone else. In addition, raising the corporate tax rate when the executive-to-worker compensation package ratio passes a certain number, such as 100, would incentivize corporations to keep their top salaries within reason.
These suggestions are all possible ways of bringing CEO pay more in line with what is reasonable for the job they do. Ideally, executives would see the light before regulations were put in place and offer to do what is best for the company. There are examples of such leadership, notably Emmanuel Faber of the French corporation, Danone, who refused raises for the seven years he was in leadership and took a 30% pay cut during COVID. In Faber’s words, “wealth concentration is a time bomb at the planetary level;” instead, he made it his mission to create a company with purpose.
There are other corporations that also invest in their future, such as Costco, and it appears increasingly McDonald’s and The Gap. These companies seem to understand and practice the maxim that they do not pay good wages because they have a lot of money, they have a lot of money because they pay good wages. Ultimately, paying fair wages, in part because the money is not all going toward executive salaries, is both the right and the smart thing to do.
Executives who make the company they lead prosper in the long term also make their leadership more valuable and sought after. This is the win-win scenario that Better Capitalism can create. Taking a cue from Tom Brady, who limited his own salary so that the New England Patriots could hire other top players and go on to win multiple Super Bowls, the executive who sacrifices in this way ultimately benefits everyone, including himself.
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