A modest economic proposal

About 30 years ago I was co-authoring a book with a CEO of a multi-million-dollar private company, and he informed me that he was going on the board of a larger public company at the behest of its two new controlling owners, clients of his, and that they had decided to take salaries of just $1 apiece per year and tie the rest of their compensation to rises in the stock price. Once the insider-trading window was closed, I bought the stock. After a year, the stock price had not risen enough to trigger the bonuses, and the board of directors decided that the next year the co-CEOs would take salaries of $1 million each, which I thought was perfectly fair; once again, they would earn considerably more if the stock price rose. It didn’t, and when the board decreed that in the third year the co-CEOs would get $10 million each, I decided it was time to sell. 

I tell this story as prelude to making a modest proposal: to cap American CEO salaries at a certain multiple of the salaries paid to their companies’ lowest-paid employees. 

Currently, many large-scale American employers have an enormously high ratio of the top manager’s salary to that of the floor-level worker in that company’s place of manufacture.  For example, Mary Barra of GM makes around $22 million a year, which­ — according to a company press release — is 281 times that of the median General Motors’ employee. If the median salary is $78,291, then the actual lowest-paid worker at a GM plant is likely being paid quite a bit less than that. And this, in a heavily unionized firm. 

A recent study of publicly held American firms shows that the “compensation ratio,” the top-salary-to-bottom-salary ratio, has risen about 1,000% since 1978. More than 100 American CEOs bring home $10 million or more apiece, many of them able to accumulate $100 million in five years. Another study shows that the CEOs of the top 3,000 firms (!) make an average of over $2 million apiece.  A third study, of 1,600 privately held American firms shows average CEO compensation at about the same level, that is, over $2 million per year. 

Does it have to be this way? Not at all. The ratio in the U.K. is 22, in France it is 15, and in Germany it is 12. (All other countries’ ratios are lower.) The average pay for a CEO in France is around €150,000, with the high end at €250,000. Bonuses keyed to accomplishments, and profit sharing, raise that compensation to €300,000. When France mandated a maximum top-to-median-salary ratio, there was a threatened exodus from the country of companies and headquarters, but that has not materialized. 

Now I am not someone who thinks CEOs don’t earn their high salaries. I co-wrote books with several CEOs who ran multi-billion-dollar companies, and was uniformly impressed at how hard they worked, and how much they did for their companies’ bottom lines. Sixty-hour weeks were the norm, and there was a tremendous amount of pressure to perform each and every day.

Let’s suppose we in America set a top-to-bottom ratio of 40, which is quite high historically but is regularly exceeded in the U.S.  If the lowest-level employee makes the minimum wage of $15 an hour, the CEO would make $600 an hour, which at 40 hours per week translates to $1,248,000 per year. 

Under this rubric, if a company wanted to bring up its CEO’s pay, it could do so easily by simultaneously raising the lowest-level salary, say, from $15 to $20- $25 an hour. A win-win situation. Actually, a win-win-win, because under such a ratio, stockholders would be assured that not too much of the company’s income would be going out to executive management salaries. Profits might actually increase, along with dividend payouts, since dividends are a prime way to add to the compensation of executives who have been given stock options.

How to do it? The ratio could be mandated federally, or if that is too difficult to accomplish politically, it could just become an executive-office policy guideline, extolled and labeled as socially-desirable. I can easily imagine there coming into existence an independent watchdog whose job would be to flag companies that do not observe the ratio and publicize those companies’ stinginess and their executives’ excess greed.   

I do not expect that if such a ratio were put in place in the U.S., that companies would suffer, or even that the CEOs would do so.  I do expect that lower-echelon salaries would rise, along with internal profit-sharing for those lower ranks, in order to meet the ratio and justify keeping CEO salaries in the stratosphere. 

Tom Shachtman is the author of more than a dozen American and world histories and of documentaries seen on all the major networks. He lives in Salisbury.