What to do with CEO pay


Limit CEO pay - a market approach
by Adam Smith II


There has been a lot of talk (again) about a number of less-than-stellar CEOs and their generous compensation packages. Between the Fisher-Price toys with unsafe levels of lead, and subprime lending debacle - which touched some of the biggest banks in the United States - more and more voices ask about CEO and Board of Directors responsibility. A couple of them said "I am sorry" - but so far, I am not aware of any returning the millions they were paid. Such CEO mis-behavior always brings up a question - should we limit CEO pay?

Typically the free market camp objects to any pay limitations - unfortunately, they also object to any meaningful control. Boards of directors are useless - they feel no responsibility to the shareholders. It is only when a corporate raider gets a chunk of stock, or a state retirement system gets tired of seeing their money go down the drain, that changes happen. Those are rare events indeed.
On the other hand, the socialist camp wants to limit CEO pay on principle - "individuals should not make that much money, their compensation is too much". I not a big fan of this approach, but I do agree in one respect - most CEOs are not worth the money they are paid.

Threfore I propose that a distinction be made in law between company founders and mere caretakers.
For all publicly traded companies, there would be a 2 tier compensation structure:

Tier A - CEOs who founded their company ( or were among the first 50 employees) would have no limits on their compensation - they created the company, they took the risks - they should be rewarded for providing jobs, tax revenue, and better standard of living for the rest of us.

Tier B - Hired-hand CEOs - those who do not fit the definition of a founder - their total compensation would be capped at 50 times average pay in the company (calculation of the average pay to include all offshore subcontractors!).

I believe this proposal would result in a number of changes beneficial to the society:
1) Entreprenuers who build companies would still collect compensation that would be limited only by their creativity and skill - thus enriching themselves and the rest of us through their efforts.
2) CEOs of publicly traded companies would have a disincentive to move jobs offshore - this would benefit all Americans.
3) Lousy "caretaker" CEOs at publicly traded companies would get paid a lot less - not truly just, but at least not as annoying as now, and certainly better for the sharholders of their companies.
4) Truly great CEOs would have an incentive to start own companies, prove to themselves how great they can be, and in the process increase everybody's standard of living.

Some of my free-market oriented friends objected to this proposal, claiming that great CEOs will not work for so little money - that's exactly the point - under my plan, they would have an incentive to start their own companies, and prove to the world that they are worth those hundreds of millions of dollars. The rest of the CEOs simply are not worth what they are getting paid right now.

The plan is simple - it does not require 100 page complicated legislation, nor additional data to be collected - simple calculation of total employee and contractor expenses divided by the number of employees and contractrs - multiplied by 50 - it would give the upper limit to CEO compensation. Since SEC controls and limits many aspects of publicly held companies, I do not see a problem with controlling one additional aspect of compensation.

I wonder if Jack Welch would have left GE to start his own...

 

 


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