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Executive Salaries

Arthur Levitt ’52 was one of the more successful chairmen of the SEC. Although he has yet to be quoted on the recent indictment of Ken Lay, you can read his thoughts on Enron and other matters here.

Despite Levitt’s successes on several issues — and his fighting the good fight on things like option expensing — he did little or nothing on out-of-control executive compensation. For a champion of the little guy, like Levitt, this is somewhat surprising, especially since it would not be that hard a problem to solve.

The SEC should pass a regulation requiring that all publicly traded companies allow their shareholders to vote on the following (binding) resolution each year.

The total compensation of both the CEO and the CFO shall not exceed $1 million in the coming fiscal year.

Those who dislike government meddling in business have little to complain of here since the government isn’t telling any business how to set salaries. The government is just requiring that business owners be allowed to vote on a specific option.

What would happen of such a regulation were in place? Senior executives would complain long and loudly. Many large shareholders — especially pension funds — would gladly vote for lower compensation. Many mutual funds would feel pressured to do so. My guess is that the resolution would pass at many companies.

There would then be significant (downward) pressure on executive salaries across the board. If you’re the CEO/CFO of a big company, there are very few employees who you think should be paid more than you are. Of course, this won’t allow you to pay people (much) less than they could get elsewhere, but the number of people for whose services the “market” is willing to pay more than $1 million per year is small. The very best baseball players, rock stars, entrepeneurs and Wall Street traders would still make millions, but only because any attempt to lower their pay would cause them to go elsewhere with their services.

Some would say that this plan won’t work since the companies whose shareholders agree to pay more than $1 million per year (whether they be public or private companies) will snap up all the “best” executive talent. Maybe. But, as Jerry Useem ’93 points out, our ability to measure executive talent is so limitted that it would be hard for any company to easily identify a CEO candidate who is significantly better than many other candidates for the job.

There is a sense in which such a scheme, if implemented, would amount to implicit collusion among the employers of senior executives. Perhaps. But collusion in the service of class warfare is no vice.

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#1 Comment By Jeff Zeeman On July 9, 2004 @ 10:18 am

Great idea, David, I wish government wasn’t so in the pocket of big business interests (and in particular, those at the top of the pyramid) that this could actually stand a chance of passing. I think we’d learn that the outrageous executive compensation is largely a product of market failure, rather than the market truly valuing the worth of executives at the top of the pyramid, due to the fact that its board members, rather than the true majority owners, who are setting compensation, often for their buddies, who will probably reciprocate when they themselves are on the board of another corporation, and so on. I have long argued for lowering exec. comp., but my free market inclinations have continued to nag at me, I feel that this is an outstanding solution. If performance does start to suffer at the companies who implement these resoluations, the shareholders can simply reverse themselves for the following year. Do you know of any economists who have tried to study in a rigorous fashion the correlation between corporate performance / growth and paying top dollar for puroportedly top talent? I would think there must be something out there on this topic.

On the other hand, there is nothing stopping shareholders, that I can see, from passing such a resolution w/out prompting at an annual meeting if they were really motivated. So, why hasn’t it been tried already, w/out being mandated as an option?

#2 Comment By Carl On July 10, 2004 @ 7:53 pm

I have to wonder whether the cure you propose is worse than the disease. There is nothing stopping shareholders from establishing a cap on officer compensation. Large pension funds and mutual funds have the clout to make such proposals stick. Why don’t we see more compensation proposals? Because shareholders could care less whether GE’s former CEO Jack Welsh makes millions through stock options as long as shareholders make billions through increased stock capitalization. I say when in doubt — keep the Government out!

#3 Pingback By Couric, Jones and Lee » EphBlog On February 21, 2008 @ 9:30 pm

[…] a little interested. And, to counteract my reputation as a rightwingnut, I’ll point out that my suggestion on how to deal with execessive executive pay is much more radical than any Democratic proposal. […]