A CEO Pay Maximum? Nope, Nope, Nope

Pay has been in the news so often lately, it can be hard to choose a topic to write about. But on November 12, 2018, I read an article titled “Setting a maximum wage for CEOs would be good for everyone.” The author was Mark Reiff, a person with an impressive academic resume who asks if setting a maximum wage could “be the long-awaited solution to economic inequality?”

I’m not going to bury the lead. The answer is no. No, a maximum wage is not a solution to economic inequality. In fact, it isn’t a solution for anything.

We can all agree that the highest paid CEOs make a lot of money. In fact, in 2017 the 200 highest paid CEOs were paid as much as $103.2 million and no less than $13.8 million. Certainly not chump change. It should be noted that at least a few of those CEOs were also the founders of their companies. As a reminder, founder pay should be looked at through a different angle of the prism than non-founder pay, but that’s a topic for a future article.

We all know that CEO pay has risen faster than the average pay of average workers. Many people may not realize that CEO has not always risen faster than the pay of the best, or highest in demand, workers. Again, a topic for a future article.

Let’s get back the maximum wage. Mr. Reiff proposes that we start by limiting CEO pay to $10 million annually. There are a few big problems with this idea.

1. If $10 million is the max, then every single one of the top 200 paid CEOs (and many below them) will be paid $10 million within a year.
2. The United States does not control pay levels in other countries. Our best 20 CEOs would be hired away to other countries (or the companies themselves would leave) within months of the rule taking place.
3. The money saved on CEO pay would provide practically nothing new for rank and file employees.

Of these three, the most relevant problem is number 3, the lack of impact on rank and file employees. If the goal is to lessen the income gap, a CEO will do nothing. Assume you are a company who currently pays your CEO $15 million.  You have to cut pay by $5 million to stay under the max. If you had only 3,000 employees, each could get a $1,666 annual increase. But the increase would probably be shared on a pro rata basis, so your lowest level employees might only get $250-$500 more each year. Inequality is not solved for the price of a used iPhone.

Here is Mr. Reiff’s example of why his proposal makes sense.

“Steve Jobs is an excellent example here, for Apple faltered when he left, and began to thrive again only when he came back, for a salary of $1 a year. So companies need not worry about losing the best candidate to someone who pays more. Very good people will work for say, $10 million a year, especially when given a chance to run a company. And these people are just as likely to do well as those who might demand $100 million.”

There is so much misunderstanding packed into those three sentences that there simply isn’t room in this article to address them. Let’s start with this simple fact. Jobs owned tons of Apple stock. As the company became wildly successful, he became wildly wealthy. Much of the pay cited by Mr. Reiff in his examples of high compensation, is pay delivered in stock and other non-cash elements. His own example contradicts his intent.

Since we know this will not happen, some of you may wonder why there was a need for an article at all. The truth is that CEO pay is often a real problem. It’s essential that we remind people of what can be and cannot be accomplished by modifying CEO or other executive pay.

Dan Walter is a CECP and CEP and works as Managing Consultant for FutureSense. He is passionately committed to aligning pay with company strategy and culture and is considered a leading expert on equity compensation issues. Dan has written several industry resources including an issue brief on Performance-Based Equity Compensation than Dan refers to as informative written Ambien. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.

Comments

[Roger Clemons]

Dan - your arguments make sense. But they do not provide guidance on addressing the pay inequality (and it shouldn't just be the CEO - the entire executive suite ought to be considered when comparing to the lowest paid employee). Might I suggest the idea of addressing the performance factors which are used as metrics for determining executive pay. Should only the board decide the goals for lucrative pay packages? Perhaps the whole company should have a say as to what needs to happen before the C-suite earns their $1m+ equity package?

[Dan Walter]

Thanks for the comment Roger

There are good reasons to do an internal comparison of executive pay to broadbased staff. Sadly the "pay ratio" rules for publicly traded companies are too broad and simplistic to be of any use.

Company size, operational strategy, employee location etc are low hanging fruit in regard to things missing. Performance factors are a more complex issue that is also missing.

In smaller companies, there are examples of employees having a say on executive pay. As companies get larger and more complex this becomes impossible. There simply isn't any way to educate people well enough for them to have a truly informed opinion. The result would be pay packages that may end up making the companies uncompetitive and then everyone ends up losing.

The best answer is for boards and executives to not be jerks. They need to have enough empathy to create programs that are just. They also need to be honest about the level of pay needed to be the company they want to be.

There is no formula or "pat answer" that will work. It is hard. It requires effort and adjustment.