The High Pay Commission’s [UK left pressure group aligned with the Labour Party] final report serves a valuable purpose by outlining in one place a broad political case for restraining the rate of increase of executive pay.
So let’s have a few reasons why high executive salaries can be a good thing for companies, for the economy and for society in general.
1. Executives earn top 1% pay a limited time. The Conference Board’s analysis of executive tenure of S&P 500 companies from 2009-2010 shows the average tenure of CEO’s is only 8 yrs and comes after 15 to 20 years with the company or in the industry. Reducing executive pay cuts out the prime earning time of an individual, this comes only after a lifetime of effort to reach that point. Taking away the goal line reduces the incentive to spend time in the race.
2. Higher pay for top executive provides a target for ambitious next-level executives. While the opportunity to lead an organization may have intrinsic value; opportunities to mentor/coach younger managers, the chance to build a healthy (job creating) company, the chance to serve vital needs and satisfy the wants of fellow humans—all virtuous goals. But limits on top pay reduce the incentive to work those long 15-20 years to get in a position to be a higher earner. It’s not just the highest earner who is impacted; those who aspire to higher earnings themselves have an incentive to keep working hard to achieve the next level.
3. Executives who are included in the top 1% are a subset of other occupation’s earners in the top 1%. Katherine Rampell in her NY time article, The Top 1%: Executives, Doctors and Bankers, presents data about the occupations of the top 1% of income earners. While executives and other managers are included the occupations, they only account for about 1/3 of the occupations. Does anyone begrudge Oprah or Michael Jordan the pay they command?
Why do we have no outrage against entertainers and athletes who are in the top 1%. I’ll concede the case of Raider’s QB JaMarcus Russell generated some outrage, but more for failure to perform than for pay itself. Does anyone think if he’d taken the Raiders to a SuperBowl, there would be any objection to his salary?
4. Unequal contributions support unequal pay. The High Pay Commission makes a point to use a multiplier comparison for executives to the average pay of workers at their companies. Why are there not the same multiplier comparisons for athletes? For example, 156-times the top QB’s pay and the league minimum.
Perhaps because in sports we recognize the existence of unequal contributions of talent, that is, yes, Tom Brady contributes more the team’s success than does the backup safety. In the same way, executives and managers who earn multipliers of average workers at their firm’s wages do so in part because they contribute a multiple of times to the success of the organization than does any other one individual worker at the same firm.
5. The top 1% are also adversely impacted by recession. In his excellent article, Tax Rates, Inequality and the 1%, Alan Reynolds, shows that between 2007 and 2009, the share of after tax income of the top 1% fell from 17.3% to 11.3%.
The larger truth is that recessions always destroy wealth and small business incomes at the top….Of course, the same recessions also increase poverty and unemployment.
When is it easier to guide a company? When time are good or in troubled times? So perhaps, the argument should be not to limit executive pay because things are going badly in the economy, but to increase pay.