According to the Summary of Legislation Proposed, Enacted and under Discussion, prepared by the institute for Policy Studies, disproportionate salaries for executives first became a concern in the early 1980s, about the same time that deep cuts in the top marginal federal income tax rate took effect. Before the 1980’s, high top-bracket federal income tax rates of 91 percent on income over $400,000 was in effect until 1964. Following that a 70 percent tax on income over $200,000 was in effect until 1981. These high income tax rates made high salaries a non-issue. After all, corporate boards could offer million-dollar pay packages, but what would be the point? The bulk of any pay over the top income tax bracket would simply be taxed away.
Tax pressure on disproportionate salaries for executives has faded over the past quarter-century as the top marginal tax rate has decreased, currently at 35 percent. Today, compensation for top executives in the United States has now soared to over 400 times average worker compensation.
The incredible difference in pay has prompted a search for legislative initiatives seeking to address superfluous executive compensation. The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (H.R. 3269), addressed the rights of shareholders to vote on executive compensation. This legislation was developed to address excessive executive compensation that was scrutinized during the financial crisis of 2008 and 2009. (Dodd, 2010)
The basic concept of economics relies upon prices being set by the market. Compensation for executive staff should be no exception. Publically traded companies that are affected by the Dodd-Frank legislation might see certain executives leave their firms or seek employment in the private sector where the Dodd Frank rules would not apply. For example, Natural-Foods Grocer originally limited compensation for their top executives “to a multiple of the average of Whole Foods worker’s pay”. The cap, which covers salaries but not stock options, started at 8 time’s average pay, was raised to 14 times average pay in the early 1990s. As sales hit $5.6 billion and rivals tried to recruit Whole Foods managers, the board of directors raised the cap to 19 times average pay, or $607,800. According to Chief Executive John Mackey, the increase was needed “to help ensure the retention of our key leadership.” (Dvorak, 2007)
Another example of the failure of capped salary can be seen in the early salary structure of the ice cream company Ben and Jerry’s. In the early 1980’s ben & Jerry’s had a policy that no employee could make more than five times what the lowest paid worker earned. In 1986, this rule capped the CEO’s pay at $81,000. This policy was eventually scrapped in 1994 when Ben Cohen, the “Ben” of Ben and Jerry’s, retired from the top position. It proved difficult for the Vermont-based company to find an outside leader that would adhere to the unique policy set in place by the founders. (The Cape Cod Critic, 2009)
It’s just my opinion but I believe that the market should dictate compensation. If an individual is worth 400 times the average employee wage then they should be paid that much. The problem isn’t in how much an individual is paid. The Problem is in determining the individual’s worth to the company.
About the Author
Jerry Landers is the Vice President of Business Development for Aspire Indiana. While the beliefs and opinions expressed in this blog are solely those of Mr. Landers you can learn more about community mental health and how it intersects with business and media at http://www.facebook.com/AspireIndiana
Congress (2012). S. 3713–112th Congress: Dodd-Frank Wall Street Reform and Consumer Protection Technical Corrections Act of 2012. In http://www.GovTrack.us. Retrieved from http://www.gpo.gov/fdsys/pkg/BILLS-111hr4173enr/pdf/BILLS-111hr4173enr.pdf
Dvorak, P (2007), Limits on Executive Pay: Easy to Set, Hard to Keep, Retrieved from http://finance.yahoo.com/news/pf_article_102878.html
The Cape Cod Critic, (2009), Lessons From Ben and Jerry, Retrieved from, http://thecapecodcritic.blogspot.com/2009/01/lessons-from-ben-and-jerry.html