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Let’s set a maximum wage for CEOs

Man walking with a briefcase.

Man walking with a briefcase. Credit: iStock

The Wall Street Journal reported last month that the chief executives of the 100 largest U.S. companies received average pay raises of 6.8 percent, more than offsetting cuts many corporate leaders took in 2015.

Donald Trump was elected president in part by promising that he would “drain the swamp” of establishment interests and look out for the millions of ordinary Americans who have lost jobs and futures due to the actions of Wall Street and corporate executives.

The Trump administration now wants to scrap Obama’s proposed “ratio” rule to require corporations to publish the ratio of chief executive pay to that of the average employee. They say the ratio rule is too complex for companies to develop the formulas to comply while rewarding top managers appropriately.

This is one more instance of a betrayal of the American people. The president has filled his top positions with Wall Street and corporate multimillionaires and billionaires. The 1 percent is getting the attention promised to the forgotten people.

A half century ago, during a period of growth in the American economy, the ratio of executive pay compared to the pay of the average employee of a corporation was about $20 per executive to each $1 earned by the average employee. Today, that ratio is $300 to $1.

The median pay for top executives at the 200 largest American corporations is approximately $20 million a year. It is a fact that executive pay has exploded upward during an era when growing numbers of American workers have experienced either stagnant wages, or the loss of all wages.

Some C-suite challenges have become more difficult, but there is not a scintilla of credible evidence to support a claim that exorbitant executive compensation is either necessary to attract talented executives nor that such compensation has benefited worker and community stakeholders.

Many chief executives are paid huge salaries even when their companies are losing money, and when companies do earn big profits, it often is far from clear that the executives were the key contributors to such success. Employees and contractors seldom reap such rewards.

We live in an era in which executive compensation is aligned with shareholder interests, and this has had pernicious consequences. A short-term focus drives stock prices up but skimps on fostering long-term growth, and often leads to fraudulent practices to produce profits - or the appearance of profits - as we’ve witnessed from Enron to Wells Fargo.

The recent recalibration of compensation plans toward a longer-term framework still doesn’t sufficiently promote authentic long-term growth that could benefit a wide range of stakeholders. One can question whether the well-being of shareholders should be uniformly privileged over the well-being of employees, communities and other stakeholders.

The administration’s position on the ratio rule does nothing to benefit these other stakeholders, despite Trump’s relentless pledge on the campaign trail to promote their interests.

While we continue to debate a minimum wage, perhaps it’s time we discussed the need for a maximum wage. A return to restricting executive compensation to a multiple of 20 times the median pay of corporate employees is worthy of serious consideration.

There is no good reason to believe that this would negatively impact company performance; it could reduce conflicts of interest among board members. Instead of having the kind of discretion that encourages the excesses we’ve witnessed, board members would abide by the set restrictions and the interests of other stakeholders could well improve.

Executive pay should be determined by truly independent entities, and should be linked with long-term benefits for the whole range of stakeholders, not just shareholders. The adoption in Portland, Ore., of a surtax on companies whose executives are paid above a certain threshold - an initiative also presently under consideration in several states - is one step in the right direction. The failure of the Trump administration to take executive compensation seriously is likely to have detrimental consequences and potentially contribute to a destabilizing political and economic crisis in the years ahead.

David O. Friedrichs, a distinguished professor of sociology, criminal justice, and criminology at the University of Scranton, is the author of “Trusted Criminals: White Collar Crime in Contemporary Society” and past president of the White-Collar Crime Research Consortium. He wrote this for The Philadelphia Inquirer.