CEO Pay and Class Resentment

Penny wise and pound foolish

I’m back baby! Ok, that’s probably a ridiculous level of enthusiasm given that a week ago I was in the Caribbean and today I’m waterlogged because I foolishly decided I needed groceries. Welcome to Vancouver! Still, it is nice to be home. So, did anything happen while I was gone?

All joking aside, the election went better than I expected. Now we just have to wait to see if Trump will make anything better. It’s almost time to take off my “the left is crazy” hat and put the one on that says, “the right is crazy.” Almost. The election has left me as close to elated as my personality allows. Others would call this feeling cautiously optimistic. Until this feeling fades I promise to…no, I will try not to criticize any Republican moves. This of course leaves me with another problem, now that the election is done what am I going to write about?

Politics won’t stop and there’s still a Canadian election to look forward to (dread) but that could be a year away. The weekly news article seems excessive without a US election to talk about. I’m going to have to rethink my routine.

Until I come up with a plan let’s ease back into things with a look at my favorite Twitter/X account, Robert Reich. Yes, Big Robbie my nemesis, my foil (ya, he doesn’t know I exist, so what?) is up to his usual tricks, and I love him for it. He is an almost endless source of material because he loves the two things that I hate so much, word games and misdirection.

Ok, so what does Robbie want?  Seems pretty clear, take some of the CEO money and give it to workers.  Let’s skip the “how” question and just look at the math (because I love math!).  According to the Bureau of Labor Statistics that average salary for a CEO in 2023 was $183,270.  That’s a good salary, but hardly extravagant.  Why is he getting all worked up about this?  Well he isn’t, he’s concerned with CEOs at the top 350 US firms ranked by sales who now make somewhere between 191 and 290 x what a typical worker makes. 

For simplicities sake let’s look at CEOs at Fortune 500 firms as that information is more attainable.  The total compensation for these 500 individuals averaged $17.7 million in 2023 for a CEO-to-worker pay ratio of 268-to-1.  That’s quite the American dream, isn’t it?  What would happen if we reduced this compensation to the previously mentioned average of $183,270?  Answer: it would free up $8.76 billion.  Robbie obviously wants to take that money and increase workers’ pay.  So, we divide that big bucket of money between the 31 million people employed by Fortune 500 companies worldwide (can’t just give it to Americans, can we?) and every worker would receive an extra $283 per year (before taxes).  It was a big pie, but it had to be shared with a lot of people.  Still, I’d take the extra money, wouldn’t you?

However, if the issue is “fairness,” there are other areas which would provide a better return for the average worker.  The average salary in the NBA was $150,000 in 1978 and today it’s $9.6M.  That’s an awful lot for winning the genetic height lottery and bouncing a ball.  It also means that while CEO salaries have increased by 1085%, NBA salaries have increased by 6400%.  Seems like we have a bigger problem here.  The average salary in the WNBA is a measly $116k and they seem happy enough.  Isn’t it sexist to pay them less (it isn’t but lets’ go with it)?  If you reduced the NBA salary to that of the WNBA, you’d save $5.1B.  Divide that amongst the 20000 that the NBA employs, and every worker could receive an extra $256k.  Now that’s dictatorship of the proletariat that I can get behind.  Of course, Reich is not really interested in fairness, he’s only using CEOs as a convenient focus of class resentment, the ultimate goal would be salary ceilings for everyone.  So how does Robbie propose we do this?

That’s where it gets interesting, he doesn’t.  It’s not like it will just happen on its own, will it?  If that were the case, we wouldn’t find ourselves in this position to start with.  No, someone or something has to make these companies pay CEOs less so that workers can pay be paid more.  Any guesses who?  Yep, it’s the government.  So, Robbie, as a big government advocate (read socialist) wants to pass a law to limit how much a company can pay a CEO.  This is a variation on a standard left-wing theme, when faced with what appears to be an economic issue, have the government “fix it.”  Examples include rent controls, price controls, wealth taxes.  The problem is that none of these work and they usually make matters worse.  

Negative Effects of Salary Ceilings (or Wage Caps):

1. Talent Retention and Attraction:

   1. In sectors like sports or public service, salary caps might make it difficult to attract or retain top talent if other industries or regions offer higher wages.

2. Potential for Wage Compression:

   1. While intended to limit high salaries, they might also compress wages, affecting the motivation for lower to mid-level employees to strive for higher positions if the pay increase is limited.

3. Innovation and Performance:

   1. By limiting the financial rewards, salary ceilings might reduce incentives for innovation or high performance, although this can be debated as intrinsic motivation or team culture can also drive performance.

4. Workarounds:

   1. Organizations might find ways around salary caps, like offering non-monetary benefits or bonuses not covered under the cap, which can lead to new forms of inequality or complexity in compensation structures.

5. Market Distortions:

   1. Similar to price ceilings, salary caps can distort labor markets by not allowing wages to reflect supply and demand, potentially leading to labor shortages or surpluses.

Is there a better idea?

Of course there is.  Robbie is doing what all big government advocates do, trying to get people looking in the wrong direction.  It’s the classic misdirection ploy and what he’s hoping you won’t notice is that there’s a better way to give people more money, cut their taxes.  This is the goal of the new Department of Government Efficiency (DOGE)  which aims to reduce government spending by $2 Trillion.  Yes, that’s right, trillion.  The $8.76 billion you could get by capping CEO pay is small potatoes.  In the words of Senator Everett McKinley Dirksen “A billion here, a billion there, and pretty soon you're talking real money."  A trillion is real money, to be exact it is 32.2% of the 2023 budget.  A cut that big is equivalent to giving every taxpayer $11,983.  Now that’s a nice paycheck.

The main problem with Robbie’s little game here isn’t that he doesn’t have a point, it’s that he is using misdirection (the problem is “greedy capitalists” not the government which loves you), conveniently avoiding the topic of government intervention (it won’t take authoritarian laws, it’ll just happen because we all think positive thoughts), and hoping readers won’t notice that there is a bigger problem (government spending and taxation).  Do I think CEOs are worth $18 million per year?  Probably not.  However, I also don’t think anyone should be paid $9.6 million to bounce a ball, but it’s not my money so why would I care? 

The best (halfhearted) defense I can provide is that CEO compensation is often tied to investor returns, so poor stock performance can lead to a decline in CEO pay.  CEO pay is also subject to “say-on-pay” votes by shareholders so there is technically a method to reign it in (obviously less than effective).  There’s also a way you as a consumer can make your opinion known; if you’re unhappy that Tim Cook of Apple, for example, is making $63.2M per year, stop buying Apple products.  The market works, and if Apple can’t sell iPhones, Cook’s salary will go down in the same way that if nobody goes to WNBA games the players won’t make much money (see, it isn’t sexism).

Letting the government pass laws dictating what a private company can pay its employees is a little too close to a command economy for my comfort and we all (should) know how that worked out for the Soviets (yes, minimum wage laws are also government intervention but one battle at a time).  The bigger issue here is that it never seems to occur to the big government left (or the big government right for that matter) that if the government spent less, we’d all be able to keep more of our money and at the end of the day, paying my bills depends on how much I make, not how much a CEO does and the government already has the power to let me keep more of my money.