Should we consider limits on executive pay for companies that don’t pay workers livable wages?
Let’s first consider executive compensation to set the stage for our discussion.
The Economic Policy Institutepublished that in 2021, companies paid CEOs nearly 400 times more than a typical worker. These CEOs made seven times more than the top 0.1% of the top-paid salaried workers. The article details approaches to limiting CEO pay to reduce income inequality without damaging the broader economy.
Shifting gears to public opinion, searching “CEO pay vs. worker pay” on Google returns many articles advocating the same solution: To combat income inequality, we must limit executive compensation.
On the one hand, capping CEO pay could free up resources that could be distributed to lower-level employees, thereby fostering a more equitable workplace. On the other hand, this blanket statement overlooks the complexities of corporate finance and the competitive market for executive talent, which can be crucial for a company’s success.
There are a couple of business arguments for limiting executive pay.
A study of Chinese firms by the National Institutes of Health found a strong correlation: as executive pay increases, a company’s likelihood of investing in future innovative activities decreases. To increase short-term profits, executives might choose to cut risky R&D efforts, which could reduce innovation in the long term. The bottom line is high compensation packages do not guarantee future innovative success.
Further, Harvard Business Review published findings that many companies neglect to consider company performance when developing executive compensation, resulting in high executive compensation even in low-performing companies.
Are these strong enough reasons to limit CEO pay?
Before we jump to conclusions, we haven’t asked the right question yet.
* The decisive issue is not whether the American people should limit executive pay.
There might be business arguments for individual companies to choose to limit executive pay, but it’s not a public opinion decision. A corporation might decide to self-impose limits on executive compensation to invest more in innovation or tie executive pay to current and future company performance.
* The decisive issue is not the disparity between CEO salaries and worker salaries.
America needs good executives. Sound executives can substantially improve the profitability of their companies. Some have exceptional vision to see the future of the business. Companies need profitability now and survival going forward to continue to pay workers and grow their business in lean years. Allocating all available financial resources solely to worker salaries in the short term may reduce a company’s long-term resilience and adaptability.
Corporations need to grow revenue to pay higher worker salaries. As a part of increasing revenue, they need to develop capability. Growing capability means expanding infrastructure, hiring skilled workers, and potentially increasing efficiency or parts availability. All these things cost money. Every growth initiative needs to be led by a great leadership team with a strong executive.
If corporations need to attract these leaders with more pay, that’s a decision appropriate for that organization. If corporations need to invest in their business for growth, that’s the right decision. Legislating limits to what any American can earn stifles competition and growth.
The decisive question is this:
* Should we consider limits on executive pay for companies that don’t pay workers livable wages?
Let’s establish that many companies pay outstanding wages. Executives who lead these companies pay their workers top dollar to compete for the best talent in their industry. No taxpayer dollars subsidize wages at these companies.
However, some businesses fail to pay workers a living wage. TheEconomic Policy InstituteCompany Wage Tracker considers 66 retail and food service firms. It identifies that two-thirds of the companies on the tracker pay most of their workers poverty-level wages. The tracker also specifies what the companies pay their CEO, and executive salaries are very high as compared to worker pay.
The American people have to subsidize these worker wages with taxpayer-supported social programs. A University of California, Berkeley study published in 2015 titled The High Public Cost of Low Wages highlighted four programs:
* Medicaid and Children’s Health Insurance Program (CHIP) - healthcare
* Temporary Aid to Needy Families (TANF) - household income assistance
* Earned Income Tax Credit (EITC) - household income assistance
* Supplemental Nutrition Assistance Program (SNAP) - food stamps
The study found that the American people contribute $200 billion per year to these programs (converted to 2023 dollars). The study further found that more than half—56 percent—of combined state and federal spending on public assistance goes to working families.
A The Wall Street Journalarticle America Pays a High Price for Low Wages published in April 2023, stated:
Liberals like the EITC because it reduces absolute poverty, and conservatives like it because it attaches a work requirement to welfare.
The author, Michael Lind, states that the EITC “makes taxpayers pay to rescue workers whose work does not pay enough.” You can read his work, titled Hell to Pay: How the Suppression of Wages Is Destroying America, published by Penguin Random House.
Low wages are an anchor on society. When businesses pay salaries less than the living standard, social programs rise to supplement business wages. This condition is detrimental to the free market, as companies that should either fail or improve due to competition instead survive with assistance from the American taxpayer. The taxpayer should supplement no business wages. People work to earn a living. Individual workers earn a substandard living when businesses fail to pay suitable wages. In this case, other workers, through their taxpayer dollars, give them extra money to survive.
Workers passing money through the government to pay their fellow workers is ridiculous.
Some might contend that subsidies for low-paying companies are crucial for businesses operating on thin margins and the larger economy by keeping unemployment rates low.
Are these businesses sustainable? What’s the societal cost of supporting companies that do not pay livable wages?
In sum, there is a strong case for limiting executive compensation in companies that do not provide their workers livable wages. While executive talent is undeniably valuable, the cost of income inequality, compounded by taxpayer subsidies for low wages, tips the scale in favor of regulatory measures.
Should we consider limits on executive pay for companies that don’t pay workers livable wages?
So long as businesses pay wages that enable workers to secure their needs, we should support competition and innovation. For these companies, executive compensation should be whatever that company deems appropriate in their competitive market.
Otherwise, it may be time to rethink how we approach executive compensation.
Thanks for considering my perspective.
May God bless the United States of America.
