Friday, February 06, 2009

CEO pay - my modest proposal

Slate has an article discussing Wall Street CEO compensation that advocates binding shareholder votes on pay for company executives. And of course, salary caps for execs at companies that have received federal "bail out" money is mentioned all over the news pages and blogs.

I have a different thought.

Years ago, I read a paper on the role of corporations in the young United States. I can't find that same paper now, but here's a quote from The Uncooling of America that is similar to what I read:

"Early American charters were created literally by the people, for the people as a legal convenience. Corporations were "artificial, invisible, intangible," mere financial tools. They were chartered by individual states, not the federal government, which meant they could be kept under close local scrutiny. They were automatically dissolved if they engaged in activities that violated their charter. Limits were placed on how big and powerful companies could become. Even railroad magnate J. P. Morgan, the consummate capitalist, understood that corporations must never become so big that they "inhibit freedom to the point where efficiency [is] endangered."

The two hundred or so corporations operating in the US by the year 1800 were each kept on fairly short leashes. They weren't allowed to participate in the political process. They couldn't buy stock in other corporations. And if one of them acted improperly, the consequences were severe. In 1832, President Andrew Jackson vetoed a motion to extend the charter of the corrupt and tyrannical Second Bank of the United States, and was widely applauded for doing so. That same year the state of Pennsylvania revoked the charters of ten banks for operating contrary to the public interest. Even the enormous industry trusts, formed to protect member corporations from external competitors and provide barriers to entry, eventually proved no match for the state. By the mid-1800s, antitrust legislation was widely in place.

In the early history of America, the corporation played an important but subordinate role. The people -- not the corporations -- were in control."


I think we need to roll back definitions of corporations toward that early standard, with its emphasis on good citizenship and public interest. And as part of the redefinition of their roles in society, the compensation (not just salary) of the highest level officers in a corporation be expressed as a multiple of the compensation of the employees.

For example, for a corporation to retain its charter, its officers can receive compensation at a rate no greater than...what would be reasonable? No greater than 5times the median compensation paid to employees? 25 times? 100? Average, rather than median?

Well, those are details for econonomic experts and policy makers. But this would do much to rectify the obscene imbalance in salary between the CEOs and workers, and it would also be an incentive for improving employee compensation at all levels.

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