Should Chief Executives Make More Than The Commander-In-Chief?
February 2, 2009 by Tisa Silver
Filed under Finance
I saw a clip of Senator Claire McCaskill (D-MO) that was quite interesting. There were two points I particularly enjoyed: 1. There were idiots working on Wall Street and 2. CEOs shouldn’t make more than the President of the United States. Both points are debatable.
The President of the United States earns a salary of $400,000. Sen. McCaskill argued that CEOs should make no more than that, at least until their companies are no longer receiving taxpayer aid.
The compensation of Wall Street CEOs is attracting more attention by the day. According to CNBC, the Obama administration has tabled the announcement of a bad bank plan in order to tackle executive compensation. I am very interested in seeing this issue addressed.
Particularly, I am interested in how much, how many and how long. As in…
How much of the total compensation packages will be regulated? For many CEOs, a sky-high bonus can make salary the smallest portion of their compensation package. Aside from cash many executives enjoy massive perquisites like private limo service, corporate jet travel, fancy homes, memberships to exclusive clubs, floor seats to the Lakers games, etc. Will corporate excess be stopped completely in its tracks or is it just the cash part that will be limited?
How many levels of management will be impacted? CEOs aren’t the only ones enjoying hefty bonuses and perks. If the CEO/POTUS comparison continues, then perhaps we should look to Cabinet members for an indication of how VPs, directors and upper level managers are treated. The correlation may be loose, but the point is that they enjoy many special, costly benefits (including some of those enjoyed by the chief).
How long will the regulation last? One of Senator McCaskill’s points was that CEOs should not be paid more than the President if their companies receive taxpayer money. Once off of government assistance, how long will it take for the companies to return to their previous compensation schedules? Will they be allowed to return to the same schedules? Why should (or shouldn’t) they be allowed to?
When it comes to the CEO vs. the President of the United States compensation debate, the idea of limiting pay may sound good, but it is definitely easier said than done!
Prof,
It sure feels good to witness an MBA take on excessive executive pay. Now I posted in a previous thread about this and I hadn’t read your November 08 post that you linked to in this current post. But for me that was a litmus test as to whether your blog was, for me, worth reading – not a reference to your business knowledge but more a question of whether this space was going to be used to attempt to defend the indefensible. And 500K is still a very healthy salary. And this number only exists while they are on the public dole so they should stop whining.
Truthfully, although I agree with the capping while they are basically being compensated with public funds, I feel a more longterm policy is to raise taxes, income and capital gains, and make them more progressive. I think 40% at the 250K+ range, 50% @ 1M+, 70% @ 2M+, and 90% @ 5M+. Sound extreme? There is historical precedent but you probably know that:
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?DocID=543&Topic2id=30&Topic3id=39
You will see that we had sensible tax rates until reagan in the 80’s and since we have had stagnant wages for low wage and middle class workers. And of course the rich have been consistently getting richer. I have no problem with people making money…as long as it is done honestly for honest work. Hence, nobody should be pulling in a multi-million dollar ‘bonus’. entrepreneurs and inventors should be making that type of obscene money not executive or managers. They are working just like the rest of us. Otherwise we are not rewarding innovation and discovery we are rewarding an oligarchy.
Here’s an Op-ed from the CEO of netflix that I agree with and feel will be a better longterm plan for tax revenue and pay inequality
http://www.nytimes.com/2009/02/06/opinion/06hastings.html?_r=5&ref=opinion
Phew! Now I can get off my socialists soapbox.
Revwkm, Thanks for the comment and links. Interesting tax ideas, for some who don’t follow taxes a 90% rate for dollars above $5mil may look outrageous. So I wanted to mention the differences between flat tax rates, marginal rates and average tax rates. Then I’ll show an example.
Flat tax rates are applied to every dollar so in the case of a person who had $5,000,001 in taxable income a flat tax rate of 90% would make them pay $4.5 million in taxes.
Marginal tax rates separate dollars into brackets, each bracket is taxed at a different rate. For example, with Revwkm’s tax rates if you make between $250K and $999,999 those dollars are taxed at 40%, then dollars from $1 million to $1,999,999 are taxed at 50%. Here is a link with an example of marginal tax brackets: http://www.moneychimp.com/features/tax_brackets.htm
The average tax rate is found by taking your tax bill and dividing by your taxable income base. This represents the percentage of each dollar in your income base that you pay in taxes.
Now for an example. With current federal tax rates the person who had $5,000,001 in taxable income would have to pay $1,728,597 (using the marginal bracket system with the above link). That equates to an average tax rate of 34.57%.
Now for your rates Revwkm. Your taxes started at $250K so I used the brackets on the link above to solve for the taxes below that amount and then applied your tax rates to everything above.
The same person who made $5,000,001 would pay about 2,968,250 in taxes. That equates to an average tax rate of about 59%.
So your suggestion changes the average tax rate for a person making $5mil from roughly 35% to 59%.
That is a substantial increase. The revenue would definitely help the government and I’d expect those benefits to trickle down and help us. I’m not a tax person, but perhaps keeping that rate just under 50% would seem less extreme.
You are right about the wage gap. The wealth gap is widening, too.
I couldn’t access the netflix link but I will try to find it elsewhere.