Should There be a Cap on Salaries for Executives?

One Side of the Coin

After watching the Inequality for All documentary on wage inequality in the U.S, I was curious about the specifics of the wages and what was being done to reduce the gap. Executive pay in comparison to typical worker pay skyrocketed from an average of 20 times in 1965 to 296 in 2013. Even after the financial crisis of 2008, top executives are comparatively making more than ever by all accounts. Protest efforts from workers, and potential restrictions from the SEC have faded into the background as pay increases virtually unrestricted. In order to help restore a healthier balance we need the some sort of legislation as a cap for salaries.

Unless specific legislation is passed to even out, or proporciate the gap between the median worker and top executives, nothing is going to change on its own. Rather, I suspect the gap will only increase according to the current trend. The plan was to embarrass companies by highlighting their wage gaps, and it has not worked in the slightest. “The increased pressure for more disclosure was motivated by public shaming,” said Regina Olshan, head of the executive compensation practice at Skadden, Arps, Slate, Meagher & Flom. “The idea was somehow that the companies would be ashamed and change their ways.”

When this didn’t work the SEC tried to enact a rule to rectify the situation.

In 2013 The Securities and Exchange Commission proposed a specific pay-ratio rule for companies to disclose the average annual total compensation of their employees and compare that number with the amount awarded to the chief executive of the company. This would go on the overview disclosure seen by investors.

The Result: Heavy lobbying from the financial services industry and top media services kept the bill from advancing further. According to the Business Roundtable, (representing CEO’s lobbying efforts) “As an initial matter, we do not believe that the proposed pay ratio rules will provide investors with useful or accurate information.”

While the stats are difficult to calculate and could be potentially skewed, the usefulness of the information is crucial in the shaming tactic that was initially intended. According to the companies of many top paid executives, executive compensation is highly dependent on performance. However, only half of top 10 hedge funds outperformed S&P's 500-stock index in 2014, yet their managers fared exceedingly well, with the top 25 earning $11.62 billion in compensation.

Lastly, the other significant explanation for the wages of CEOs is to attract the best talent. The attracting of talent is on a relative scale as I see it. If more and more companies push the envelope for payment, the rest will follow. If the wage gap was much more even in the 1970’s, were companies then attracting lesser talent? I doubt it. It’s all proportional to what the norm has become and without proper regulation the current model could spiral out of proportion.