Just imagine, you are the CEO of a listed company. Your bonus has gone up again and you find your name in an overview of top earners in one of the national newspapers. On the previous page of that same newspaper, you read that purchasing power in your country is falling at an unprecedented rate due to soring energy prices and high inflation and that poverty is increasing rapidly.
How on earth are you going to explain why you are, again, getting more, while your employees are finding it harder and harder to pay their electricity bills? You take another look at the collective labour agreements that you have just signed: a few percent pay rise for lower earning colleagues. ‘More than least year, right?’ ‘And I work really hard. So I am setting the right example, aren't I?’ And out come the well-known economic arguments as justification for extremely high CEO pay: added value, competition, and risk.
Added value should be reflected in higher share prices. Oddly enough, though, the remuneration of CEOs often rises much faster than the share price of their company. This means that either the value of that CEO has increased even faster or that this reasoning is all nonsense. My guess is the latter. The added value of CEOs cannot be measured by stock performance. The competition argument is also hard to substantiate. Top positions tend to get filled very quickly. What often happens is that the peer group for benchmarking the salary is chosen in such a way that the only way is up: very seldom does such a benchmark exercise lead to downward adjustments. And as for the third argument: yes, company heads do run the risk of sudden dismissal. But doesn’t that also apply to flex workers? I think Amazon’s Jeff Bezos runs far fewer risks than all the workers he employs in warehouses. So this makes the company head’s story a very weak one.
Don’t get me wrong, I have nothing against pay differences. Rewarding talent and compensating for risk make sense. But excessive differences smack of self-interest and nepotism, rather than being the effect of market mechanisms. They only have negative effects. The highest earners, for instance, make the biggest contribution to greenhouse gas emissions. The highest earners tend to have more political influence, which contributes to inequality. And, moreover, you will find that the rest of the organisation will work with considerably less enthusiasm for an overpaid boss.
So it is not such an outrageous idea to curb remuneration levels. Research shows that the line should be drawn somewhere between EUR 1 million and EUR 3 million. That should leave you well capable of paying your electricity bill.
The recent proposal in the US, the country where CEOs are paid the most, by Bernie Sanders is a little step in that direction: He and fellow Senator Elizabeth Warren offered a bill on Wednesday that would ratchet up the tax rate 0.5 percentage points for companies that pay their chief executive officers between 50 and 100 times more than their typical worker. The highest penalty would be 5 percentage points for companies with leaders making more than 500 times the typical employee. Still a small step, and probably impossible to implement.
Much more is needed. Lower CEO pay and higher pay for the lower incomes is the only way out of this crisis.
This is an adaption of Hans Stegeman's column in Het Financieele Dagblad, published 23 August 2022.
Also read Hans' previous column 'Population reduction is not the silver bullet, either'.