2012
“The Business Buffett Rule”
Here’s a way executives can get in front of the mounting frustration about income equality and corporate greed: Restrain your pay.
What if your firm announced that top executives would not make more in total compensation than 100 times the lowest-paid worker?
For a company paying the federal minimum wage of $7.25 an hour (about $15,000 a year for a full-time worker), that means income of about $1.5 million. And that figure would include the stock awards CEOs often get.
As pay goes, $1.5 million is not peanuts. But it also is a far cry from packages that have ballooned for many execs into the tens and hundreds of millions of dollars.
Beyond-the-pale CEO pay is part of what’s making Americans angry these days. It and other factors are fueling the sense that the nation is slipping into a place that has lost its bearings about what is fair and decent. We also have a tax code where millionaires can pay less than 15 percent of their income in taxes, a recovery in which corporate profits are up but unemployment remains high, and average wages that are stagnant even as companies demand more from workers.
President Barack Obama’s “Buffett Rule” is based on billionaire Warren Buffett’s observation that he pays taxes at a lower rate than his secretary. In the State of the Union address this week, Obama said those making more than $1 million annually should pay at least 30 percent in taxes. A majority of the U.S. public supports the concept.
Call my 100x compensation-restraint plan the “Business Buffett Rule.” And limiting executive pay in this way could pay off for your firm. A dramatic, personal commitment to go against the greed grain would likely boost employee morale. This includes among high-potential workers. Such workers often have been asked to shoulder large loads in recent years with little in return—which helps explain why1 in 4 were seeking new jobs last year compared with 1 in 7 in 2005. These key employees may be more willing to stick around if they see executives making sacrifices, too.
More concretely, containing pay at the top would allow raises for the rest of the workforce. And it would burnish the company’s reputation among potential workers and consumers who want, more and more, to do business with socially responsible companies.
There’s evidence that more equal societies tend to be healthier and happier. Companies are societies in miniature—and too much inequality between corner suite and standard cubicle frays a fabric of trust and common purpose that organizations need to perform at their best.
Doubters will claim the best executives will flee pay-limiting firms for pastures offering more green. But research has dented the theory that high executive pay corresponds with outstanding performance. Instead, the incentive packages crafted for C-level employees in recent decades have contributed to a short-term mindset and hyper-risky behavior.
By showing moderation in CEO compensation, companies are likely to find leaders focused on accomplishing the company’s mission instead of executives primarily out to amass a fortune. What’s more, CEO pay under the Business Buffett Rule has no absolute ceiling—it can rise as long as the lowest-paid employees also see their boats lifted.
There’s already momentum to rein in executive rewards. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that companies show the relationship between executive pay and corporate performance. And some organizations already have adopted a version of pay restraint.
Executives of auto companies bailed out by the federal government had their pay capped. The California State University system recently agreed to limit salaries for new campus presidents, and there is a bill in the Golden State to restrict the pay of those presidents to 150 percent of what the chief justice of the state Supreme Court makes. In the private sector, financial services firms including Bank of America Corp. reportedly are capping cash bonuses.
And during the recession, a number of executives agreed to annual salaries of just $1, including Apple’s Steve Jobs.
On the other hand, Jobs’ successor Tim Cook recently was given a restricted stock grant currently valued at some $440 million. To be sure, Cook has helped Apple take the world by storm. But does anyone really need $440 million? Especially given the sickening evidence that Apple’s products are made by workers often toiling in harsh, sometimes-unsafe conditions.
In fact, a more dramatic version of pay restraint would be to limit an executive’s compensation to 100x the pay of the lowest-paid worker in their supply chain. But let’s just stick with direct employees for the moment. I suspect Apple—and other companies—would shine brighter among employees and would-be customers by adopting the Business Buffett Rule.
A version of this post originally appeared at Ed’s Work in Progress blog at Workforce.com.
2011
What is the real reason behind stock buybacks?
Although Wall Street has typically viewed stock buybacks as a bullish sign, in that it may signal that a firm believes its stock is undervalued, there is an alternative and much less hopeful interpretation of the most recent spate of buybacks: those buybacks also tend to boost CEOs’ bonuses, which are often tied to earnings per share.
If the buyback is combined with layoffs – especially in the R&D function – that is likely to be a really bad sign. For example, Pfizer cut its R&D budget, laid off 1,100 employees, and simultaneously bought back record amounts of its stock. For a pharmaceutical company to cut its R&D is the corporate equivalent of eating the seed corn. [For the non-agriculturally inclined, that means that you won’t be able to plant your crops next year because you ate the seeds that should have been reserved for planting.]
Other companies that are engaging in buybacks on a grand scale include Campbells, Hewlett Packard, Zimmer, JPMorgan Chase, AutoNation, Celadon Group, Granite Construction, and Eastman Chemical.
Corporate America is complaining that there are too few good investment opportunities. But perhaps that is because of a conflict of interest: if the CEO’s pockets get lined when he/she is unable to identify good investment opportunities, insufficient effort may be devoted to creating and finding those good investment opportunities.
2011
One way NOT to be a good steward
A couple of weeks ago, the New York Times noted that at least 25 major US companies, averaging $1.9 billion per year in profits, somehow paid more to their chief executives in 2010 than they paid in taxes. The companies include Boeing, GE, and Verizon.
Wow.
This behavior speaks loudly. Those firms that engage in aggressive tax avoidance reveal that profit “earned” at the expense of taxpayers is a higher priority than social responsibility.
PR spin that, “We fully comply with all tax laws” doesn’t cut it. These firms are not interested in doing business in an “all-win” way. They are interested in shareholders and executives winning – at the expense of taxpayers.
Yes, it’s true that U.S. corporate tax rates are high and need to be lowered. But using that as an excuse to pay little or no taxes is greed, pure and simple.
A huge shift in public opinion is underway. Greed is being restored to its rightful place – a vice that will no longer be tolerated, rather than a virtue to be admired.
Those firms that shirk their tax-paying responsibilities can expect to be punished by a public that has grown weary of their greed.