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Why limiting CEO pay is a good idea

September 28, 2008|Kathy M. Kristof | Special to The Times

One of the stickier issues to come up in the wrangling over how to bail out the imploding financial system is the question of how much money top executives at investment banks and other publicly traded companies are paid.

This is not an idle question. Chief executives at these firms are often paid tens of millions of dollars per year -- so much that their compensation can actually cut into the company's earnings.

And during the continuing financial storms of the last several months, even CEOs who drove their companies into disaster left with fantastically rich severance packages.

But should executive pay be limited? And does it matter to you and me?

Where I'd normally report other people's ideas, just this once I'm exercising the columnist's prerogative to talk about mine. My answers are yes and yes.

I think executive pay should be limited to 50 times the pay of the average full-time employee -- particularly for companies that want to participate in any government-funded bailout.

If the company's average wage earner takes home $20,000, the CEO can't earn more than $1 million. If the company exports all its jobs overseas, the wages of those employees are factored in.

The limitation is important because over the last two decades executive paychecks have gone from being generous to being piles of cash so large that they can significantly diminish per-share earnings (and, thus, stock price). At the same time, companies have outsourced vast quantities of work to cheap labor centers overseas -- sometimes resulting in even higher pay and bonuses for the top dogs.

That's bad for both shareholders and taxpayers.

Why? Because a workforce that's paid a reasonable wage does a better job for customers, and thus for shareholders, than the bottom-of-the-barrel workers you get when you hire on the cheap.

Moreover, if employees are impoverished by stagnant wages, they can't buy what American companies produce. That's bad for the economy in the long run.

Opponents say that limiting compensation would hurt companies because the market for chief executives is highly competitive. Limiting CEO pay would hamper the ability to hire top CEOs and would make American companies less competitive, they say.

I'd counter that if we lose a few greedy, overpaid prima donnas as a result of this, corporate America will still survive -- maybe even prosper.

Another thought: If top executives cut pension or healthcare benefits for the rank and file, they should be required to cut their own perks too.

After all, if a company can't afford retirement benefits for the people who most need them, how can it pay for multimillion-dollar annuities -- or free doctor's visits -- for execs?

Would limiting these perks discourage good people from taking the top jobs?

If a guy earning $1 million a year can't figure out a way to save for his own retirement or pay for his own doctor's visits, I think it's better that you keep this spendthrift away from a corporate balance sheet where he can do real harm.

As for severance agreements, how about if they're limited to one year's salary and bonus, except in instances when the company is being purchased at a premium price? After all, a year ought to be plenty of time for even a CEO to find a new job. Paying for longer provides an incentive for failure.

Finally, the company plane should be used for company business. These aircraft cost thousands of dollars each hour to operate, and if the CEO wants to take his family on vacation, he should have to pay the cost -- not shareholders.

To be sure, these ideas may not eliminate every excess, nor would they necessarily fix what ails the economy. But I'm guessing that most taxpayers would feel a little less offended about their money being used to shore up failing financial institutions if they thought the game was a little more fair.

--

kathy.kristof@latimes.com

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