25 April 2009

Capping the Pay of Bank's CEOs

We can't escape the importance of financial institutions to our economy. If large banks and financial institutions collapse, we're hosed: credit markets keep us from third-world lifestyles.

In practice, this means that banks get to be free market profiteers when times are good and public beneficiaries when times are tough. It's not obvious that we'll ever get away from this reality, so here is my simple suggestion about how to address this: make CEO pay in these institutions a function of the pay of the average worker. Align their interests with that of a normal guy like Blogger Bob.

I think we can work out something like the pay for the nation's chief executive,as can be seen in this simple table comparing the ratio of the President of the US's pay to the average worker to the ratio of CEO's pay to the average worker.

I like what we've done in the public sector. The president makes a lot of money but it is not an outrageous sum, unlike CEO pay.

Banks and financial companies are some of the worst at creating pay inequities. Goldman Sachs CEO made $70 million in 2007 and Goldman’s two COOs made slightly more - $72.5 and $71 million. Lehman Brothers CEO made $34 million in ’07, the year before his company went bankrupt. And yet banks are sort of in the public sector. At least, that is, we're on the hook for their mis-management.

The deal should be simple: if you need the insurance of the U.S. government (and any bank beyond a particular size needs to be required to avail itself of this insurance), then you fall into the world of public sector. That is, your CEOs' salary will be capped in a ratio roughly related to that of the President's.

Feeling generous, I wouldn't even require that these CEOs limit their pay to today's presidential ratio of about 13X. I would even let them return to 1960's ratio of president's pay to average worker, a ratio of 25X.

One thing that I naively believe about this arrangement is that it could help average salaries to move upwards. Investment decisions can have huge impact on average salaries by influencing productivity and the creation of good jobs. CEOs of financial organizations might be more considerate of the impact of their investments on average salaries, eager to bump them up, stressing investments that translate into higher pay. If they could raise the salary of the average person by even $1,000, they'd get another $25,000. This seems like the right incentive to me.

CEO pay is outrageous. Still. One great place to begin rectifying this is in the quasi-private / quasi-public arena that is the modern bank. And what better time to do it than now, when banks are so obviously tangled with the public interest.


Anonymous said...

you ARE generous.

this actually makes a lot of sense. banking isn't all that hard. it doesn't require a genius. so we don't need really high salaries to attract the nation's very best. run-of-the-mill smart will do.

Life Hiker said...

I'm fed up with managements who rape their companies with outrageous compensation. Stockholders have become too diverse to control these weasels, and managements rig boards to stay in power regardless of performance.

Your logic is impeccable. 25X would be fine with me, even if coupled with a stock options that have a long vesting period.

Anonymous said...

Are your compensation figures based on cash compensation or total compensation? Most CEO's would be granted stock options and as those increased in value in 2000 and beyond, their total compensation would increase. In some measure, they are responsible for the stock increasing and decreasing so they could make the stock go down in value and in turn, we could see our 401k become the 201k or 101k that they have become.....just a thought..

Norman said...


At the risk of you throwing something at me, I'll ask you to revisit Elliot Jaques' idea of "felt-fair" pay :)

And OBTW, your 25x is right in line with what his research found when he surveyed various working populations around the world.