Executive salaries

Plot of top bracket from U.S. Federal Marginal...

Plot of top bracket from U.S. Federal Marginal Income Tax Rates for 1913 to 2009. Data are from http://en.wikipedia.org/wiki/Income_tax_in_the_United_States#History_of_progressivity_in_federal_income_tax (Photo credit: Wikipedia)

Why are top executives in the US paid so much more than their companies’ lowest paid employees? There once was a rule of thumb (I have it written on my thumb) that the CEO’s salary was limited to a relatively small multiple of the janitor’s wages, such as 100 to 1 or 250 to 1. Now the sky is the limit. In Japan, I believe the old standard of 40 to 1 still holds true. In Europe, much smaller multiples than in the US are sufficient to attract and hold top talent to the CEO position. Only in the US are we told that outrageous salaries and bonuses are required to attract and retain top talent. And then those talented individuals earn their money for the company by increasing sales and profits, as Wall Street demonstrated during the onset of the Great Recession.

I think that the arguments put forth for CEO pay are specious. If US corporations will not rein in their CEO pay, I think that the marginal tax rates on outsized salaries and bonuses should be raised to the 90%+ level. The argument against higher personal taxes on CEOs and higher corporate taxes in general is that the consumer will be forced to pay higher prices. That argument is true in some cases, but not all. Consumers can resist higher prices if there are competitive products available. Then corporations are forced to accept a lower profit margin, stockholders receive lower profits and stock prices, and corporations have less money to pay outrageous salaries. Corporations have plenty of money now to pay their CEOs. If outsized salaries and bonuses were required to attract and keep top talent, then Japanese and European firms would not have any CEOs.

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