April 14, 2006
The SEC should pass a regulation requiring that all publicly traded companies allow their shareholders to vote on the following (binding) resolution each year.
"The total compensation of both the CEO and the CFO shall not exceed $1 million in the coming fiscal year."
Those who dislike government meddling in business have little to complain of here since the government isn't telling any business how to set salaries. The government is just requiring that business owners be allowed to vote on a specific option.
What would happen of such a regulation were in place? Senior executives would complain long and loudly. Many large shareholders --- especially pension funds --- would gladly vote for lower compensation. Many mutual funds would feel pressured to do so. My guess is that the resolution would pass at many companies.
There would then be significant (downward) pressure on executive salaries across the board. If you're the CEO/CFO of a big company, there are very few employees who you think should be paid more than you are. Of course, this won't allow you to pay people (much) less than they could get elsewhere, but the number of people for whose services the "market" is willing to pay more than $1 million per year is small. The very best baseball players, rock stars, entrepreneurs and Wall Street traders would still make millions, but only because any attempt to lower their pay would cause them to go elsewhere with their talents.
Some would say that this plan won't work since the companies whose shareholders agree to pay more than $1 million per year (whether they be public or private companies) will snap up all the "best" executive talent. Maybe. But, our ability to measure executive talent is so limited that it would be hard for any company to easily identify a CEO candidate who is significantly better than many other candidates for the job.
There is a sense in which such a scheme, if implemented, would amount to implicit collusion among the employers of senior executives. Perhaps. But collusion in the service of class warfare is no vice.