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Does Executive Compensation Matter?

Executive compensation has been a hot political issue. The paychecks of American CEOs, in particular, have come under criticism (contrary to common belief, they are not excessive). How important is this issue to you?

Does it matter to you how much more I am paid than my employees? Do you care about the ratio between the salary paid to the CEO and to the janitor of your life insurance company? I think that valuing the contribution of employees is essential. Whether or not that involves establishing pay ratios within the company hierarchy is a question. Here is my thinking:

Pain and Gain

In the company I own (a small life insurance brokerage) I pay people as much as I possibly can afford. They deserve it. They know their contribution is valued, and I put my money where my mouth is. I postpone improvements in my own life in order to pay people well. If my business is going through a rough patch and I have to dip into my own pocket to meet payroll, I do so gladly. As the entrepreneur, I make the necessary sacrifices. My employees just have to show up. The risks are my business. Therefore, the rewards are my business. This is a fair system because the greatest gain is realized by the people who take on the most pain.

Let’s suppose my business is more mature and past the entrepreneurial stage. It is a full-fledged corporation and sustains itself without going into my pocket as the founder/chairman. Would it be fair to establish a ratio between the highest and the lowest compensation? You could certainly say that the janitor plays as vital a role as the CEO (Similarly, when the New York City garbagemen went on strike, the name of the mayor was forgotten by most people. Except to fix things with the union). But I do not believe that value to the operation is the best determinant of fairness.

Risk and Reward

For me, the overriding principle is again risk/reward. The janitor is key but he does not take on the same level of responsibility as the executive. The higher up on the pyramid you are, the more jobs, revenue, liabilities, etc. fall under you. Your decisions have more at stake than the decisions of people at the bottom of the ladder. You take on more of the risk, so you deserve more the reward.

Now let’s suppose someone in this “future mature company” made this point: “well and good, but compared to other nations, the discrepancy in the US pay scale is absurd.” My response would be this: it is up to me as a person to meet my own potential. If I compared myself to less productive people, I would let myself down. Same thing goes for America – we cannot hold ourselves back just because other nations are not as productive.

Nonetheless, I might consider spreading the wealth around a little bit more, to better recognize value. Of course, people that wanted in on this would have to put their money where their mouth is. They would have to pony up some capital and buy some stock, and take on some of the business liability. They would have to be willing to take a hit when business fails. A person who wants to get more of the reward, without taking on more of the risk, cannot be taken seriously when talking about “fairness.”

Freedom and Liberty

Here is the bottom line: if the way I run my business is not someone’s cup of tea, they are free to go forth and try to do better on their own. If people want to work in a company with a “reasonable pay ratio,” they are free to form one. I am not forcing anybody to work for me. It would also be unfair of me to try to force other business owners to run their businesses as I do mine. Similarly, it is unfair for others to try to force their principles on me, via legislation, or consumer action, or other coercive of measures.

What do you think is fair?