“The CEO Challenge” by John Edward
John Edward teaches economics at Bentley and UMass Lowell. He’s a frequent contributor of columns on economic issues.
Imagine a new video has gone viral. In the video, a CEO announces he is issuing a share-the-wealth challenge to fellow executives. He lifts a bucket over a railing and dumps the contents down to the atrium below. Instead of ice, it is cold cash. The money is symbolic, he says, of the pay cut he is taking so that people below him will share in the company’s good fortune.
Could it happen? Might good examples, peer pressure, and publicity help decrease income inequality? Might we take a step back from The Social Cliff ?
In August The Boston Globe ran a brief article titled “Income Inequality: Walking the Walk.” The interim president of Kentucky State University voluntarily took a 25 percent pay cut. He asked the Board of Directors to use the money to increase wages of custodial workers from the minimum $7.25 to $10.25.
His salary was already well below the industry average. He did not care. He had a good pension from a prior employer. He cared that there were workers who needed the money more than he did. He cared that they could put the money to better use.
He said, “I didn’t do it to be an example to anyone else.” He should be an example. Maybe someone will walk the walk and challenge other top executives to follow.
The Market Basket saga has been one of the most fascinating stories of the year. Business schools will be studying the management style of Arthur T. Demoulas for years.
As CEO and shareholder, Artie T. did something about inequality, lost his job because of it, and got it back. Employees suffered heavy losses in their profit-sharing plan during the great recession. He used shareholder profit to cover some of the money employees lost.
Then, with the Board of Directors breathing down his neck, he announced a 4 percent rebate on prices. His rationale – customers need the money more than shareholders.
Artie T. is not hurting for money. Most likely, he never will. What makes him special is that he is not driven by greed. He maximizes stakeholder value instead of just shareholder value. He recognizes that in doing so shareholders win as well. He recognizes that shareholder profit is not possible without frontline workers and customers.
A few years ago, executives at a Boston hospital took a voluntary pay cut. They were doing so to prevent lower-paid staff from losing their jobs. There are other examples of people doing the right thing. However, voluntary pay cuts are by far the exception. They do not get enough publicity. Other executives do not take it as a challenge.
CEO pay is always going to be much higher than the typical worker’s pay. CEOs deserve compensation for the important work they do, the difficult decisions they make, the profits they enable, and, in some cases, the risks they take (having said that, CEOs do not always do a good job, and it is the low-wage workers who are truly at risk).
As reported recently in The Boston Globe: “Harvard survey finds ‘troubling divergence’ in the US economy.” The evidence of this troubling divergence is hard to miss.
According to the most recent report on family finances from the Federal Reserve: “Families at the bottom of the income distribution saw continued substantial declines in average real incomes between 2010 and 2013, continuing the trend observed between the 2007 and 2010 surveys.”
On the other side of the divergence, an Associated Press (AP) pay study looked at S&P 500 CEOs. During the last four years their pay has gone up by 50 percent. Their median annual pay is over $10 million.
Fifty years ago, the ratio of S&P CEO pay to that of the average worker was about 20 to 1. The AP survey estimated CEOs now make 257 times the pay of the average worker, up from “just” 181 times in 2009. Other studies put the ratio much higher.
Until 1994, Ben & Jerry’s ice cream had a policy limiting executive pay to 7 times that of the lowest paid workers. In contrast, Larry Ellison, stepping down as CEO of Oracle, made $94 million in 2012 and has an estimated net worth of $50 billion.
Extreme inequality is bad for the economy. Even Wall Street is starting to complain. Standard and Poor’s issued a report recently warning that inequality was suppressing economic growth.
In the Globe article, it was observed that the survey of Harvard Business School graduates represented “a unique and powerful constituency for their message: graduates of one of the world’s most prestigious schools, many of whom hold powerful positions in industry.” Forty-one percent of the survey respondents thought that in three years workers would be making less than they do now.
If these powerful masters of industry believe that, why don’t they do something about it? Congress is not going to do anything. Shareholders can make advisory votes against executive compensation. They did at Oracle. Boards of Directors ignore the advice.
We need just one influential CEO. One CEO playing the role of Pete Frates who helped popularize the ice bucket challenge. We need a CEO willing to go on YouTube to challenge high-paid executives to forego a little of their millions so that their workers or their customers will get a little more. As Artie T. said, the workers and customers need it more than the CEOs.
If you can think of any good candidates to kick-start the challenge (and they do not actually have to be a CEO) submit a comment below. Better yet, issue the challenge by sending them this column.