I am a capitalist and I believe in the free market. Government interference almost always makes things worse, not better. Then, when the government “solution” causes those worse problems, people forget that government caused those problems in the first place. And so another government “solution” is called for, and so the cycle continues.
So one might expect me to say that high CEO pay should not be considered a problem.
But that is not what I think. My thinking is in line with Peter Drucker’s thinking, well summarized by William Cohen in The Practical Drucker: Applying the Wisdom of the World’s Greatest Management Thinker:
Drucker defended perceived high executive salaries in his earlier writings. He knew how hard executives had to work to reach the pinnacle of their careers.
However, skyrocketing executive salaries caused him to drastically alter his opinion. He said executive salaries at the top had clearly become excessive and that the ratios of compensation — top managers in relation to lowest paid workers — were the highest in the world. Moreover this income difference wasn’t slight — it differed by magnitudes.
Drucker felt that this was morally wrong, and that we as a nation would end up paying a tremendous price for this. Indeed, in 2001, the ratio of average US CEO compensation to average pay of a non management employee hit a high of 525 to 1. At that point, Drucker recommended a ratio of no more than 20 to 1.
Interestingly, Drucker drew a parallel between high executive salaries and the demands of unions for more and more benefits without increases in productivity. He predicted we would pay a terrible price for these examples of gluttony from both management and labor. “It is never pleasant to watch hogs gorge,” he said. In fact, we have been paying this price for several years.
I agree that in general, CEO pay is too high in proportion to the pay of the non managerial worker. I believe this causes all sorts of problems. While I believe that companies ought to have the freedom to pay their executives what they choose, as it is their money, that does not mean that all of their decisions are by definition morally good or beneficial.
So what is the solution? Well, we know what it is not. It is not government interference, such as in the form of wage controls. That will simply cause even more — and likely worse — problems (see first paragraph). A company owns its money, and has a right to do with it what it chooses. For the government to come in and force certain wage restrictions or other such things is simply a disguised form of stealing. It is for the government to force itself into participating in the management of the company, which it does not have a right to do.
So what, then, is the solution? The solution has to come from the market it self; from people. From persuasion, not force (read, laws).
And that is one of the beautiful things about the free market. The market does have imperfections. But, just as with the scientific method, by being left free those imperfections often become self-correcting as we begin to see the damage they are creating.
The imperfections of the market can often be overcome by ordinary people making good decisions and using influence to change culture. And so even when the market is imperfect, it must be left free to correct itself. (Cases of ethical violations of course excepted.)
And that, I believe, is the solution here. But at some point, this specific issue of extreme executive pay needs to become a bigger issue. It’s not a crusade I’m interested in taking up. But it is something worth thinking reflectively and intelligently about — from a free market (rather than command and control) perspective.