The problem with high corporate pay
Letter to the Editor | Thursday, March 21, 2019
In 2016, CEO of Amazon Web Service Andrew Jassy made $35.6 million; Amazon CEO worldwide consumer Jeffrey Wilke took home a total of $32.9 million; Diego Piacentini, senior vice president of international consumer business, made $23.7 million. Excluding founder and CEO Jeff Bezos’ $81.8 million dollar beneficial ownership stake as of 2017, the median annual compensation at Amazon was $28,446.
Greater context reveals where specifically these large sums are coming from. Apple’s Angela Ahrendts, senior vice-president of retail and online stores, earned $24.2 million in 2017; Luca Maestri, senior vice president and chief financial officer, made $24.1 million. Both of these annual income stats compose an identical official salary of $1 million, with the rest coming from $20 million worth of stock awards and a bit more extra from their non-equity incentive plans. The company’s well-known CEO Tim Cook made $12.8 million, with $3 million being his salary and the rest largely coming from his own non-equity plan.
Differences in income are a natural and arguably beneficial part of society. Not every person has the same skill set or the same level of education, and those with higher levels of personal investment tend to be more valuable as a resource. Workers with higher education tend to produce higher levels of advanced output. Disparities in income encourage the pursuit of education by rewarding skill development with higher salaries.
Consider a professor at Notre Dame who may make around $100,000. The market produces that number by intersecting their education, experience and skill set against the needs of competing employers. But is there a point where the annual income of an individual exceeds his own reasonable output?
It’s questionable to argue that the aforementioned exorbitantly high annual incomes are the result of the market’s value of their labor alone. If Amazon’s top executives made a fraction of their current income, it’s reasonably certain that they would remain in their same jobs, and would continue operating at the same level of output. At that reduced income, they would be making an incredibly well-off living. They certainly wouldn’t be incentivized to slack off, relocate or stop working. If their decision to work would not change as a result of an income reduction, then that original income was not a reflection of the market’s value on their labor.
The problem is that top corporate executives are abusing their executive influence by independently considering the value of their own labor. It’s the Progressive “Name Your Price” tool, only this time it’s your own income.
By simultaneously being part of the leadership of their company while also collecting the highest paychecks, it’s almost like they are giving the money to themselves. After all, salary decisions are decided (or at least heavily influenced) by a corporation’s board of executives. The top earning executives of Amazon are also conveniently part of that same executive board. The board members participate in a back-rubbing circle that sets aside high salaries for fellow board members in order to set pay precedence and mutual alliances. This helps ensure high salaries for the executive and ensure the longevity of their position.
“Say, Jim, we were thinking that you’re worth about $20 million. How does that sound?”
“That sounds great, John. Looks like here it says you’re worth $20.7 million, how about we make that $21 million even?”
“Seems fair to me!”
The principle agent problem is a market failure where the interests of the management are not aligned with those who own the company. Corporate executives by definition answer to their shareholders, who are in essence the owners. Their concerns are primarily for the business’ continual growth so that the value of their shares appreciate. After all, the shareholders, acting in their own self-interest, bought into the company directly or into their stock portfolio believing that their holds would eventually rise in value.
However, corporate executives, who are also acting in their own self-interest, seem to be collecting larger and larger sums of the company’s revenue into their own pockets rather than reinvesting it back into the company’s operational expenses. Can you blame them though? It’s practically just sitting there. Top corporations have such resounding market power that their annual profit is in the billions. What’s a million out of a billion? Moreover, it’s counted in the books as a business expense, so a company’s announced annual profit would not include the salaries of top executives. Those are instead being factored into the “operation costs.”
The problem is that that money is not rightfully theirs, and they have a duty to their owners to take a reasonable salary. Doing otherwise wrongs the owners, who are the shareholders, as well as the smaller lower-earning workers that helped generate those sales to begin with.
A 70 percent marginal tax rate is a Band-Aid at best and a foolish idea at worst. Setting that rate wouldn’t make these problems go away. Problems should not be solved by implementing problem generators. The causes of these issues run far deeper. Perhaps the first step is to reconsider the relationships between managers and owners.
The views expressed in this Letter to the Editor are those of the author and not necessarily those of The Observer.