A Note on Executive Compensation It is too high we know. Marginal productivity is not a material determinant. CEOs get raises whether their companies do well or lose money. Why is executive compensation so high? Piketty, Saez and Stantcheve have studied this problem extensively and the conclusion they reach is because the top marginal income tax rates have dropped from 70 to 90 percent well down into the 30 plus percent range. With rates at say 90 percent, a CEOs net pay after taxes is not changed much by a pay hike. Seeking additional pay is somewhat pointless because the government gets so much of any pay hike. But when top marginal income tax rates are substantially lowered, it becomes worthwhile for a CEO to press for higher pay in the myriad political ways available for him or her to do that, starting with stuffing friends and sympathizers on the Executive Compensation Committee. That is exactly what has happened. The best way to get a handle on executive compensation is to raise the top marginal income tax rates back into the 80 to 90 percent range. Recall that from 1940 to 1980, the top marginal rate in the US was 70 to 80 percent. The same phenomenon has been observed in other advanced nations, but to a lesser extent because they have not reduced their marginal rates as much as we have in the US since 1980. Under Reagan, the top marginal rate actually fell to 28 percent briefly, which must have been a word of real encouragement to CEOs that the time was ripe to politically go after higher pay. Higher top marginal income rates is the way to deal with excessive CEO compensation.
Posted on: Wed, 23 Apr 2014 23:44:00 +0000
Trending Topics
Recently Viewed Topics
© 2015