Governments and CEOs

Last year, I wrote about CEO compensation packages. I didn’t specifically say that governments shouldn’t fix CEO remuneration but the idea was there. What I thought at the time was that a private venture was just that, private, and that the government had nothing to do with it (up to a point).

 

As I was thinking about this however I came to the realization that, for society as a whole, the difference between a CEO raise and an employee raise is not negligible. I just want to point out that, for argument’s sake, I’m considering that 1$ injected in the economy has the same social effect whether it comes from a rich person or a poor(er) person.

 

Now, let’s say you have Company A, that has the possibility of redistributing $1 million dollars to its employees or having this as a raise in remuneration for its CEO. Of course, the decisions are not often that simple but this is to give an example. Assuming that the employees would be going from a 35K yearly income to 40K with this raise, they would get taxed 15% by the federal government here in Canada and around 16% by the Quebec provincial government. This means that each employee would get and extra $3450 of disposable income. Now $1 000 000 in $5 000 slices means that 200 employees got to profit from this. Therefore, a total of $690 000 would get added to the local economy and go through the multiplier effects (again, this is simplified).

 

Looking at the other possibility, for a CEO making over a million dollars a year, the vast majority of his income will fall within the highest taxation bracket. This means 29% from the federal and 24% from the provincial government which leaves the CEO with $470 000 that he’s free to spend.

 

Now, you could argue that the government will spend our taxes to make everyone’s life better but one thing I didn’t include in my calculations was the savings rate. As you get more income, you devote a higher percentage of it to savings. That’s good for the individual, but for society, it is better to have the money circulating as much as possible. This means that the CEO solution will see less money in the hands of the population even if you don’t consider taxes.

 

From the above example however, it’s easy to see which solution the governments likes the most. In the short term, they are making more money with the CEO. The reason governments don’t issue a decree that only CEOs can get raise however is that, in our system at least, CEO votes are supposed to be equal to their employees. And it is the votes, not the money, that keep a government afloat.

 

At any rate, the above example shows that the way remuneration is distributed in the company affects society as a whole. The same way governments issue laws about environment, crime, etc. they have cause to issue laws about remuneration. Now, would a law saying that “CEO remuneration cannot be higher than X” be a good thing? At first glance, I think not. But that is another question…