Dale Glading's Blog

I am a true capitalist, but these CEO salaries are CRAZY!

Wednesday, May 24, 2017

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Capitalism has proven to be - by far - the world's best economic system since its adoption in the Middle Ages. Championed by Adam Smith in his timeless manifesto, "The Wealth of Nations", capitalism has enabled daring entrepreneurs and astute businessmen to succeed beyond their wildest dreams. It has also given rise to an expanding middle class in which, by the sweat of their brows, virtually anyone can experience some semblance of economic prosperity and security.

However, the unparalleled economic engine that is capitalism seems to have blown a gasket of late.

In recent years, financial analysts in the U.S. have pointed to a growing gulf between the top wage earners and those at the bottom of the economic ladder. In fact, the area where I live - the Vero-Sebastian "metropolitan" area - was named by 24/7 Wall St. as the American community with the greatest disparity between rich and poor in the entire country.

My purpose today is not to bemoan "the rich getting richer and the poor getting poorer". Like I said before, I am a die-hard capitalist who believes that "a rising tide lifts all boats" and that there is still adequate opportunity for anyone with a strong work ethic to get ahead in life. With a sound business model, a quality product or service, and a willingness to take risks - you or I could become the next millionaire... or billionaire.

And yet, all is not well in the world of American capitalism. Which is why, at the risk of alienating my fellow conservatives, I wish to pick a bone today. Specifically, I question the outlandish - and out of control - compensation packages being paid some corporate CEO's these days.

In 1993, changes were made to the U.S. tax code, capping deductions for executive pay at $1 million. However, a loophole allowed for virtually unlimited "performance-based" income (i.e. stock options and other financial incentives). As a result, executive pay in America has grown 127 times faster than worker pay over the past 40 years - and 1,000% since 1950.

To put it another way, the average CEO of a large U.S. corporation made 20 times more than one of his employees in 1965. By 2016, that ratio had exploded to 347 to 1... and continues to climb unabated.

Like all explosions, this one has caused some collateral damage. Picture an underwater earthquake that creates a tidal wave of epic proportions. It barrels toward the coast, making landfall at the worst possible time - high tide. Working-class people in huts and skiffs are washed away in a matter of seconds. The only ones who survive - and in fact, escape much damage - are those in luxury yachts or penthouse apartments.

Speaking of tsunamis, Japan has often been criticized for limiting CEO compensation. Naysayers believe that such caps limit innovation and make executives more risk-averse. But to me, the answer is not throwing the baby out with the bath water... or the tidal wave.

The secret may lie in tweaking the current system, thereby creating viable economic opportunities for everyone. Offering discounted stock options and profit-sharing to line employees would be a good first step. So would be allowing more shareholder control over setting CEO compensation.

I don't pretend to have all the answers or even the best ones. All I know is that capitalism, the greatest economic engine the world has ever known, may need a tune-up after 800 years.

And I think Adam Smith - and even Marco Polo - might agree.

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