How to Fix CEO Pay

How to Fix CEO Pay

Less than three years after the collapse of the housing bubble and onset of our most recent financial crisis, a year when wages for the typical worker grew by a mere 2% (SSA), average CEO compensation swelled by 24% (Beck). While the idea of fairness may be arbitrary, one cannot deny the public outcry over CEO pay. The recent Occupy Wall Street movement has spread to all 50 states, bringing the issues of increasing wealth disparity and excessive executive compensation to national recognition (Salvatore).

In light of such widespread social unrest, which “threatens the social fabric [of society],” (Williams) it’s government’s responsibility to intervene and protect public interest. Throughout the last decade, politicians sought an effective means of curbing executive salaries; yet, these measures have proven unsuccessful, because they fail to address the underlying mechanisms of CEO pay. To resolve the issue of disproportionate CEO compensation, government should reform corporate governance by mandating that all directors be independent in order to avoid conflict of interest, allowing both majority shareholders and stakeholders to elect third-party directors to improve employee representation, and establishing a transparent pay system determined by these appointed directors to increase accountability.

Government should reform corporate governance because of broad social unrest regarding excessive CEO compensation. While it may not always be necessary for government to intervene on the public’s behalf, when a majority of society agrees on an issue it’s government’s duty to step in and promote public interest. Given Bloomberg’s most recent poll concluded that 80% of Americans believe CEOs are paid too much, it’s clear that CEO salaries are a general societal concern (Wolverson).

One may ask, however, is this upheaval against CEO pay warranted? Compared to 1995, the CEO-to-worker pay ratio has increased by over 300% (Mishel). Not only are Chief Executive Officers earning higher salaries, but, relative to their workers, this wage gap is increasing over time. The consequences of expanding wealth disparity hold harsh, unforeseen repercussions for corporations and workers alike. A study conducted by Stanford’s Graduate School of Business found that inordinate, widening wage gaps lead to lower middle-management performance, lower productivity and decreased worker effort (Stanford GSB). Reforming corporate governance would remedy the issue of disproportionate CEO pay, thereby reducing its negative effects and resolving the resulting social turmoil.

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