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Why Caps on Executive Pay Won’t Work

We have all heard the argument for caps on executive compensation.  Although we here at NFPCC believe that compensation should be targeted at appropriate levels, tied to performance, and sustainable, the idea to cap executive compensation has a lot of holes in it.

The argument was most recently made by Mr. Douglas Smith in the NY Times here with the concept of capping federal wages, therefore setting the example of what needs to be done in corporate America.  There are several points made in this opinion piece that are made every time this issue arises that we would like to put to sleep.

First, the premise that the US President’s ratio to minimum wage is way off. $400,000 in salary is correct, but what is missing is 1) the expense budget while in office, 2) all expenses paid while serving, and most importantly 3) post presidency compensation of approximately $100mm in book deals, speaking fees, etc. Most importantly, this pay all comes independent of performance. So, while a good thought, the President’s ratio is a weak starting point.

Second, the pay ratio cap has been tested and it failed. An honest review of Ben & Jerry’s attempt to cap CEO pay after the founder’s retired with their millions, shows that the cap had to be removed in order to attract, retain and motivate a real candidate.

We plan to write more on this subject in this month's LBlast.

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