Workforce.com

'The Business Buffett Rule'

January 27, 2012

Here's a way executives can get in front of the mounting frustration about income equality and corporate greed: Restrain your pay.

What if your firm announced that top executives would not make more in total compensation than 100 times the lowest-paid worker?

For a company paying the federal minimum wage of $7.25 an hour (about $15,000 a year for a full-time worker), that means income of about $1.5 million. And that figure would include the stock awards CEOs often get.

As pay goes, $1.5 million is not peanuts. But it also is a far cry from packages that have ballooned for many execs into the tens and hundreds of millions of dollars.

Beyond-the-pale CEO pay is part of what's making Americans angry these days. It and other factors are fueling the sense that the nation is slipping into a place that has lost its bearings about what is fair and decent. We also have a tax code where millionaires can pay less than 15 percent of their income in taxes, a recovery in which corporate profits are up but unemployment remains high, and average wages that are stagnant even as companies demand more from workers.

President Barack Obama's "Buffett Rule" is based on billionaire Warren Buffett's observation that he pays taxes at a lower rate than his secretary. In the State of the Union address this week, Obama said those making more than $1 million annually should pay at least 30 percent in taxes. A majority of the U.S. public supports the concept.

Call my 100x compensation-restraint plan the "Business Buffett Rule." And limiting executive pay in this way could pay off for your firm. A dramatic, personal commitment to go against the greed grain would likely boost employee morale. This includes among high-potential workers. Such workers often have been asked to shoulder large loads in recent years with little in return—which helps explain why 1 in 4 were seeking new jobs last year compared with 1 in 7 in 2005. These key employees may be more willing to stick around if they see executives making sacrifices, too.

More concretely, containing pay at the top would allow raises for the rest of the workforce. And it would burnish the company's reputation among potential workers and consumers who want, more and more, to do business with socially responsible companies.

There's evidence that more equal societies tend to be healthier and happier. Companies are societies in miniature—and too much inequality between corner suite and standard cubicle frays a fabric of trust and common purpose that organizations need to perform at their best.

Doubters will claim the best executives will flee pay-limiting firms for pastures offering more green. But research has dented the theory that high executive pay corresponds with outstanding performance. Instead, the incentive packages crafted for C-level employees in recent decades have contributed to a short-term mindset and hyper-risky behavior.

By showing moderation in CEO compensation, companies are likely to find leaders focused on accomplishing the company's mission instead of executives primarily out to amass a fortune. What's more, CEO pay under the Business Buffett Rule has no absolute ceiling—it can rise as long as the lowest-paid employees also see their boats lifted.

There's already momentum to rein in executive rewards. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that companies show the relationship between executive pay and corporate performance. And some organizations already have adopted a version of pay restraint.

Executives of auto companies bailed out by the federal government had their pay capped. The California State University system recently agreed to limit salaries for new campus presidents, and there is a bill in the Golden State to restrict the pay of those presidents to 150 percent of what the chief justice of the state Supreme Court makes. In the private sector, financial services firms including Bank of America Corp. reportedly are capping cash bonuses.

And during the recession, a number of executives agreed to annual salaries of just $1, including Apple's Steve Jobs.

On the other hand, Jobs' successor Tim Cook recently was given a restricted stock grant currently valued at some $440 million. To be sure, Cook has helped Apple take the world by storm. But does anyone really need $440 million? Especially given the sickening evidence that Apple's products are made by workers often toiling in harsh, sometimes-unsafe conditions.

In fact, a more dramatic version of pay restraint would be to limit an executive's compensation to 100x the pay of the lowest-paid worker in their supply chain. But let's just stick with direct employees for the moment. I suspect Apple—and other companies—would shine brighter among employees and would-be customers by adopting the Business Buffett Rule.

Ed Frauenheim is Workforce Management's senior editor. To comment, write to efrauenheim@workforce.com.