The Institute for Policy Studies’ 2016 Executive Pay Reform Scorecard – part of the latest edition of the IPS annual Executive Excess Report – evaluates an extensive list of creative and practical proposals for reining in excessive executive compensation.
Principles for a Better CEO Pay System
The 2016 Executive Pay Reform Scorecard covers proposals that have been either introduced in the U.S. Congress or enacted into law in recent years, as well as other promising reform approaches either proposed or put into place elsewhere in the world. We have based our pay reform rating system in this scorecard on the following five principles that advance economic fairness and stability in executive pay policy and practice.
1. Encourage narrower CEO-worker pay gaps.
Extreme pay gaps — situations where top executives regularly take home hundreds of times more in compensation than average employees — run counter to basic principles of fairness while endangering enterprise effectiveness. Management guru Peter Drucker believed that the ratio of pay between worker and executive can run no higher than 20-to-1 without damaging company morale and productivity. Researchers have documented that Information-Age enterprises operate more effectively when they tap into — and reward — the creative contributions of employees at all levels.
2. Eliminate taxpayer subsidies for excessive executive pay.
Ordinary taxpayers should not have to foot the bill for excessive executive compensation. And yet they do. Government contracts and subsidies routinely make mega millionaires out of corporate executives. And all chief executives benefit from a tax provision that lets corporations deduct unlimited amounts from their income taxes for the expense of executive pay.
3. Encourage reasonable limits on total compensation.
The greater the annual reward an executive can receive, the greater the temptation to make reckless decisions that generate short-term earnings at the expense of long-term corporate health. Government policies can encourage more reasonable compensation levels without micromanaging pay levels at individual firms.
4. Bolster accountability to shareholders.
On paper, the corporate boards that determine executive pay must answer to shareholders. Recent reforms have made some progress toward forcing corporate boards to justify to shareholders the compensation they award to executives.
5. Extend accountability to broader stakeholder groups.
Executive pay practices, as the 2008 financial crisis vividly demonstrated, impact far more people than shareholders. Effective pay reforms need to encourage management decisions that take into account the interests of all corporate stakeholders, including the consumers, employees, and communities where corporations operate.
In the 2016 Executive Pay Reform Scorecard, IPS grades each reform by assigning a rating for each of these five principles.