A Fresh Approach to Limiting CEO Pay — and Saving Our Environment

We can cite many reasons for opposing large discrepancies in pay within enterprises, everything from the depressing impact of these discrepancies on employee morale to diminished firm productivity and widened gender and racial disparities.

But another reason for opposing corporate pay discrepancies is becoming increasingly evident: the impact of this pay inequality on our environment. Wide pay gaps tend to increase adverse environmental impacts. And high pay — particularly high CEO pay — is incentivizing the kind of unsustainable economic growth that’s feeding our ongoing social and environmental crises.

Many corporate CEO pay packages, for instance, include generous grants of stock and stock options. These sweeteners motivate CEOs to strive for ever more corporate growth  no matter how ecologically destructive —  then use the resulting profits to buy back their company stock, a move that raises corporate share prices and enriches CEOs even further.

The compensation of oil company top executives, for instance, links intimately to exploring for new fossil-fuel fields, extracting ever more oil, and promoting still more carbon consumption. Top Big Oil corporate chiefs, as Richard Heede of the Climate Accountability Institute observes, “have personal ownership of tens or hundreds of thousands of shares” and that “creates an unacknowledged personal desire to explore, extract, and sell fossil fuels.”

Stock and bonus-based CEO compensation also encourages companies to take speculative and short-term perspectives. Chief execs demand that their firms make  risky corporate maneuvers to quickly boost their stock prices. The Enron scandal, for example, involved CEOs trying to rapidly raise their share prices in a reckless pursuit of higher personal bonuses.

Selfish and short-sighted corporate decisions like these are taking a serious environmental toll and come — disastrously — at a time when companies should be committed instead to the long-term health of our planet.

To counter inequality in the USA, the Center for the Advancement of the Steady State Economy is now proposing the adoption of a new Salary Cap Act. This model legislation would create salary caps in all our major occupational sectors, as Brian Czech has proposed in his book Supply Shock. The Salary Cap Act would essentially make it a crime for corporate employers to pay out exorbitant salaries.

This proposed legislation defines “salaries” as wages, bonuses, and other forms of compensation specified under Section 3401(a) of the Internal Revenue Code. This broad definition would encompass forms of compensation — like corporate stock options — not traditionally classified as “salary.”

Section 4 of the Salary Cap Act describes how we could be capping top executive pay. Under the legislation, the U.S. secretary of labor would set pay caps for each of the 23 major occupational groupings in the Standard Occupational Classification Codes that the Bureau of Labor Statistics maintains. These annually updated caps would correspond to 1.8 times the compensation of the 90th percentile of employees in each major occupational grouping.

In other words, the maximum compensation in each occupational grouping would be no more than 80 percent higher than the pay that 90 percent of the employees in that grouping are making.

Why this 1.8 times multiple? This maximum pay multiple reflects a simple reality. The president of the United States is currently making 1.8 times the 90th percentile of CEO salaries. At the Center for the Advancement of the Steady State Economy, we do not believe that any CEO deserves to be paid more than the president of the United States. The Salary Cap Act’s maximum salary formula offers more than ample room to reward superior performance while curbing the social and environmental distortions that our most exorbitant pay packages bring.

The Salary Cap Act’s fifth section describes how the Office of Labor-Management Standards in the Department of Labor would enforce the legislation. This office would have the power to petition the courts when it believes companies are violating the Salary Cap Act. Companies found guilty would face criminal penalties of up to $100 million. Their top executives could also face up to ten years in prison.

Those of us involved in preparing the Salary Cap Act have designed this legislation as both a stand-alone bill and a component of a larger Steady State Economy Act. The Salary Cap Act would not, by itself, end wealth inequality or ecological overshooting. But the legislation would help apply brakes on the executive pay incentives now driving our largest corporations to grow the economy well beyond our planet’s carrying capacity.

Dr. Daniel Wortel-London focuses on policy development for the Center for the Advancement of the Steady State Economy.