Maximum Salary for Executives: Is Obama Setting a Precedent?
Published in L'Expansion
(France) on 4 February 2009
by Thomas Bronnec (link to original)
The executives of companies receiving aid from the American government cannot receive more than 500,000 dollars per year in compensation. The idea of a payment ceiling isn’t new. But Barack Obama has pushed it particularly far. Is this the beginning of a new trend?
Will Obama really instate a maximum salary?
Yes, but only for a small number of companies. Irritated by the 18.4 million dollars in bonuses distributed on Wall Street, the American president has decided to impose a ceiling on compensation for the executives of large banks, at least those which have requested bailout money. Among those companies are Citigroup, Bank of America, AIG, General Motors and Chrysler, according to the New York Times.
Where will this ceiling be fixed?
At 500,000 dollars, more or less the salary Barack Obama is receiving in the White House. The executives won’t die of hunger, and they have no real grounds to complain. For many of them, though, it represents a huge reduction in their way of life. Kenneth D. Lewis, the CEO of AIG, earned 20 million dollars in 2007, of which 5.75 million were in salary and bonus. Vikram Pandit, CEO of Citigroup, received more than 3 million dollars.
Is this a new idea?
No, not exactly. It reemerges with every scandal over golden parachutes or retirement funds. The idea of limiting the compensation of executives of companies that receive government aid was adopted by the Bush Administration. They prohibited, among other things, the issuance of golden parachutes. But Barack Obama, encouraged by the Democratic senator from Missouri, Claire McCaskill, has pushed the idea to a new level never before seen in the United States. A level which would have pleased the man who, at the beginning of the twentieth century, declared that the salary of a chairman shouldn’t exceed more than thirty times that of the average employee. That man was John Pierpoint Morgan, who founded the company of the same name (JP Morgan), star of Wall Street. Times are changing.
Could a salary cap be extended to all companies?
On the outside, nothing prevents a government from imposing the law of a universal maximum salary, just as there is a minimum wage. Certain economists in France defend this principle, among them Jacques Genereux and Oliver Ferrand, who are close with the Socialist party. But no country would actually put this measure in place. Governments have other weapons at their disposal. The fiscal option, for example, which consists of applying a very high tax rate above a certain income, like the tax which the Netherlands has already levied. Since the first of January, the owners of all of the companies based in Amsterdam must pay a 30% income tax if they take in more than 500,000 euros a year.
Does a instituting a maximum salary risk penalizing the countries that adopt it?
The company executives are obviously not in favor of the idea of imposing a limit on their salary. For them, a government that imposes a maximum salary on its companies is a prejudiced one. So the owners and their executives prefer to take their talent elsewhere, to a place where there is no ceiling. In reality, the movements of the big executives remain nearly entirely national, as stated by L’Expansion.
The German-Canadian Chris Viehbacher of Sanofi-Aventis and the Dutch Ben Verwaayen remain the exceptions. Every time they are confronted with the excesses of some among their number, these executives feel that they must do something about it. In order to prove their good will, they are fond of creating ethical codes to limit compensation. The French Business Confederation declared a similar code in October 2008, and most of the companies in the CAC 40 have said that they will abide by it. Make a point of checking on that in a few months...
Will Obama really instate a maximum salary?
Yes, but only for a small number of companies. Irritated by the 18.4 million dollars in bonuses distributed on Wall Street, the American president has decided to impose a ceiling on compensation for the executives of large banks, at least those which have requested bailout money. Among those companies are Citigroup, Bank of America, AIG, General Motors and Chrysler, according to the New York Times.
Where will this ceiling be fixed?
At 500,000 dollars, more or less the salary Barack Obama is receiving in the White House. The executives won’t die of hunger, and they have no real grounds to complain. For many of them, though, it represents a huge reduction in their way of life. Kenneth D. Lewis, the CEO of AIG, earned 20 million dollars in 2007, of which 5.75 million were in salary and bonus. Vikram Pandit, CEO of Citigroup, received more than 3 million dollars.
Is this a new idea?
No, not exactly. It reemerges with every scandal over golden parachutes or retirement funds. The idea of limiting the compensation of executives of companies that receive government aid was adopted by the Bush Administration. They prohibited, among other things, the issuance of golden parachutes. But Barack Obama, encouraged by the Democratic senator from Missouri, Claire McCaskill, has pushed the idea to a new level never before seen in the United States. A level which would have pleased the man who, at the beginning of the twentieth century, declared that the salary of a chairman shouldn’t exceed more than thirty times that of the average employee. That man was John Pierpoint Morgan, who founded the company of the same name (JP Morgan), star of Wall Street. Times are changing.
Could a salary cap be extended to all companies?
On the outside, nothing prevents a government from imposing the law of a universal maximum salary, just as there is a minimum wage. Certain economists in France defend this principle, among them Jacques Genereux and Oliver Ferrand, who are close with the Socialist party. But no country would actually put this measure in place. Governments have other weapons at their disposal. The fiscal option, for example, which consists of applying a very high tax rate above a certain income, like the tax which the Netherlands has already levied. Since the first of January, the owners of all of the companies based in Amsterdam must pay a 30% income tax if they take in more than 500,000 euros a year.
Does a instituting a maximum salary risk penalizing the countries that adopt it?
The company executives are obviously not in favor of the idea of imposing a limit on their salary. For them, a government that imposes a maximum salary on its companies is a prejudiced one. So the owners and their executives prefer to take their talent elsewhere, to a place where there is no ceiling. In reality, the movements of the big executives remain nearly entirely national, as stated by L’Expansion.
The German-Canadian Chris Viehbacher of Sanofi-Aventis and the Dutch Ben Verwaayen remain the exceptions. Every time they are confronted with the excesses of some among their number, these executives feel that they must do something about it. In order to prove their good will, they are fond of creating ethical codes to limit compensation. The French Business Confederation declared a similar code in October 2008, and most of the companies in the CAC 40 have said that they will abide by it. Make a point of checking on that in a few months...