Laborist fair pay allocation
A company does better the less it pays the CEO. — Peter Thiel
Ed Woolard, his mentor on the Apple board, pressed Jobs for more than two years to drop the interim in front of his CEO title. Not only was Jobs refusing to commit himself, but he was baffling everyone by taking only $1 a year in pay and no stock options. "I make 50 cents for showing up," he liked to joke, "and the other 50 cents is based on performance. — Walter Isaacson
The upshot is that a mediocre-or-worse CEO - aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo - all too often receives gobs of money from an ill-designed compensation arrangement. - Warren Buffett
Keeping capital from taking the profit earned by labor is part of the laborist story, but those profits also need to be fairly distributed among the employees who collectively produce them. Our current system tends to assume that the CEO is as valuable as 300 regular employees put together. That is not true. It is true that a bad CEO can pretty much single-handedly wreck a company, but the best CEOs are the ones who assemble a great team of other employees who are competent at getting the work done. A high-performing company is an assembly of a lot of employees each adding value and connecting with each other without needing a lot of managerial oversight.1
For this reason, and to help correct the assorted social ills that flow from over-concentration of wealth, laborism calls for the pay multiples within a company to be kept within limits. It is fair for the CEO to be paid more than other people, and it is fair for college graduates (who invested time and money in getting their degree) to be paid more than those who started working for pay straight out of high school. It is fair for the hardest workers and the most creative employees to be paid more than those who work less long or intensely or who are less talented at creativity or problem solving, and for those with more experience to be paid more than those with less. But should a CEO earn more in 2 weeks than another employee earns in a year? Elon Musk, whatever you think of him, has been a valuable creator of companies, but he likes running things. The fact that he has more money than a small country but is still working shows that he likes being a CEO. Not being allowed to earn so much would not change that. The same is true for many other good CEOs. If they are good, they like their jobs, and they don’t necessarily want to take the risks of a true individual entrepreneur. If they would quit because they aren’t paid millions, then they are the type of vain and greedy grifters that wreck corporations.
Laborist policy therefore provides that the highest-paid employee should not earn more than 8 times as much as the median employee (that is, than the employee who earns more than the lowest-paid half of employees but less than the highest-paid half), and the median employee should not earn more than 3 times as much as the lowest-paid employee. The CEO would then not earn more than 24 times as much as the lowest-paid employee, earning as much in 2 weeks as that employee earns in a year. If the CEO was paid $1,200,000, then half of the employees would have to be paid at least $150,000, and the lowest-paid employee would need to earn at least $50,000 full-time equivalent.2 The median annual wage for an Hispanic female (the lowest-paid ethnicity and gender combination) works out to $42,900 for 2024, while the median for all workers was $59,228, so this element of laborist policy would tend to pull the lower-paid employees up towards the current median, while also helping out mid-range employees. There would be supportive rules to prevent employers from cheating (for example, it would be prohibited to use a Kelly Services type of company to provide de facto employees who are paid less because technically they work for Kelly).3 Subcontracting of lower-wage activity to unrelated companies could further be controlled through look-through rules that could also help to discourage offshoring, though one would want to see how things go and tailor that accordingly, starting with stricter limits on changes and gradually loosening those if appropriate. The changes in corporate governance that will be discussed in a later post could in large part make strict controls unnecessary.
While these ratios will only apply to entities with limited liability created by the state, laborist policy will also favor pro-union rules for all businesses with multiple employees. This will both provide important support for the ratio rule (by encouraging unions with the strength to ensure that the ratio rule is implemented in a sensible, good-faith way) in limited-liability companies and to help ensure that genuine, risk-taking individual entrepreneurs recognize the value contributed by their employees. Risk-taking entrepreneurs should not be limited on pay the way corporate CEOs are. An entrepreneur actually creates value by starting the enterprise, invests time and money in making it work, and likely has particular creativity. That makes her different from most CEOs, who are instead awarded the position. Someone like Taylor Swift employs a number of people, and because she is an excellent businessperson she pays her people well even in the current system. Laborism would not interfere with her. Further, as noted in an earlier post, few entrepreneurs would be willing to keep operating outside of a limited-liability entity beyond a certain stage of success. Still, employees should be able to give a reminder that their contribution is valuable, too, if that is needed.
To defeat the power of compound interest, we must use compound effort. Please subscribe as a supporter (it’s free) and pledge to recruit at least 5 other people who each pledge to recruit at least 5 others. Recruit family, friends, co-workers, church members, union members, lodge members, people in your organizations, strangers. We can do this, but we each need to put in the effort.
One of the companies I worked for got a new CEO who didn’t feel the need to do a lot of things like foolish acquisitions or consultant-fueled projects etc., and the company then made substantially more cash money precisely because he just behaved himself and let the employees do what they knew how to do without needless distractions.
These figures might be phased in or adjusted to avoid situations in which many employees have their salaries reduced to achieve the median-to-lowest ratio, but the 24X CEO-to-lowest ratio should be prioritized. The median-to-lowest numbers might also be adjusted for different kinds of companies. The ambition is to cause the profits to be shared across a broad group by creating an incentive to raise the mid-range as well as raising the lowest-paid employees, and to reduce the incentive to just get rid of the lowest-paid employees. All rules have unintended consequences, and one wants to provide enough flexibility to minimize those consequences while still keeping the intended benefit of the rule.
There would still be incentive to automate, and therefore society would still need to focus on finding good alternative employment for workers whose jobs can be automated away. Laborism seeks to ensure that the profits from production go to the employees who do the work, but stops short of sharing those profits with persons whose work is not needed for the company to do what it does. Still, laborism seeks to ensure that everyone willing to work can have a good-paying job.