Question

Given the current trends in pay disparity, do you think laws should be enacted that limit the amount of CEO compensation to align with the average pay of the organizations’ employees? For example, CEOs could only make up to 40x that of the average employee? Why or Why don’t you think this is a good idea?

Answer 1

No, it is not a good idea. According to the marginal value theory the wages/salaries are set equal to the marginal contribution of an employee to the firm. Now, it is indeed difficult to imagine that the contribution of the CEO is 40 times that of the average employee, but it is certainly higher. CEOs are the ones making the big decisions about expansions and technology changes. They are responsible for the growth of the firm. Thus, their decisions and actions have the ability to make or break a company, which no other single employee possesses. Thus, if the salaries of CEOs are driven to the average salary of the firm. they will have less fo an incentive to work hard and it will lead to a declining technology and growth in the economy. Further, it will attract sub-standard talent as more able former CEOs would want to earn a premium for their skills in some other job. While, indeed, earning 40 times the average salary is not justifiable and there need to be effective policies such as higher marginal taxes to keep a check on effective salaries, bringing the salary to the level fo an average employee can significanlt hurt incentives and innovation.