The Answer To The CEO Pay Dilemma

After the debate between Jon, dreck, myself and others yesterday (see: Pay Cap A Hat Many Won't Wear and Do CEOs Need A Salary Cap?) I thought I'd share an interesting perspective I just found while researching the larger debate.

Turns out the CEO of Netflix, Reed Hastings, has what he thinks is a better idea than Obama's "name and shame" game -- tax all income above $1 million dollars at a 50% marginal rate.

He starts out a recent Times op-ed by addressing the competitive landscape for (so-called) "already proven" talent:

The reality is that the boards of public companies hate overpaying for anything, including executives. But picking the wrong chief executive is an enormous disaster, so boards are willing to pay an arm and a leg for already proven talent. Putting limits on the salaries at public companies, or trying to shame them into coming down, won't stop this costly competition for talent.

...and then goes on to say that if the marginal tax rates on CEOs were raised to 50%, "a shocking $20 million severance package would generate $10 million for the government. That's a far better solution than what we have today, not least because it works with the market rather than against it."

According to Hastings, one benefit of such a proposition is that it wouldn't focus only on executives at publicly traded companies like himself, but would instead include all stripes of earners, including hedge fund managers, athletes, movie stars, etc. (Obviously, he's counting on misery loving company.)

This week, President Obama proposed imposing a $500,000 compensation cap on companies seeking a bailout. It's a terrible idea. We all want the taxpayers' money returned, and capping compensation at bailout recipients will just make it that much harder for those boards to hire and hold on to the executives who can lead their companies to compete and thrive.

Instead of trying to shame companies and executives, the president should take advantage of our success by using our outsized earnings to pay for the needs of our nation.

Hmm. Far be it from me to scoff in the face of such a refreshingly patriotic viewpoint of paying taxes (a viewpoint that I myself share). However, while Hastings says "the difference between salaries like mine and those of average Americans creates a lot of tension," I don't actually believe this is so. (After all, does anyone in America begrudge Buffett his billions?)

While I do think that such "already proven" CEOs have become an overvalued asset (see: Nardelli, Bob, or my post The Great CEO Asset Bubble) I don't think Americans begrudge success in the marketplace. It's only when these companies fail so spectacularly that they need to feed at the taxpayer trough, and then don't adopt a corporate spending stance befitting the humility of a company receiving corporate welfare, that people get angry.

As President Obama himself put it:

"This is America," the president declared at the White House. "We don't disparage wealth. We don't begrudge anybody for achieving success. And we believe success should be rewarded. But what gets people upset -- and rightfully so -- are executives being rewarded for failure, especially when those rewards are subsidized by U.S. taxpayers."