Proportional Pay and Corporate Structure

Derek Jeter retired this year as the shortstop of the New York Yankees.  His final contract was for $12,000,000.  In contrast, my last contract as the principal of a large elementary school was just short of $80,000.  In our last year of employment, Mr. Jeter made 150 times more money that I.  

Now, if I were one of the pouting, petulant, whining types, I would say that this isn’t fair (no, “faaaaaaaaaiiiiiir”).  Jeter and I should be paid the saaaaaame.  I’m as impooooooortant as he is.  This, of course, is bullshit. 

Is Jeter worth $12 million?  They paid him that amount so, by definition, he is.  On the other hand, I doubt Mr. Jeter could take a room of 32 sixth graders of uneven talent, preparation or even simple luck and teach them for an entire year with the success I had.  To be able to teach well is a rarer skill than most people think, but the fact is that more people are qualified to teach than to play baseball.  My skills are simply not as rare as Jeter’s.

Oddly, that brings me to a discussion of ice cream.

What is your favorite flavor of Ben and Jerry’s ice cream?  Mine is Cherry Garcia.   The story of how Ben Cohen and Jerry Greenfield built a huge company out of a store front shop is an affirmation of the American entrepreneurial spirit.  From the point of view of an economist—and, ultimately, that is how I see everything—they also present an interesting lesson in proportional pay and corporate structure. 

When Ben and Jerry formed their company they set up a pay ratio of 5:1.  The difference between the highest and lowest paid employee would never exceed this ratio.  This system worked for sixteen years, right up to the time that Ben Cohen planned to retire.  The company could find no executive to work under the restraints of the 5:1 ratio.  They expanded the ratio to 7:1.  Over the next six years they increased the ratio to 17:1 seeking competent help.  Eventually, the company was acquired by Unilever and God knows what the pay ratio is now. 

Simple greed you say?  When was the last time you turned down a pay increase?  Do you believe in the right of unions to negotiate for higher wages?  Then don’t blame executives for looking for the best pay they can get.  If someone would have offered me $12 million/year I’d still be working. 

I believe that people should be paid according to the worth of their occupation based on supply and demand.  I also believe that corporations should operate as free of governmental regulation as economics allows.  But neither of these requisites means that we can not entice corporations to help the commonweal through tax incentives.  The corporate tax rate in the United States is one of the highest in the world.  Why not offer dramatically reduced tax burdens for companies that employ optimal ratios of compensation?  Even if we took the salaries mentioned at the top of this article and set the ratio at 150:1 that would still mean that a CEO earning $12 million would produce a salary at the bottom of the pay scale of $80K a year.  Not bad for a custodian, but the company could choose the best custodian of the bunch. 

Society benefits from a strong, stable middle class.  Society benefits from our lowest paid, least skilled workers having a wage that offers hope instead of subsistence.  Why not put our money were our mouth is and reward companies who structure wages to the advantage of all their employees.

Entice, don’t coerce and keep the faith.