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  • How To Fix Outsized Executive Compensation

    Defenders of executive compensation argue that executives create value: that their outsized compensation is justified. Shared Capitalism Research Project shows the opposite.

    Upstart: Management

    A new study recommends a tweak to the Tax Code: Let companies deduct bonuses only if they give all their workers the same incentive packages.

    From the mid-1970s until at least the mid-2000s, the earnings of American workers did not keep pace with U.S. productivity growth. The earnings of corporate executives, however, increased dramatically. The total annual incentive compensation, not including base salaries, of the top five executives of U.S. public companies increased from $4.9 billion in 1992 to $29.3 billion in 2006.

    Among the top five percent of these companies’ income earners, the value of the exercised stock options alone increased from $10.8 billion to $65.1 billion, a total of $806.7 billion for the 15-year period—and that does not include earnings from cash incentives and restricted stock plans. Moreover, companies can deduct large payouts from their income before they pay their taxes, large sums shielded from government coffers as a cost of doing business.

    The defenders of executive compensation argue that senior executives make the most significant contribution to a company’s success; ergo, outsize compensation is justified. But the NBER Shared Capitalism Research Project has shown the opposite: Distributing rewards across the corporation—sharing them with workers—is the most efficient way of making businesses more successful. Motivated employees are more productive and spur innovation in products and processes.

    Sharing the Booty

    The Shared Capitalism Project, originally funded by the Russell Sage and Rockefeller foundations, has been in progress for a decade. Harvard economist Richard Freeman, Rutgers sociologist Joseph Blasi, and Rutgers economist Douglas Kruse analyzed data from surveys of 41,206 employees at 323 work sites. They note that almost half the employees of American corporations participate in some form of profit-sharing or stock-option plans, what they call “shared capitalism.” The researchers found that shared capitalism:

    • Improves company performance. It is associated with greater attachment, loyalty, and willingness to work hard; lower turnover; workers reporting more commonly that co-workers work hard and are involved in company issues; and workers suggesting innovations.

    • Improves worker well-being. It is associated with workers’ greater participation in decision-making; higher pay, benefits, and wealth; greater job security; satisfaction with influence at work; trust in the company; positive assessments of managers; and better labor–management relations.

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    Upstart: Business and Management for 20-40 Year Old Professionals

    Filed Under: Management


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