The New Management Incentives
Corporate upper management must have its incentives aligned to the long-term health of the companies and stakeholders that they serve. Too often, directors are not beholden to the long-term interests of their shareholders, nor the economic success of the nation.
Compensation is determined by the directors themselves and allows for a disconnect between compensation and performance. When salaries are more closely tied to performance, it tends to be short-term performance, while often sacrificing the long-term health of the firms. Salary caps are a dangerous solution (like all price and wage controls), and would result in skilled management leaving for places without caps. Instead, by law, a sizeable portion of executive compensation (including non-cash benefits) should be in the form of long-term shareholdings, which can be sold after 5+ years. The interests of other shareholders would already be tied to the longer-term interests of the company through tax incentives we would apply to capital gains as part of the Assisted Savings Program. This would involve taxing capital gains in a way to incentivize shareholders to also hold shares for 5+ years, become invested in the long-term health of their companies, and favouring domestic investment.Voting shareholders must have a binding say on executive compensation, to ensure no perverse incentives for the board of directors. However, with shareholder meetings so distant and inaccessible, there must also be an easier way for shareholder to communicate their feedback and ideas with company directors. A country’s securities regulator must host an online forum for each listed company in which shareholders can voice their opinions, and form groups to elect and influence the boards. It would also provide opportunities for the boards to directly respond to any concerns.
There must be a surtax on companies with excessive executive pay ratios (in addition to on the executives themselves).
This would mean that it would make more financial sense for companies to raise salaries of their workers. The funds raised from the surtax would go toward the National Income Supplement, so that regardless of whether the companies make the decision to raise salaries or not, the labor force benefits. With the suggested income tax rates of 8, 16, and 24 percent (before the Three Pillars are paid out), a tax rate on executives beyond a certain pay ratio within their company would add on a new tax bracket, at a rate of 32 percent for income earned beyond the breach of the ratio. When executive pay breaches the limit, the company itself would see a surtax of 2 percent in addition to the normal rate of 8 percent. This surtax would also be returned to the labor force via the NIS.The disadvantage of using executive pay ratios as a metric, is that these incentives could encourage companies to shed their lower wage workers altogether. The incentive would therefore need to be conditional on a certain percentage of the company’s workforce being comprised of lower income individuals. Calculating the pay ratio would also need include work that is contracted out to other firms, to prevent companies splitting up to meet the requirements.