During frequent debates about income inequality on PolicyMic, commentators attack both the affluent and the U.S. government for enacting laws that make it possible “for the rich to get richer at the expense of the middle and lower classes.” In the interest of full disclosure, I want to discuss why certain people in this country are able to justifiably earn six or seven figure compensation. I totally expect that the critics who scream the loudest about cronyism, unfair tax treatment, and moral compass will not change their minds. But, maybe the conversation can be a little more balanced if relevant facts are laid on the table and some myths are debunked.
Based upon my experience, it is impossible to earn high compensation at a U.S. corporation unless an employee provides value-added service. This is an important point because some believe that money is gifted to corporate executives; this is untrue. The competition for dollars in high-paying industries is extraordinary; in fact, it is cut-throat each and every day. Management must justify compensation to their superiors and usually to the board of directors. There is little chance that an executive is paid a sum that he or she has not earned.
The example often cited by opponents of excessive compensation is the “golden parachute.” From time to time, CEOs are terminated and receive a huge payment even if the investment community has deemed their performance unsatisfactory. A “parachute” is generally negotiated between an employer and a senior employee to convince the latter to accept a job offer. The employee is then protected against being unjustly terminated after leaving a very good position elsewhere. In other situations, the employer wants to buy confidentiality and/or make an amicable break with an existing employee. In any case, “parachutes” are not paid by corporations to benefit the employee; the employer is buying something from the person with the “parachute” when he is terminated.
Many people on the outside cannot imagine how an employee of any company is able to negotiate six or seven figure compensation. What some skeptics fail to accept is that if an employee’s performance has consistently been at a high level, it justifies a large salary arrangement. For instance, a bond salesman’s compensation could be based upon the amount of commissions generated for the company. If it is $10 million, he may be contractually entitled to a salary of 10% of the total, or $1 million. Did he earn the compensation? Well, if you believe that an arrangement that splits commissions 90% to the company and 10% to the employee is fair, the $1 million payment is reasonable and not egregious in any way. Then again, if you do not believe any person should earn $1 million, regardless of his performance and contributions, you would disagree.
Every major company and organization in this country evaluates its employees. Those employees who provide the greatest value-added service generally are paid the largest compensation. Value-added service can take many forms; it may mean a percent of commissions as delineated above, or it might reflect non-monetary contributions of an employee. In any case, it is always real in the eyes of the employer, or he would not agree to outsized compensation.
And finally, there is the contention that money for high salaries comes out of the pockets of the lower classes. A case could be made for this relating to taxes; the rich get taxed less, so there is less money available for entitlements and the like. But, the money earned by the aforementioned bond salesman comes out of the pockets of the company’s shareholders, not poor people or other employees of the company. And the employer is comfortable paying the salesman so long as he generates the targeted level of commissions.
Others argue that the businesses of those making high compensation are shams and produce no tangible benefit to society. This needs to be evaluated on a case-by-case basis. But, I would contend that investment banks are not in this category. It appears that many of the most vocal critics of the securities industry have never read an annual report of one of its members.
Surely, it is disquieting for advocates of the poor to see exorbitant salaries paid in certain industries when so many are in need. Before criticizing the companies paying and the individuals earning the compensation, it makes sense to consider the facts. Most executives who reach lofty levels of compensation have provided significant value-added service to their companies. It is this salary/value-added relationship that should be considered before anyone cries foul. Unfortunately, people are blinded by the numbers and do not consider the circumstances of the employee who enjoys high compensation.
Photo Credit: Manu_H