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While Congress injects massive resources into the U.S. economy to respond to the coronavirus pandemic, it’s time for the private sector to do its part. America’s CEOs, led by the Business Roundtable, recently promised that shareholder value is not the only purpose of a corporation, pledging instead that corporations are responsible for all of their stakeholders, including their workers and surrounding communities.
Supersized executive compensation packages have become the norm in corporate America, fueling concern about widening income inequality. For example, at Apple AAPL, -4.14% , until recently the most valuable public company in the world, the top five executives received total compensation valued at more than $125 million in 2019 alone. In 2018, average CEO total compensation at an S&P 500 SPX, -3.37% company was $14.5 million annually. The ratio of CEO-to-worker pay was 287 to 1.
If CEOs wish to be faithful to their newly stated commitment to social responsibility, then as the highest paid in our economy they should give up their salaries and stock-based compensation for 2020. Instead, they should direct that money to their workforce and the cities and towns that are now on the front lines in the battle against the coronavirus pandemic.
Such a private measure is an important complement to government action. CEO compensation has become increasingly complex over the past few decades. Legislating the many technicalities and loopholes required to redirect that compensation would be costly and time consuming. In this crisis, time is a precious resource.
First, simplicity matters: Simple agreements are easy to understand and uphold. Simplicity, for example, is a key feature of the universal basic income idea, a form of which is now part of the government’s first pandemic relief package.
Second, private incentives can be superior to public enforcement. Rules that people want to follow, like stopping at a red light, are easier to enforce than ones that people are consistently trying to evade.
A pledge from the highest-paid CEOs to forego compensation for this year meets these requirements: It is simple, and it is an idea that most people would appreciate. And it sets an example. Given the deep well of generosity that is part of American culture, many people would do the same if they are able to afford it.
Thus, we propose a simple pact that executives at America’s leading corporations, including the members of the Business Roundtable, can make right now to demonstrate their leadership: Forego your compensation this year and commit that money to funding the things you’ve asked Congress to pay for, including paid time off, health coverage, child care for all your employees and contractors, and donations to local entities aiding the battle against COVID-19.
It is particularly important for leaders of America’s largest corporations to be out in front on this issue because not all CEOs can devote their salaries to helping their employees and communities survive a crisis. Small business remains a dominant factor in our economy and its owners often barely get by as it is. A Congressional aid package will, no doubt, be of value to these firms.
There is some movement among business leaders in this direction. Boeing’s BA, -10.27% CEO Dave Calhoun and Board Chairman Larry Kellner have agreed not to receive any additional pay until the end of the year. Marriott International’s MAR, -4.78% CEO Arne Sorenson and Executive Chairman Bill Marriott are receiving no pay during the downturn in business.
If all Business Roundtable members and others followed this lead, it would be a concrete step towards putting into practice the Roundtable’s Statement on the Purpose of a Corporation, where America’s largest corporations pledged to invest in its employees and communities. This pledge, made only seven months ago but in a world that now seems very far away, is more important than ever.
Jennifer W. Kuan is an assistant professor at Cal State Monterey Bay College of Business. Stephen F. Diamond is an associate professor at Santa Clara University School of Law.
Read: Why CEO pay belongs at the center of the coronavirus bailout debate
Plus: Tie CEO pay to increases in stakeholder and shareholder value
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