Moneybox

How to Stop CEOs From Laying Off Workers While Earning Fortunes

Corporations should have “parity pills”: automatic executive pay cuts whenever a recession—or a pandemic—hits.

A check for $50 million, cut.
Photo illustration by Slate. Photos by Getty Images Plus.

Some CEOs have exhibited a callous indifference to the plight of their employees during the pandemic-related economic crisis, continuing to collect massive paychecks as workers were laid off or furloughed. Executives at Hertz and J.C. Penney took home multimillion-dollar bonuses right before their companies entered into bankruptcy protection. CEOs might claim it’s their fiduciary responsibility to cut payroll and force workers to take the brunt of sacrifice so that their businesses can survive—but it doesn’t have to be that way.

All companies are governed by legal documents, such as articles of incorporation and bylaws. A clause in these governing documents—call it a “parity pill”—could automatically redistribute part of top earners’ compensation when a crisis occurs. The funds could be used to prevent layoffs or bolster the paychecks of the most economically vulnerable workers, and would incentivize leaders to avert the crises they can. Parity pills would give unions and activists against income inequality a tangible reform to push for. It would also bestow reputational advantages on companies that voluntarily adopt them—a pro-worker perk to go with good benefits and office amenities.

My idea of the parity pill is modelled on the poison pill, a common mechanism in governing documents that offers a public company some protection from being the target of a hostile takeover. In one version of the concept, once an adverse party acquires a certain percentage of all the outstanding stock, the poison pill is triggered and waters down the would-be acquirer’s stock by offering all other shareholders the option to buy more stock at a reduced price. What poison and parity pills share in common is that they could be automatically triggered by criteria set ahead of time.

Like income in general, corporate compensation has become shockingly concentrated at the top of some organizations. In 1965, the ratio between CEO pay and the typical worker’s compensation was 20 to 1. Now it is at least 221 to 1. At media company Discovery Inc., for instance, the total compensation for just five named executive officers was $84,204,174 in 2019. That year the company had approximately 9,200 full-time and part-time employees. The median worker’s pay at Discovery Inc. is $79,343, making the CEO-to-median salary ratio 578 to 1.

If those top five earners took a 50 percent pay cut during a yearlong recession, it could provide the lowest paid 46 percent of employees at the company an additional $10,000 each in salary and benefits. The same five-person pay cut at the top could spare the entire bottom 10 percent of earners from layoffs (assuming each made $45,760 or less in salary and benefits). Imagine the potential to prevent layoffs or boost the income of the lowest earners if the entire top 1 percent of the corporation—roughly 92 employees—took a pay cut during a recession.

Once in place, parity pills could be activated by external situations, such as an economic downturn, or something internal to the company—for example, if the pay of the top 1 percent of employees rose above some multiple of the average salary.

Using economic triggers to redistribute income isn’t an outlandish idea. The House Budget Committee has been considering automating spending for benefit programs like Medicaid, unemployment insurance, and food programs during economic downturns. A related idea is the so-called Brandeis Tax, which would raise the top marginal tax bracket if inequality within all of America rose beyond a set threshold. While these related ideas are largely expounded by Democrats, there’s no reason to think that lower wage–earning Republicans would automatically be against them.

Parity pills, however, are more immediately promising in part because they do not require an act of Congress or a president’s signature. Any company can quickly implement a parity pill on its own, just as the CEOs of Marriott and Dick’s Sporting Goods have announced that they will forgo much or all of their salaries for the year due to the economic downturn. The government could always encourage parity pills by offering companies that adopt them a lower corporate tax rate during periods of noncrisis.

Every company could tailor its parity pill as appropriate, determining which of its highest earners should contribute, how much, and for how long. Further, plans could be put into place to determine how the money should be used—to prevent layoffs, bolster the incomes of the lowest paid, or both.

For example, in a mild recession, a large corporation might not lay off those who are often paid the least, such as individuals who keep buildings clean and cafeterias open. Yet if a pandemic hits and buildings close, those same individuals might be the first to lose their jobs, all while everyone else does their work from home. Some firms might thrive during a recession yet still want to redistribute income with the understanding that their lowest paid workers might be feeling the pinch because of the effects on their households.

The parity pill would offset some of the most pernicious developments in corporate incentives. Performance-based restricted stock and stock options linked to returns encourage executives to think short term, take on more risk, and when coffers are full, to buy back stock rather than raise wages. If the executives’ gambles pay off, they primarily benefit as opposed to their employees; if their speculations fail, their employees take the hit. Parity pills would force executives to absorb some of the pain in bad times and encourage them to do their best to prevent crises.

While numerous heads of nonprofits have voluntarily reduced their salaries or donated money to their organizations during the COVID-19 pandemic, parity pills could also benefit the nonprofit sectors, including hospitals and universities where top leaders earn large salaries. The idea could even be applied to government officials—for example, Ithaca, New York’s mayor, Svante Myrick, has taken a 10 percent pay cut to stem layoffs of city employees because of a coronavirus-related budget shortfall.

CEO pay has risen dramatically over the past decades, while union membership has fallen precipitously. Parity pills can help society demand protections for those that CEOs too often deem expendable.