Macro Economics
How Much is Too Much?

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April 6, 2009

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Draw the line. Some people make too much money, at least according to most US citizens. I'd like to know where people draw the line. How much is too much?

This is a capitalistic economy. As such the entrepreneurs are the ones to whom the biggest rewards should flow. So, for those who have the idea and the vision and the tenacity to start their own enterprise, as long as they make their money within the rules of the society, I would put no limit on how much wealth they could make.

However, what has happened increasingly over the last 20 years is that the follow-on managers have taken unto themselves the reward structure of the entrepreneurs. Even that may be OK on some level if the company were still a private company. For, as a private company the only one who has the right to gainsay the income of the follow-on managers is the original entrepreneur or his descendants.

When that enterprise becomes a publicly traded company, then is where some limits need to be set. Just how much is too much needs to be liberal enough to attract high quality managers but low enough to give the owners of the company (the shareholders) adequate compensation for their equity capital.

I would recommend a two-step approach. One would be to limit the compensation for all of management to a percentage of net profits...say 33%. This would allow one third to go into capital equipment expansion and one third to flow to the shareholders.

The second step would be where there weren't enough profits to cover management's payroll from the above formula. There the cap would be that no manager could make more than 15 or 20 times the lowest paid worker, no bonuses would be paid until they could be encompassed by formula one above.

Also, in publicly traded companies I would alter the issuance of stock and stock options to a policy where, if such were awarded, the shares would have to be purchased on the open market, expensed as current expenses, and the cost counted toward the 33% cap to management.

Therefore, with the above system, the only way management gets a raise is for the business enterprise to do well.

It is obvious that our current system of shareholder protections is inadequate to the task and something like the above needs to be instituted and oversight given to the SEC or some entity that is allegedly independent.

I am not against people being wealthy, I think that is a big part of the allure of America. I would like to see the wealthy taxed proportionately to the level of income that is above the poverty line, but not taxed so hard that they cannot stay affluent. I would like to see the corporate playing field leveled back to where the shareholders are getting their fair share of corporate profits. I would like to see entrepreneurs be able to achieve and maintain any level of wealth they long as all of the above are done within the scope of the law.

I have no problem with Warren Buffett or Bill Gates being as rich as they are. But I have a lot of problem with the Wall Street managers gobbling up all those bonuses and having virtually no responsibility for the failures of their enterprises. The entrepreneur would have gone down in flames with this debacle, these follow-on managers get to write angry, babyish, letters to major newspapers when their bonuses for failed businesses get crushed by that failure.

The field needs to be tilted back to level.