Suppose that there is a small, publicly traded company. This company
has 10,000 employees, and it has annual sales of 1,000,000,000 ($1b).
Typically, the CEO's compensation package is based on the stock's
performance. The stock's performance is strongly a function of how
much earnings they have.
To increase the net income (i.e. profits, earnings), you can simply
increase sales, increase prices, or reduce costs. The easiest way to
reduce costs is to reduce the salary of all employees.
According to my analysis, FOR EVERY $1.00 CUT FROM EMPLOYEE'S SALARY,
THE SHARE PRICES WILL GO UP $113,900. THE CEO WILL THUS GET
COMPENSATED FOR PUNISHING HIS/HER EMPLOYEES.
Here is the logic in my derivation:
1. The company is in the 33.3% tax bracket.
2. All the savings flow down to earnings, after tax.
3. The average PE ratio of the S&P 500 is 17.
Therefore, for every $1 cut from an employee's salary, the after tax
earnings would increase by $0.67. The market cap of the firm would
increase by ($0.67 earnings/employee * 10,000 employees *
17x P/E )
It's intuitive that the CEO should be making a small percentage of
this increase in market capitalization.
Therefore, the compensation methods of executives of publicly traded
companies is very unethical; it pits protagonist groups; it over-
powers the executives.
This same example can be extended to the screwing over of the
consumers as well.