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:
- The company is in the 33.3% tax bracket.
- All the savings flow down to earnings, after tax.
- 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 ) $113,900.
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.