President Obama sparked a fierce debate when he announced his intention to cap executive pay at $500,000 for any firm receiving "exceptional assistance" from the government. The move may help to calm the understandable outrage towards some of the egregious executive compensation, but history shows the effectiveness of such a move is only temporary. In the story below, which will appear in the March 2009 issue of Harvard Business Review, HBR Business Development Editor John T. Landry examines a past effort to curb executive compensation, and shows that, while popular at the time, the effort didn't last.
Assuming that you're able to keep your executive job in this downturn, what will become of your compensation? Despite the heightened rhetoric since the onset of the financial crisis, Americans have shown a remarkable tolerance for big C level paychecks. Past crises have curbed pay only temporarily. During the Great Depression, an alarmed Congress forced large U.S. companies to divulge executive pay for the first time, and stockholders at several firms sued management over bonuses and salaries disbursed before the stock market crash.
But toward the end of the 1930s, most big firms returned to substantial executive compensation, much of it in deferred form so that individuals could dodge new government limits on salary. Even family-controlled DuPont resumed its policy of paying hefty sums to executives regardless of performance, because the owners wanted to ensure the enthusiasm of its leaders. Executives' pay relative to workers' shrank between 1945 and 1974, but only because the rank and file gained leverage from the rise of unions. The unions benefited not just from federal protection but also from the end of mass immigration, which made workers scarce compared with senior managers. As those pressures eased in the 1970s and deregulation offered opportunities for aggressive management, companies were free to dramatically increase executives' compensation relative to workers'.
From 1978 to 1989, the pay of the CEOs at the largest U.S. companies went from 35 times the average worker's salary to 71 times. It ballooned to 300 times at the end of the 1990s, the decade of heroic leadership, as the media made CEOs into superstars. With stock options, it was very easy for companies to boost pay. Then the next test came. The bursting of the internet bubble in 2000, followed by a "jobless" recovery, led to renewed popular outrage. Congress limited the tax deductibility of executive…