How to lower executive pay

October 18, 2013 by Joshua
in Blog, Education, Leadership

The New Yorker this week has yet another article on executive pay, how high it is, how it continues to grow, and how attempts to slow it aren’t working. Everybody knows the situation. We’ve read tons of such articles. We know executive pay is high enough that it isn’t getting what shareholders are paying for, but no one can stop its growth.

Want to lower executive pay? Basic economics and negotiation tell us all we need to know.

Basic economics: supply and demand

A CEO’s wages have a price in a market. What sets prices in a market? Unless you believe the CEOs are fixing prices or the market isn’t competitive, supply and demand set the price. If you want to lower prices either decrease demand or increase supply.

Increasing supply lowers price

Increasing supply lowers price

How do you increase supply of leaders? Start more leadership schools! Or leadership programs within existing schools. Train more people to lead effectively.

That’s my dream and what I’m working to do, as I describe in my post on my Leadership Dream. Reducing CEO pay is just one benefit of a leadership school. The main benefits, of course, are

  1. Enabling people who love leading to lead
  2. Having more organizations led by people who love leading, not who have to get paid tons to do it

So if you don’t have time to start a school or degree program yourself but would like to see it happen, email me. I could use your support. Or criticism, for that matter.

Basic Negotiation: BATNA

How do you motivate a candidate CEO to accept a lower wage? Improve your Best Alternative To a Negotiated Agreement, also known as a BATNA, a well-established concept in negotiation.

If your alternative to hiring a CEO at a high wage is hiring an equally qualified CEO at a lower wage, you won’t hire the CEO at the high wage. If the CEO’s alternative to taking your deal is seeing another candidate get an offer and not receiving one him or herself, he or she will more likely accept the lower wage.

There’s no magic here. Improve the company’s BATNA and worsen the candidate CEO’s, at least with regard to wage, and the company will get better deals. Big companies should at least start or improve internal leadership development programs to lower CEO wages by creating new alternatives — and they’ll get better leadership within, even if they don’t hire me to do it.

Basic supply and demand and negotiation work. Rarely do markets exist where increasing supply raises prices. Rarely do people with better alternatives take worse deals than people with no alternatives.

You can look everywhere for how to change prices, but if you don’t affect supply and demand, you’re missing the most important factors.

If you do see supply and demand as important, I think you’ll agree on at least this value of starting a leadership school, or at least increasing leadership programs in existing schools. I’d love to hear from you.

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