Economists have rightly forewarned of the dangers of setting a minimum wage in the US. With the minimum wage in Mexico at 53 cents an hour, and China at US$1.30 per hour, moving the current pay up from US$11.30 to US$15 per hour in the US will ensure that corporations will move every conceivable job offshore and, wherever possible, replace people in the US with robots. Hence the only sector that has seen rapid increases in employment in the past 5 years has been that of waiters, you can’t yet order your meal from someone in Mexico or a robot, but even this may come soon!

But let’s look at the other end of the scale. In the past 25 years, the pay of CEOs has increased 500% while the pay for the lowest paid jobs, in real terms, has remained stagnant. CEO’s in the USA are paid generally over double what their colleagues in Europe are receiving. What, asks the earnest Keynesian economist had led to this dire shortage of CEO’s in the US?

During the same 25 years, the number of managers holding MBAs has quadrupled, so it doesn’t seem to suggest a shortage of qualified candidates. What is it then that has driven up the price of these senior managers? The answer can be found in the mechanics of what is called the Remunerations Committees that approve the recruitment and packages of the senior executives. A tight group of board members which also, ironically, also often include the CEO himself. Each year the Human Resources Manager is asked to do a benchmark on 5 or more CEOs in a similar industry and report back to the Committee. The Committee either chooses the median or upper quartile of this number to determine the appropriate package for their CEO. No Committee suggests that their CEO get paid along the lines of the lowest quartile as this somehow suggests the company is not worthy of the best of the best! This means that every year the remuneration is skewed upwards. This in turn raises the benchmark for the other companies who in turn revise their packages upwards to ‘stay in line’. This upward spiral has now been going on for 25 years unchecked. So, if we exclude 5 founders who pay themselves nominal packages, the average S&P500 CEO pay packs have gone from US$2.5 million to a staggering US$15 million! Are the Remuneration Committees seriously informing the board that they cannot find a capable CEO for a cool US$2.5 million a year!

So, what would be the impact of setting a maximum wage of US$2.5 million? As mentioned earlier, CEO’s in the US are paid over double what their compatriots earn in Europe, and the packages in Europe have been climbing for the same reason as those in the US, so no fear of the CEO role being outsourced to cheaper locations. If that was the case it would have happened already. If we focus on the S&P500 we can look at what this would mean. CEO’s in the S&P500 take home every year a blistering US$6 Billion. If they were pegged back to US$2.5 million each this would drop to US$1.2 Billion a corporate saving of US$4.8 Billion.

But this doesn’t include retirement packages and golden parachutes. The average CEO stays in the job for seven sweet years. With 500 CEOs that is 70 retirements or firings each year. At Exxon, Lee Raymond, as Chairman of the Remuneration Committee, bestowed upon himself US$398 million. Rex Tillerson took early retirement for a mere US$180 million. But others like Jack Welch out did them with US$418 million. These are fantastical sums and brazen abuse of position. It is splitting hairs to differentiate this behaviour from ‘raiding the till’.  But these cases are at the upper end of this unregulated practise. So now imagine a world where you got a cap of US$10 million as a retirement package. This would save another US$2.8 Billion per year.

But let’s go a step further. Who else is paid over US$2.5 million that are a direct or indirect ‘cost’ for these S&P500? We find COOs and CFOs on as much as US$25 million and rarely less than US$7 million respectively. Vice presidents on US$6 million to US$4 million. Broadly speaking, capping these at US$2.5 million would save another US$5 Billion.

So, we are now at US$12.6 Billion, with just 4000 people tightening their belts.

But let’s take now another step. These large companies have important relationships with the leading banks in the US. At the banks, we see 3 tiers of management earning over US$2.5 million, or around twenty people in each of the US ten biggest banks and less in the other six thousand others. Let’s again imagine the saving pro-rata for the S&P as clients, in fees and interest rate spreads, if these banks also had a salary cap of US$2.5 million. The S&P500 represent 17% of the US economy so of the 7,000 banks in the USA, if we allocate a conservative proportional share of the largest 500 banks to the S&P500 it is another US$1.6 Billion.

Then let’s look at the second financial arm, the Funds charged with managing the S&P500’s pension funds. The raiding of the funds is again another whole topic unto itself, but the best paid 25 hedge fund managers took home double what the CEOs of the 500 companies in the S&P500 took home combined! US$12 Billion. An astonishing figure. While this is not the time to explain the mechanics of high frequency trading, front running, market moving, and the games you can play with a US$10 Billion + portfolio, lets imagine a scenario where fund managers are capped at US$2.5 million a year. It is hard to know how to allocate the savings but a conservative sum would be US$3 Billion for the S&P500s in Treasury and Pension Fund allocations.

So, with the lower banking fees and more competitive interest rates improving the companies’ financial costs, and fund management fees, and performance fees, reducing the pension fund liabilities, we come to a grand total of US$ 17.2 Billion in savings.

Let’s now transfer that money to the bottom end of the pile. To the people who make the products, deliver the packages, close the sales. The people doing the heavy lifting, both literally and figuratively.

The S&P500 proudly informs us that they employ 24 million people. What they are careful to avoid explaining is how many they employ in the US and how many overseas. After a good deal of digging the best estimate that we could collate was that about 52% of these are in the US, heavily skewed by the likes of Wallmart who employ an astonishing 2 million people onshore. So, of the 12,400,000 estimated employees in the USA, a high proportion of these are earning US$11.50 an hour. Wallmart, McDonalds, and Target alone account for 20% of the total onshore employees of the S&P500.

We can either look at this saving in terms of how many people would be able to move to a minimum wage of US$15 per hour, or how many jobs the companies could afford to bring back onshore. The first number is easy to calculate, even if this may not be the best use of the funds. The lower tier of workers is currently taking home US$17,500 per year. With this saving the bottom 3 million workers in the S&P500 could have their wages raised to US$23,200, a 30% raise. Alternatively, the saving can be allocated in other ways that could ensure more jobs stayed onshore or help companies grow and expand their base of employees.

This US$17.2 Billion would effectively be leaving the financial sector, where the wealthy senior managers park the funds with fund managers and enter the pockets of families who will most likely spend this money in the economy at large on high turn-over goods giving an important boost to GDP.

Try explaining this to the CEO’s with their MBA’s.