Entrepreneurs and CEOs’ salaries after cutting back

Once entrepreneurs quit cutting back, they’ll likely notice a considerable drop in their salaries. That’s because they tried to solve a problem that was caused by cutbacks, by using the proceeds of the cutbacks to increase their salaries.

Hourly wages based on training were introduced as an austerity measure in 1980, and were intended to reduce the salary of workers. But over the years, entrepreneurs seem to have forgotten about this, and they started using this system to calculate their own salary. Today, most entrepreneurs feel it’s just not right for them to earn the same salary as an employee in the same function. And rightly so. Since they also carry the ultimate responsibility for the company, and the risk, it is only reasonable that they should pay themselves a higher salary.

The same also applies to the CEOs of large companies. They too carry more responsibility, and are more at risk than ordinary employees. For that reason, it is reasonable that they should pay themselves a higher salary than regular employees in a similar function.

As we wrote in Dutch Money Management, entrepreneurs and CEOs can, as long as the company is healthy, fulfil any role they want and pay themselves any salary they want. The problem with cutbacks didn’t lie with the entrepreneurs and CEOs paying themselves too high salaries, but that they never thought about the cutbacks. As a result, they erred while economizing, ultimately leading to the bankruptcy of their companies and high unemployment.

The idea that a measurable phenomenon is needed to determine salaries is a response to the introduction of hourly wages. Prior to 1980, entrepreneurs and directors could pay themselves as much as they wanted, the only limitation being that if their salary was too high, it could damage their business.

However, this also meant that employees could earn a much higher salary through a combination of the law of supply and demand and performance pay than based on hourly earnings. Sometimes, they could earn hundreds of dollars a day by carrying out work for which there was a great demand.

Strict rules determining entrepreneurs and workers’ salaries could thus only work if the whole world would also abide by these strict rules. But the mere fact that companies suffer losses makes it clear that the world at large does not abide by this. The work necessary to keep our world functioning properly is often heavy, dirty, and sometimes downright dangerous. The salary for that kind of work is not only determined by how hard entrepreneurs and workers are working, but also by how much money society is willing to pay to have that work done.

After years of cutbacks, much of this work is no longer carried out. This could hurt us considerably.

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