Fluent Essays

Read chapter 5-6 QUESTION 1 Discuss how negotiators prepare for negotiations. Explain the distributive and integrative bargaining approaches. How do these methods differ? When would a negotiator likely choose each?  Your response should be at least 400 words in length. QUESTION 2 Generally why do both management and the union favor no-strike, no-lockout provisions? Discuss commonly used methods for peacefully resolving a negotiation impasse, and explain the advantages and disadvantages of each.  Your response should be at least 400 words in length. Read chapter 5-6 QUESTION 1 Discuss how negotiators prepare for negotiations. Explain the distributive and integrative bargaining approaches. How do these methods differ? When would a negotiator likely choose each? Your response should be at least 400 words in length. QUESTION 2 Generally why do both management and the union favor no-strike, no-lockout provisions? Discuss commonly used methods for peacefully resolving a negotiation impasse, and explain the advantages and disadvantages of each. Your response should be at least 400 words in length. Unit IV Article Review Instructions Locate an article from a scholarly journal or industry magazine about a specific arbitration case, involving a union or non-union, related to the topics introduced in Chapter 5 of your textbook. Some topics to consider, but not limited to, bargaining, negotiations, norms, and zone of possible agreement. The article must have been published in the past five years. The format for the article critique is as follows: Article Title Journal Name and Date Key Points: (Five to seven key ideas from the article) Summary: (Two to three paragraphs summarizing the article in your own words) Personal Evaluation: (Two to three paragraphs highlighting the relevance of this article to your position or occupation, your agreement or disagreement with the author and/or findings, and any additional insights you may have.) Note: The arbitration does not need to be one specifically related to your occupation. It can involve any job field Your response must be a minimum of two pages. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations in APA format. References Witkin, N. (2019). Executive Bargaining: Ceos Negotiating Their Pay with Employees for Corporate Efficiency. Kansas Journal of Law & Public Policy, 29(1), 119–172. 119 E ECUTIVE BAR AININ : CEOS NE OTIATIN THEIR PA WITH EMPLO EES OR CORPORATE E ICIENC By Nathan Witkin I INTRODUCTION Rising executive pay is a significant problem that points to a structural flaw in American corporations. This article presents a solution to that flaw through which Chief Executive Officers (CEOs) negotiate their pay in company resources with lower-paid employees. Exploring this solution also unearths an explanation for capitalism s apparent drive toward inequality and examines the historical development of corporations and trade unions in the United States. The problem is that managers and corporate directors will raise pay at the top so long as that pay-setting process does not consider the pay of average- and low-wage workers. The solution is that CEOs and other top executives negotiate their pay in company resources with employees in a process that determines the pay and bonuses of both sides. Microeconomic theory indicates that confronting the tradeoffs of raising executive compensation with other potential corporate expenditures—by negotiating this compensation with workers from different parts of the company—will make executive compensation more efficient.1 Also, historical analysis indicates a pattern in which executive compensation became aligned with public interest only during the period in which workers had significant power to negotiate their wages and Master of Public Policy Candidate at eorgetown University s McCourt School of Public Policy J.D., The Ohio State Moritz College of Law. The Author is an independent researcher, originator of a variety of social innovations (co-resolution, interest group mediation, consensus arbitration, dependent advocacy, the popular tax audit, the hostile correction, a partnership between citizen review boards and community policing, and a two-state/one-land solution to the Israeli-Palestinian conflict), and author of several ambitious theories (the shift in sovereignty from land to people under international treaties, the use of impact bonds as a solution to climate change, and resistance to the accelerating expansion of the universe as the cause of gravitation). He is also a former solo-practitioner in criminal and family law. 1 N. RE OR MAN IW, PRINCIPLES O MICROECONOMICS ( th ed. 2012) (describing the first principle of microeconomics as centered on trade-offs). Many basic microeconomic models involve trade-offs between potential allocations of resources to achieve efficiency. See DAVID BESAN O RONALD R. BRAEUTI AM, MICROECONOMICS 20 07 (5th ed. 201 ). 120 KAN. J.L. & P B. POL’Y Vol. I :1 benefits. This is not to say that the solution to executive compensation is a return to unions, which developed as a separate organizational structure with their own flaws and inefficiencies. Rather, a corporation that synthesizes the inputs of all its employees will be able to maximize efficiency and productivity, producing profits for shareholders and growth for the overall economy. This article will proceed in several parts. Part II will explain the core idea of this proposal, which is that executive pay is systematically excessive because the current pay-setting process for CEOs does not consider alternative corporate expenditures. Because employees from various levels and departments would be informed and motivated advocates for these alternative corporate expenditures, CEOs should negotiate their pay (in company resources) with these employees to reach efficient compensation decisions. Part III will examine the problem of CEO pay that does not confront the tradeoffs of alternative expenditures. Unrestrained compensation is not necessary to motivate executives, is inefficient for the corporation, leads to negative externalities for society, slows economic growth, saps employee morale, and interferes with the motivation and prosocial tendencies of executives.2 Part IV will then present policy proposals for CEOs negotiating their pay with lower-paid workers and the proposed benefits of these executive bargaining processes. Though these particular proposals are currently untested, historical analysis of trends in U.S. executive compensation and comparative analysis of corporations in other countries indicate that regular negotiations with workers restrains executive compensation. Having presented the effects of escalating executive pay and a promising mechanism for restraining it, Part V then analyzes why current approaches to executive compensation produce wage inflation. Part VI concludes with a theory of how capitalism s drive toward efficiency would lead to inevitable inequality and employee backlash unless corporations take steps such as having CEOs negotiate their pay with lower-paid workers. II THE CORE IDEA OF A NEGOTIATED EXECUTIVE COMPENSATION PROCESS The core argument behind executive bargaining is this: if corporations set executive compensation in a separate process from the budgeting of other corporate expenditures, spending on executives will not confront the tradeoffs of alternative uses of those resources. In economies where individual 2 These assertions summarize the arguments presented in the subsections of Part III. See infra text accompanying notes 9 12 . Douglas C. Michael, The Corporate Officer’s ndependent Duty as a Tonic for the Anemic Law of E ecutive Compensation, 17 J. CORP. L. 785, 797 (1992) ( T here is nothing approaching a 2019 WITKIN: EXECUTIVE BARGAINING 121 shareholders do not have the information or capacity to sit across from CEOs in considering these tradeoffs,4 employees are in the best position to confront executives with alternative expenditures.5 This executive bargaining process primarily seeks to achieve economic efficiency, which should subsequently lead to higher profits for shareholders.6 However, there may be other benefits of requiring CEOs to negotiate their pay with employees. First, it may improve morale for employees and lead to better alignment within each company.7 With better understanding and communication between the bottom and top of the corporation, managers at all levels will have better incentives to listen to and work with their direct reports. Second, to the degree that this structure leads to a greater dispersion of wages, it may help to grow the economy by increasing the spending power of regular workers.8 The process of allocating company resources to the pay of top executives should not be divorced from considerations of alternative uses of these resources. Before this article proposes mechanisms for executive bargaining, the next section will explore current trends in unchecked executive pay and how they indicate an ignorance of the tradeoffs or alternative uses of these significant CEO pay packages. Readers who already believe that escalating executive compensation is an existing and harmful trend may wish to skip to the description of, and the case for, executive bargaining in Part IV. competitive market for chief executives where supply and demand can exert their traditional moderating pressures.”). 4 Martin Gelter, Taming or Protecting the Modern Corporation? Shareholder-Stakeholder Debates in a Comparative Light, 7 N.Y.U. J.L. & BUS. 641, 646 (2011) (“Today, the US and the UK are normally thought to be characterized by dispersed ownership, while in most other countries' economies concentrated ownership persists even in most of the largest firms.”). 5 Robert J. Rhee, Intrafirm Monitoring of Executive Compensation, 69 VAND. L. REV. 695, 734 (2016) (“The advantage of employees as monitors compared to shareholders becomes apparent when we consider the question of information through the lens of market efficiency.”); Wanjiru Njoya, The Problem of Income Inequality: Lord Wedderburn on Fat Cats, Corporate Governance and Workers, 44 INDUS. L.J. 394, 423 (2015) (“[W]orker participation in setting levels of executive pay may help to advance the efficiency goals of company law.”). 6 See infra Section III.B.1; see also Brett H. McDonnell, Employee Primacy, or Economics Meets Civic Republicanism at Work, 13 STAN. J.L. BUS. & FIN. 334, 336 (2008) (“Employee primacy is likely to create the most surplus within a corporation due to incentive effects and the wealth of information that employees possess.”). 7 See infra Section III.B.3; see also Jim Harter & Annamarie Mann, The Right Culture: Not Just About Employee Satisfaction, GALLUP WORKPLACE (Apr. 12, 2017), https://www.gallup.com/wo rkplace/236366/right-culture-not-employee-satisfaction.aspx [https://perma.cc/S3DX-9N4A] (pre senting evidence that engaged employees consistently correlate with better business outcomes and that “common philosophies and practices” of engaged workplaces involve corporate leaders having regular, open communication with employees). 8 Njoya, supra note 5, at 407 (“It is clear that extreme income inequality is harmful to economic growth and the integrity of economic institutions.”). 122 KAN. J.L. & P B. POL’Y Vol. I :1 III THE PROBLEMS WITH UNRESTRAINED EXECUTIVE COMPENSATION There is a growing consensus that the process of executive compensation in the United States is problematic.9 Even those who celebrate the American tradition of exalting captains of industry and those who are not uncomfortable with significant wage inequality are somewhat taken aback by today s executive compensation practices. 10 A significant consequence of this problem, and an indicator of its severity, is that pay for other employees has stagnated over time while executive compensation has escalated.11 According to the many commentators who have studied the ratio between the average pay for CEOs of large companies and the average pay of workers, this ratio was between twenty and thirty-to-1 in the 19 0s and early 1970s, between forty and 50-to-1 in the 1980s, more than 100-to-1 in the 1990s, more than 00-to-1 in the 2000s12 and currently at 278-to-1 after a decline during the 2008 financial crisis.1 This growth is such that an infamously excessive corporate pay package of 10 million, considered an outlier in 1998,1 is only 9 Steven A. Bank et al., E ecutive Pay What Worked , 2 J. CORP. L. 59, 1 (201 ) (noting the substantial consensus that something is seriously amiss with executive pay . . . . ) Robert C. Downs, E ecutive Compensation n a Culture of Greed and Selfishness s There Room for a Theory of Enough , AUL NER L. REV. 5, (2012) (describing CEO compensation as having run amuck ) Rhee, supra note 5, at 702 0 (noting the empirical literature on the subject) Susan J. Stabile, Viewing Corporate E ecutive Compensation Through a Partnership Lens A Tool to ocus Reform, 5 WA E OREST L. REV. 15 , 15 (2000) hereinafter Stabile, Viewing Corporate E ecutive Compensation (noting that criticizing executive compensation has become something of a national pastime. ). 10 David A. Westbrook, Notes Toward a Theory of the E ecutive Class, 55 BU . L. REV. 10 7, 10 9 (2007). 11 Stephen Plass, Wage Compression as a Democratic deal, 25 CORNELL J.L. PUB. POL 01, 02 0 (201 ) (noting the disparity between lavish pay packages at the top and the fight for a living wage at the bottom) Njoya, supra note 5, at 2 ( W ages for ordinary workers continue to decline in real terms while managerial remuneration soars. ). 12 Bank et al., supra note 9, at 8 9 Downs, supra note 9, at 5 , Erica Beecher- Monas, The Risks of Reward The Role of E ecutive Compensation in inancial Crisis, VA. L. BUS. REV. 101, 10 (2011) Peter M. Cicchino, The Problem Child An Empirical Survey and Rhetorical Analysis of Child Poverty in the nited States, 5 J.L. POL 5, 72 7 (199 ) John W. Hennessey, Jr., The Ethics of Business Decision-Making, 27 VT. L. REV. 8 , 8 (200 ) Nathan nutt, E ecutive Compensation Regulation Corporate America Heal Thyself, 7 ARI . L. REV. 9 , 500 (2005) Rhee, supra note 5, at 70 Alberto R. Salazar John Raggiunti, Why Does E ecutive Greed Prevail in the nited States and Canada but Not in Japan The Pattern of Low CEO Pay and High Worker Welfare in Japanese Corporations, AM. J. COMP. L. 721, 721 22 (201 ) David I. Walker, Who Bears the Cost of E cessive E ecutive Compensation and Other Corporate Agency Costs , 57 VILL. L. REV. 5 , 59 (2012). 1 Lawrence Mishel Julia Wolfe, CEO Compensation Has Grown Since , ECON. POL INST. (Aug. 1 , 2019) https://www.epi.org/publication/ceo-compensation-2018/ https://perma.cc/ N N-M NP . 1 Stabile, Viewing Corporate E ecutive Compensation, supra note 9, at 1 1, 1 1 n.25 (reporting 2019 W TK N E EC T VE BARGA N NG 12 slightly above the median pay for the CEO of a large firm fifteen years later.15 In absolute terms, this is an annual transfer of 25 billion to the top 10,000 executives1 while many corporations pay their CEOs more than they pay in federal income taxes. 17 Also, because this quantification of rising executive pay does not count executives beyond a handful of high-earners at these predominantly large companies, the above numbers understate the larger problem.18 If the rise in executive compensation tracked the productivity of executives or allowed for a rising standard of living for lower-paid workers, this trend might not be problematic. However, when executive compensation far outpaces growth of the entire economy,19 while inflation-adjusted wages for lower-wage workers are declining,20 there is a sense that wealth is being transferred from low-income to high-income individuals.21 The following sections will explore whether this transfer is productive for companies, impactful on worker wages, or detrimental to the larger economy and society. A Rising Executive Compensation is Unnecessary irst, system-wide escalation in executive compensation is not necessary because it does not convey useful information about the value of any given executive/firm or serve as motivation for executives. This is similar to how everyone in a stadium standing up to see better leaves no one able to see better (or able sit down, for that matter).22 Executive pay has the same motivational power whether all similarly- Jack Welch made 2.8 million in salary and 7.2 million in bonuses in 1998, earning him significant publicity ). 15 Plass, supra note 11, at 0 (noting that the median compensation for CEOs of large companies was 9.7 million in 2012). 1 Walker, supra note 12, at 58. 17 Rhee, supra note 5, at 705. 18 See Walker, supra note 12, at 0 1 (noting that the above figures only count the top five executives at each company and do not count second-tier vice presidents). 19 Michael B. Dorff, The Group Dynamics Theory of E ecutive Compensation, 28 CARDO O L. REV. 2025, 2027 (2007) (noting that CEO pay has outpaced inflation) Rhee, supra note 5, at 97, 70 (noting and listing the disparate growth rates between CEO pay and worker pay). 20 Cicchino, supra note 12, at 72 7 ( After-tax income for CEOs during the 1980s increased in inflation adjusted terms by . During the same period, production workers real hourly pay decreased by 7 . ) rant Crandall et al., Hiding Behind the Corporate Veil Employer Abuse of the Corporate orm to Avoid or Deny Workers’ Collectively Bargained and Statutory Rights, 100 W. VA. L. REV. 5 7, 5 8 9 (1998) (noting the decline in real wages for most workers in the 1980s and 1990s, with a decline of 1 . for blue-collar male employees). 21 Plass, supra note 11, at 0 ( W age growth for senior managers continue to outpace that of other workers thereby pushing wage divergence to a historical high mark. ). 22 THOMAS SOWELL, BASIC ECONOMICS 70 71 ( th ed. 2011) (describing the fallacy of composition). 12 KAN. J.L. & P B. POL’Y Vol. I :1 situated CEOs make 250,000 per year, 2.5 million per year, or 25 million per year. Psychological studies show that increases in pay past a comfortable wage do not boost motivation however, being paid less than peers causes a decline in motivation.2 Defenders of high CEO pay point to the individual effects of executives being paid less than peers2 while ignoring the system- wide effects of annual pay raises that keep each CEO above the reported median executive pay.25 In other words, paying each CEO more does not have any productive effects on the economy and only results in a greater transfer of wealth to high-income earners. Empirical studies support these ideas by demonstrating that large increases in pay for top-income earners did not lead to improved economic performance.2 Comparisons of conditions for the top one percent of earners with economic growth indicate that the rising share of overall income accruing to top earners is not correlated with growth of the overall economy and is, furthermore, correlated with a decline in growth for middle-income workers.27 Differences in pay practices in other countries provide concrete, anecdotal support. or example, the CEO of Toyota received less than one-tenth the pay of the highest-paid CEO in the auto industry and generated the highest return among the five largest automakers.28 urthermore, because low-wage, blue-collar workers are struggling to maintain a living wage, there is much more room for a de-escalation in wages at the executive level than elsewhere in companies.29 So, given that CEOs are motivated by their amount of pay relative to peers, and given that this pay is currently much higher than alternative uses of executive skills, a systematic reduction of executive compensation would not affect the economic or 2 atie Johnston, Efforts to Regulate CEO Pay Gain Traction, BOS. LOBE (Oct. 25, 201 , :2 PM), https://www.bostonglobe.com/business/201 /10/25/growing-effort-limit-ceo-pay/1V Cu Mk Jva RmUb RN/story.html https://perma.cc/D8 D- JT (citing the work of Harvard Business School professor Michael Norton). 2 Bengt Holmstrom, Pay Without Performance and the Managerial Power Hypothesis A Comment, 0 J. CORP. L. 70 , 707 (2005) ( Paying CEOs less than they think they are worth based on comparative data is demoralizing. ). 25 d. at 705 ( Currently, we pay him in the top quartile, because we think it is important that he feels appreciated. ). 2 Josh Bivens Lawrence Mishel, The Pay of Corporate E ecutives and inancial Professionals as Evidence of Rents in Top Percent ncomes, 27 J. O ECON. PERSPECTIVES 57, (200 ) (citing research). 27 d. at 72 7 (citing research by Piketty, Saez, and Stantcheva, Jencks and Leigh, and Thompson and Leight). 28 Salazar Raggiunti, supra note 12, at 722. 29 EN JACOBS ET AL., PRODUCIN POVERT : THE PUBLIC COST O LOW-WA E PRODUCTION JOBS IN MANU ACTURIN (201 ) (finding that thirty-four percent of blue-collar families are enrolled in one or more public safety net programs). 2019 W TK N E EC T VE BARGA N NG 125 psychological incentives for executives. 0 All of the reasons that escalating executive pay is unnecessary support the implementation of a process whereby CEOs negotiate their pay with employees. B Rising Executive Compensation is Inefficient Next, escalating executive compensation is an inefficient allocation of corporate resources. 1 The inflation of CEO pay is inefficient because it does not respond well, let alone optimally, to CEO performance, 2 the market, or a judicious budget for the company. Efficiency is the optimal use of resources 5 and requires available information about the value of alternatives and competition in terms of the quality and price of the service rendered. Contrast the current executive compensation process with boards of directors, the body responsible for negotiating compensation with top executives, asking for bids each year to see if a junior or outside executive could do the job of the CEO at a lower cost. Instead, executive compensation decisions purportedly focus on avoiding tensions among leaders 7 and hiding any insecurities about 0 Bivens Mishel, supra note 2 , at ( W e are making a positive argument, not a normative one, that the rise in income for the top one percent income was not necessary to entice the people in that group to seek those jobs nor to provide effort in those jobs. ). 1 Rhee, supra note 5, at 758 ( T he extreme pay of a single senior employee in a corporation raises the issue of corporate efficiency and income inequality. ). 2 Michael, supra note , at 792 ( C ompensation of the chief executive has little if any correlation to performance on the job, by any conventional measure. ) Beecher-Monas, supra note 12, at 10 (noting the disconnect between firm performance and executive pay ). Salazar Raggiunti, supra note 12, at 728 (noting that executive compensation remained high during the 2008 financial crisis). In fairness, average executive compensation did decline in the aftermath of the financial crisis however, it remained high compared to inflation-adjusted 20th- century executive compensation. Also, this temporary decline in executive compensation. See Walker, supra note 12, at 59 ( The ratio declined as executive pay moderated during the financial crisis, but even in 2009 it continued to exceed 250 to 1. ). Steven Clifford, How Companies Actually Decide What to Pay CEOs, ATLANTIC (June 1 , 2017), https://www.theatlantic.com/business/archive/2017/0 /how-companies-decide-ceo-pay/ 5 0127/ https://perma.cc/ HM-B S (noting that tying bonuses to budgets, while common, is a bad idea because it incentivizes the executive to use information asymmetry to produce a budget projecting low expectations to beat). 5 MAN IW, supra note 1, at 5 (defining efficiency as getting the most out of resources) BESAN O BRAEUTI AM, supra note 1, at 207 (defining technical efficiency as optimal output given limited inputs). Andrew C. Sobel, Rosy E pectations Cloudy Horizons, COLUM. J. EUR. L. 5 , 55 (1998) (noting that economic efficiency requires full information, competition, and a lack of price manipulation) Lary Lawrence, Toward a More Efficient and Just Economy An Argument for Limited Enforcement of Consumer Promises, 8 OHIO. ST. L.J. 815, 8 (1987) (noting that value should be measured by what consumers would be willing to pay when they have complete information). 7 Holmstrom, supra note 2 , at 705 0 ( M ost importantly, we want to avoid arm s-length bargaining. Compensation is a sensitive matter. ). 12 KAN. J.L. & P B. POL’Y Vol. I :1 company leadership. 8 Therefore, critics 9 and defenders 0 of current executive pay practices agree that the market for executive talent is not competitive. 1 This means that market forces do not moderate executive pay, 2 creating conditions in which the rewards for corporate output increasingly collect at the top of the income bracket while economic competitiveness declines. These problems could be mitigated if CEOs negotiated their pay with other employees. A decision process that confronted all employees with the tradeoffs of alternative uses of corporate resources would involve competition among motivated and informed individuals. However, because it would be distractingly chaotic for all employees to agree on the allocation of all resources, it may be better to have executives decide on corporate expenditures and negotiate their pay with non- executives from across the company. While inefficiency is a problem for firms and the economy, the inequity of this situation is that regular workers are exposed to the competitive pressures in a way that executives are not. 5 The next section therefore explores the degree to which these inefficiencies in executive compensation are paid for by consumers, shareholders, or employees. C Rising Executive Compensation Is Largely Paid for by Employees Intuitively, an increase in executive compensation that outpaces executive output and firm growth would result in higher prices for consumers, lower profits for shareholders, or lower wages for other employees. As a very 8 d. at 707 (describing a thought experiment in which the departure of a CEO signals something to investors, causing a devaluation in stock). This reflects back to the fallacy of composition. If CEOs were regularly reevaluated and replaced, this move would not send the same negative signal. 9 Downs, supra note 9, at 5. 0 Holmstrom, supra note 2 , at 707 ( The executive market is not competitive in the normal sense. ). 1 Michael, supra note , at 795 (1992) (noting significant imperfections in the market for chief executives of large corporations ) Beecher-Monas, supra note 12, at 107 (finding the idea of a competitive market for executive talent questionable at best ). 2 Michael, supra note , at 797 ( T here is nothing approaching a competitive market for chief executives where supply and demand can exert their traditional moderating pressures. ). Rhee, supra note 5, at 98 (summarizing analyses of economists studying the effects of large income disparities). Michael, supra note , at 795 (noting that Japanese firms have identified high executive compensation as a key non-tariff barrier to the competitiveness of American firms). 5 Plass, supra note 11, at 7 ( Corporate regulations to rein in excessive pay have also failed to incorporate the interests of the larger workforce so median and low-wage workers have been left in the competitive labor marketplace. ). Jim Staihar, ncome nequality and Pay Ratio Disclosure A Moral Critique of Section B , 19 U. PA. J. BUS. L. 57, 88 (2017) ( Presumably, excessive CEO pay could otherwise be used 2019 W TK N E EC T VE BARGA N NG 127 significant fraction of corporate earnings, excessive executive compensation could be meaningfully redirected to these other stakeholders. 7 However, if high CEO pay resulted mainly in higher prices for consumers or lower returns for shareholders, then employees might not be the best group to sit on the other side of the table in negotiating executive compensation. Two theories indicate that this is not the case. irst, Professor David Walker analyzes the burden of executive compensation by considering the difference between high CEO pay in an individual company and high CEO pay across comparable companies in an economy. 8 If high executive pay occurred at a small fraction of firms, it would be difficult for existing shareholders to pass on such firm-specific costs to consumers or employees. 9 However, if high CEO pay occurred systematically across all comparable firms, it could be passed from the shareholders who ultimately own the corporation to other stakeholders (in higher prices or lower wages).50 This theory suggests that employees and consumers will bear the higher cost of excessive executive compensation when those excesses occur systematically. The questionable assumptions behind this theory are that shareholders cannot also avoid the cost of high CEO pay at a single company by selling shares (i.e., devaluing the company) and also that funds used for high CEO pay could not also be potential profits for shareholders even when the high CEO pay is systematic. Notwithstanding these uncertainties, there is value in the insight that it may be harder for certain groups to avoid bearing the costs of rising executive compensation when it is systematic and not an aberration. To determine how the cost of inefficient CEO pay is divided among consumers, shareholders, or other employees, it is useful to apply incidence theory to Walker s tax analogy. Incidence theory is the economic study of how costs, particularly taxes, are passed from one market participant to another. 51 Under this economic model, an imposed cost is divided among market participants52 depending on how likely they are to change behaviors in to increase shareholder value, raise other workers wages, or reduce prices charged to consumers. ) ristopher ingling, Pay Ratio Disclosure Another ailed Attempt to Curtail E ecutive Compensation, 18 U. PA. J. BUS. L. 20 , 20 (2015). 7 Walker, supra note 12, at 58 (Professor Walker teaches at Boston University School of Law, where he focuses on taxation and executive compensation). 8 d. at 57. 9 d. at 1. 50 d. 51 Herbert Hovenkamp, The ndirect-Purchaser Rule and Cost-Plus Sales, 10 HARV. L. REV. 1717, 1721 n. 29 (1990). 52 In this case, market participants are the consumers, the executives of the corporation, the shareholders supplying capital to the corporation, and the workers supplying labor to the corporation. 128 KAN. J.L. & P B. POL’Y Vol. I :1 response to changes in price (their price elasticity ).5 The reason costs are divided by elasticities is that participants who are able to avoid costs by changing what they buy or sell (high elasticity) will do so, while participants who cannot easily change what they buy or sell (low elasticity) will pay more in a free market.5 Compared to consumers and shareholders, employees would have the most difficult time changing their behavior in response to higher CEO pay. Employees invest nontransferable human capital into a company and may have to move or accept a lower standard of living when forced to change jobs. Meanwhile, consumers can respond to higher prices by purchasing substitutes or leaving the market for that particular good, and shareholders can sell their shares and invest in other markets. The resulting free market outcome is that, when rising CEO pay is allocated through rising prices, lower shareholder returns, or cuts in pay and benefits to employees, the brunt of that cost will fall on the employees because they cannot as easily leave the market. Because employees are more rooted in a company than transactional consumers and shareholders, they bear more of the cost of rising executive compensation. Having this skin in the game makes employees the ideal party to sit across the table from the CEO in negotiating the use of company resources for executive compensation. D Rising Executive Compensation Has Negative Effects on the Economy Because systematically excessive executive …