The Rule of 20-50

New Page -- 9 September 2003

The Rule of 20-50 is a proposal which if implemented would establish justifiable limits on the power of public and private corporations to misuse corporate funds in paying tribute to those who have managed by hook and crook to become a member of the Corporate Aristocracy -- and at the decided expense of the workers who are creating the corporate funds in the first place.  The concept can be viewed as one of, "Hey, guys; enough is enough! 

Libertarians, capitalists, and entrepreneurs the world over may immediately rush to defend the ramparts of such corporate largesse, but note that the proposed Rule is not an attempt to deny the fruits of their labors for the lucky and hard-working individual who has made it to the point of having it made purely on their own merits.  The key is to limit the capitalists who use others as so much cannon fodder in their market place wars.  It is, in effect, a revised work ethic, which rewards results and not political and corporate maneuvering, back stabbing, and one-upmanship.

Obviously, in order to be viable in a capitalistic society, it would be necessary to apply the Rule across the board in every corporation which does business within the nation or state imposing the Rule.  Anything less would result in unfair competition.  Furthermore, in some locales, it might require international agreements to be fully effective.  [And that should really have some executives reaching for their elephant guns.  Oh darn!  They left the gun on their ocean-going yacht!]

The Reasoning

A fundamental difference between a corporation, LLC (Limited Liability Corporation), or other such organizations where the key word is "Limited" (Ltd., Inc., Etc.), and that of a sole-proprietorship is that in the former entities all owners, directors, officers, and employees enjoy the fruits of a limited liability in whatever acts they commit.  For the sole-proprietorship, there is the unlimited liability of an individual -- where wrongful acts can result in jail terms, personal fines, personal bankruptcies, and so forth and so on.

As an aside, one might note that in the real world whenever a corporation is caught doing something despicable and is levied a heavy fine or lawsuit (and loses), there is never any mention of anyone going to jail or personally paying a fine.  This is the benefit of limited liability, whereas an unincorporated individual doing business is not so blessed with carte blanche in their business dealings.

The gist of the reasoning for The Rule of 20-50 is that any entity or organization which enjoys the benefits of the corporate veil -- the wall of limited liability protection -- in order to conduct business with abandon, should also have reasonable limits placed on them in return.  Thus in the social contract between the governed and the government, the latter is employed to limit the limited liability groups, which might use their power to supercede any and all aspect of said social contract or constitution.  Such limitations are many and varied, and The Rule of 20-50 is only one of them.

It is important to realize that corporations are fictitious entities, that is they do not exist in nature, but are a contrivance of law -- effectively a Straw Man.  As such they are not required "to tell the truth, the whole truth, and nothing but the truth", but only "to tell the truth and nothing but the truth."  Fundamentally important, a corporation is not required "to tell the whole truth."

This is actually reasonable in a capitalistic society in that any business which is required by law to tell a client or customer that there is a better deal down the street, will probably not stay in business very long.  It is a part of the very concept of capitalism that what one knows is as valuable an asset as what one possesses -- and that either can be sold for profit within the economic system.

With these very substantial benefits, therefore, corporations must of necessity accept limits on their powers to do anything they happen to think of.  With limited liability comes limited authority to use other people's assets without their knowledge or specific voluntary consent.  Sole proprietorships with unlimited liability are by the same reasoning granted unlimited powers, and thus do not come under the same forms or extents of regulatory control.

Given this justification, and on the basis of historical experience with the abuses foisted on society by CEOs, their partners in crime, and similar protected species, The Rule of 20-50 is promulgated as a means to partially redress the inequities within the system, to indirectly limit the power of Corporate Rule, to reduce the extent and power of Corporate Politics, and to give the rest of us a break!

The Rule

The Rule of 20-50 is simple.  Whenever someone works for another in any form of a limited liability company, the total compensation of the highest compensated individual in the company cannot exceed twenty (20) times the total compensation of the lowest compensated individual in the company.  Total compensation is defined to include: wages, salaries, stock options, signing bonuses, golden parachutes, performance bonuses, pension benefits, fringe benefits, executive privileges, and every other form of beneficial services, products or remunerations provided to employees, consultants, advisors, officers, directors, blackmailers, embezzlers, and/or virtually anyone else.

Three exceptions are allowed.  For any company which employs between 100 and 499 employees (inclusive), the ratio of total compensation is thirty (30) times.  For any company which employs between 500 and 999 employees (inclusive) the ratio of total compensation is forty (40) times.  Finally, for any company which employs 1000 or more employees, the ratio of compensation is fifty (50) times.

An accompanying key ingredient in the Rule is that the ratios should apply to all major aspects of the different means of compensation by which the total compensation is composed.  That is, there should be no great disparity between executive and worker stock options, wages, bonuses, benefits, or other means of compensation.  The idea is to eliminate the eagerness of executives to find ways to enrich themselves at the expense of the people actually providing the products or services -- based on creative accounting of the value accorded one piece of a compensation package.

For example, if the lowest compensated individual annually receives $10,000 in wages, $5,000 in fringe benefits, and $1,000 in bonuses and stock options, then the maximum the highest compensated individual is allowed to receive annually is $200,000 in wages, $100,000 in fringe benefits, and $20,000 in bonuses and stock options.  This is, of course, for a company with fewer than 100 employees.  For a major corporation with a thousand or more employees, the highest compensated individual can receive $500,000 in wages, $250,000 in fringe benefits, and $50,000 in bonuses and stock options.  In all cases, the mix of compensation must be roughly equivalent.

[Obviously, if a CEO wants a multi-million dollar package, then he will need to raise the compensation package for the lowest paid workers.]

Two additional caveats are needed to offset the inevitable shenanigans that will be employed by the guys with the elephant guns and yachts (and their co-conspirators). 

The first is that the ratio of the highest compensated individual to the average compensated individual should not exceed a multiple of half the ratios in the Rule of 20-50.  For the 1000+ employee companies, for example, the highest paid individual can only receive 25 times the average compensation of all employees (as opposed to 50 times that of the lowest compensated employee).  This is to reduce the inevitable "out-sourcing" and use of "part-time" employees (such as janitors) to raise the level of the lowest compensated, full-time employee.

The second caveat is very important and occurs in the event of layoffs and a reduced number of employees in the company.   In this case the lowest number of employees during the year constitutes the number to be used in determining which ratio in The Rule of 20-50 to use.  In addition, the annual pay of all employees (including the laid off ones) is to be used in calculating the average compensated individual of the company for the year.  For example, those laid off in July, might have half the normal annual wage, and thus might significantly lower the average compensation figure.  [This has the unfortunate aspect that December might be the prime time to lay off employees.]

All of the above is based on permanent, full time employees.  Consultants, temporary employees, advisors, directors, and all other forms of compensated individuals for services rendered (or not rendered -- just gifted) are included in the limits of total compensation awarded, but are not included in the totals of employees for purposes of determining which ratio is applicable. 

The problems of the world will probably not be solved with the implementation of The Rule of 20-50, but it's going to feel a whole lot better nevertheless.  Just the idea of instilling a moderate equality into the system reduces the frustration and anger at what is now thoroughly despicable!

CEOs         Capitalism         Justice, Order, and Law

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Independent Accounting Firms         Outsourcing         Hierarchy

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