When You’re the Boss, but Your Employees Make More Money
Power dynamics get complicated when managers earn less than their employees
Power dynamics get complicated when managers earn less than their employees
When NFL quarterback Justin Herbert and NBA star Jaylen Brown signed contracts this summer worth $262.5 million and $304 million, respectively, they struck the richest deals in their leagues’ histories. They’re also out earning their bosses by millions a year.
Professional athletes often command higher salaries than their coaches, since it’s harder to find people to execute plays than diagram them. And individual contributors can earn more than managers in a lot of fields, from finance and tech to sales and media.
The sticking point is how bosses and their charges deal with those imbalances.
There are two keys to a functional working relationship when a subordinate makes more money than their manager, people in both camps tell me: The boss must possess the humility to accept the situation and the confidence to project authority. And the highly paid employee can’t be a diva.
Richard Reice, a labor attorney and chief people officer of a restaurant group, says fat paychecks can lead to entitlement and make a highly paid employee practically unmanageable.
“Some refuse to do basic things, like attend meetings, just because they think they’re silly,” he says.
It’s hard to quantify how frequently rank-and-file workers make more than their bosses, but Reice says he has observed a shift from his dual perches in employment law and human resources. Many companies are scrapping the old notion that bigger titles should automatically mean bigger bucks. Instead of promoting star employees into management, where administrative duties can siphon time from their true talents, more businesses are keeping top performers in individual-contributor roles—and paying them like bosses.
Leadership, in these situations, is considered like any other skill, and not necessarily one that is worth more money.
We’re more likely to notice now when someone out earns the boss. The pandemic-era rise of distributed teams was accompanied by cost-of-living adjustments, which meant a manager based in an inexpensive town might earn less than direct reports living in pricier cities.
Pay-transparency laws have given some bosses the jarring experience of seeing less-senior positions at their companies posted on job boards with advertised salaries that exceed their own. Market demand can explain some discrepancies; in other cases, racial, age or gender biases could be to blame.
Nikki Barua, who runs the women’s leadership program Beyond Barriers, says her clients in managerial positions sometimes feel underpaid relative to subordinates and are unsure whether discrimination is a factor. Bosses need to recognise there are often valid reasons behind pay, she says, and advises managers to pay more attention to what their fellow bosses make.
“The star performer is not the right comparison,” she says.
Barua says that in previous roles at technology and consulting firms, her knack for bringing in business sometimes led to incentives that pushed her pay over her managers’. She kept her ego in check by viewing her skill as a blessing, remembering that others might be equally good at different jobs that the labor market rewards less generously.
Now, as an entrepreneur trying to conserve cash, she’s sometimes paid herself less than her employees. She admits that, at times, it was hard not to resent people making more than she did, feeling that she’d be able to draw a salary if only they’d work harder or do better.
Founders often draw modest salaries, or none at all, in companies’ early days, says Jeff Bussgang, general partner in the Boston office of startup investor Flybridge Capital Partners.
“Naturally, if they own a big chunk of equity, it makes it all more palatable,” he says.
Plus, owners’ status is seldom in doubt, regardless of pay. Berkshire Hathaway CEO Warren Buffett, who acquired a controlling stake in the company in 1965, has for several decades taken an annual salary of $100,000. His total compensation last year was $401,589, while two vice chairmen earned more than $19 million apiece. Buffett, the world’s sixth-richest person with a net worth of $122 billion, according to the Bloomberg Billionaires Index, derives most of his income from investments.
Ellen Taaffe, who sits on the compensation committees of several companies, including AARP Services, says corporate boards often set pay by studying the going rates for similar roles in other organisations. Boards can ease potential tension by giving junior executives lower base salaries and enabling them to surpass more senior leaders only through bonuses for exceeding expectations. Usually the people with the loftiest titles make the most money, but not always, notes Taaffe, who teaches at Northwestern University’s Kellogg School of Management.
For instance, the chief scientific officer of a biotech company—whose research might be the crux of the business’s success or failure—could be paid more than the CEO. George Yancopoulos, the chief scientific officer of Regeneron Pharmaceuticals, has received almost $435 million in total compensation since 2012, according to securities filings, making him the company’s highest-paid employee over that span. (Regeneron may be best known for its monoclonal antibody treatment for Covid.)
At some universities, the highest-paid employee isn’t the president; it’s the football coach or the person who manages the endowment. The $2.2 million pay package awarded to Yale University President Peter Salovey last fiscal year was one-third of what the chief investment officer earned, according to tax filings.
Leaders who successfully handle higher-paid employees find satisfaction in helping others shine, Taaffe says.
Warren Cereghino, a retired TV news director in California, says he kept pride at bay by reminding himself that viewers tuned in to watch his station’s anchors, who earned more than he did as their boss. He says the on-air talent didn’t abuse their sway.
Still, being privy to their contracts, he knew that some had negotiated a measure of editorial control in addition to large salaries. If there was a disagreement, he wouldn’t necessarily win.
“Even though my name was on the door of the news director’s office, there was a limit to my power,” he says.
—Theo Francis contributed to this article.
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When will Berkshire Hathaway stop selling Bank of America stock?
Berkshire began liquidating its big stake in the banking company in mid-July—and has already unloaded about 15% of its interest. The selling has been fairly aggressive and has totaled about $6 billion. (Berkshire still holds 883 million shares, an 11.3% interest worth $35 billion based on its most recent filing on Aug. 30.)
The selling has prompted speculation about when CEO Warren Buffett, who oversees Berkshire’s $300 billion equity portfolio, will stop. The sales have depressed Bank of America stock, which has underperformed peers since Berkshire began its sell program. The stock closed down 0.9% Thursday at $40.14.
It’s possible that Berkshire will stop selling when the stake drops to 700 million shares. Taxes and history would be the reasons why.
Berkshire accumulated its Bank of America stake in two stages—and at vastly different prices. Berkshire’s initial stake came in 2017 , when it swapped $5 billion of Bank of America preferred stock for 700 million shares of common stock via warrants it received as part of the original preferred investment in 2011.
Berkshire got a sweet deal in that 2011 transaction. At the time, Bank of America was looking for a Buffett imprimatur—and the bank’s stock price was weak and under $10 a share.
Berkshire paid about $7 a share for that initial stake of 700 million common shares. The rest of the Berkshire stake, more than 300 million shares, was mostly purchased in 2018 at around $30 a share.
With Bank of America stock currently trading around $40, Berkshire faces a high tax burden from selling shares from the original stake of 700 million shares, given the low cost basis, and a much lighter tax hit from unloading the rest. Berkshire is subject to corporate taxes—an estimated 25% including local taxes—on gains on any sales of stock. The tax bite is stark.
Berkshire might own $2 to $3 a share in taxes on sales of high-cost stock and $8 a share on low-cost stock purchased for $7 a share.
New York tax expert Robert Willens says corporations, like individuals, can specify the particular lots when they sell stock with multiple cost levels.
“If stock is held in the custody of a broker, an adequate identification is made if the taxpayer specifies to the broker having custody of the stock the particular stock to be sold and, within a reasonable time thereafter, confirmation of such specification is set forth in a written document from the broker,” Willens told Barron’s in an email.
He assumes that Berkshire will identify the high-cost Bank of America stock for the recent sales to minimize its tax liability.
If sellers don’t specify, they generally are subject to “first in, first out,” or FIFO, accounting, meaning that the stock bought first would be subject to any tax on gains.
Buffett tends to be tax-averse—and that may prompt him to keep the original stake of 700 million shares. He could also mull any loyalty he may feel toward Bank of America CEO Brian Moynihan , whom Buffett has praised in the past.
Another reason for Berkshire to hold Bank of America is that it’s the company’s only big equity holding among traditional banks after selling shares of U.S. Bancorp , Bank of New York Mellon , JPMorgan Chase , and Wells Fargo in recent years.
Buffett, however, often eliminates stock holdings after he begins selling them down, as he did with the other bank stocks. Berkshire does retain a smaller stake of about $3 billion in Citigroup.
There could be a new filing on sales of Bank of America stock by Berkshire on Thursday evening. It has been three business days since the last one.
Berkshire must file within two business days of any sales of Bank of America stock since it owns more than 10%. The conglomerate will need to get its stake under about 777 million shares, about 100 million below the current level, before it can avoid the two-day filing rule.
It should be said that taxes haven’t deterred Buffett from selling over half of Berkshire’s stake in Apple this year—an estimated $85 billion or more of stock. Barron’s has estimated that Berkshire may owe $15 billion on the bulk of the sales that occurred in the second quarter.
Berkshire now holds 400 million shares of Apple and Barron’s has argued that Buffett may be finished reducing the Apple stake at that round number, which is the same number of shares that Berkshire has held in Coca-Cola for more than two decades.
Buffett may like round numbers—and 700 million could be just the right figure for Bank of America.
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