Give CEO Pay the Pink Slip

Give CEO Pay the Pink Slip

 

     Capping outsized salaries is the first step toward

     creating responsible corporations.

 

By David Moberg

March 23, 2009

http://www.inthesetimes.com/article/4306/give_ceo_pay_the_pink_slip

 

Nearly everyone is angry about excessive corporate

executive pay these days, from laid-off autoworkers and

foreclosed homeowners to former Federal Reserve

Chairman Paul Volcker.

 

At the seven biggest financial firms that have recently

failed, been sold or been bailed out, top executives

have received $464 million in "performance pay" since

2005. And these are the same people who helped create

the conditions that led to the worldwide crash. For

example, in December 2008, Merrill Lynch CEO John

Thain-paid $83 million in 2007-gave out $3.6 billion in

early executive bonuses before his firm was taken over

by Bank of America, which has received $45 billion in

federal bailout money.

 

In February, in discussing the $500,000 salary cap with

limitations on golden parachutes, Obama said, "What

gets people upset-and rightfully so-are executives

being rewarded for failure. Especially when those

rewards are subsidized by U.S. taxpayers."

 

In 1980, CEOs at Fortune 500 firms were paid 42 times

the average worker's salary. By 2007, they were being

paid on average 364 times as much.

 

During the most recent expansion from 2002 to 2006, for

example, the top 1 percent of taxpayers took three-

fourths of all income growth, according to University

of California-Berkeley economist Emmanuel Saez. And

much of it, he says, was due to "an explosion of top

wages and salaries."

 

Apologists for CEOs argue that companies bid up

salaries to get the best executives, who then boost

profits and stock value. The cult of the heroic

executive imagines that these Lone Rangers solely

determine how fast and profitably a firm grows, not the

thousands of workers-from secretaries to engineers-

doing their daily jobs.

 

But the differences in performance among executives are

tiny-merely 0.016 percent between the performance of

the top CEO and the 250th ranked, according to

economists Xavier Gabaix of the Massachusetts Institute

of Technology and Augustin Landier of New York University.

 

Gabaix and Landier claim the sixfold growth of CEO pay

from 1980 to 2003 tracks the growth of corporate stock

market value. But Princeton economist Uwe Reinhardt

argues that most of this growth simply reflected the

now-deflated general stock market boom, not the

uniquely valuable talents of highly paid CEOs.

 

Indeed, scads of CEOs, like Robert Nardelli of Home

Depot, reaped riches as their companies floundered. And

overseas, CEOs of large, successful companies typically

earn much less. From 2004-2006, top European CEOs

received less than half of the $13.3 million that their

American counterparts made, on average; top Japanese

CEOs received only $1.5 million.

 

Supersized pay

 

The meltdown in the financial sector demonstrates that

these executives had a talent not for strengthening

their companies but for enriching themselves. And the

public bank bailout has given legitimacy to demands

that CEO pay be limited, as Obama modestly proposed for

executives of companies that get federal help in the future.

 

But the public has a legitimate interest in all

corporations and how much they pay executives, not just

those it bails out. Government created and granted

rights to corporations to serve the public interest,

and government regulates corporate behavior when it

affects the public, such as securities or environmental

regulation. Why not CEO pay?

 

Many corporations rely on government contracts or

financial assistance, and taxpayers provide $20 billion

a year in direct tax subsidies for excessive executive

pay, according to a 2008 study from the Institute for

Policy Studies (IPS) and United for a Fair Economy (UFFE).

 

"Average U.S. taxpayers subsidize excessive

compensation-by more than $20 billion per year," the

report says, "via a variety of tax and accounting

loopholes. That $20 billion for America's most powerful

is more than double what the federal government spent

last year on educating America's most vulnerable-

children with disabilities."

 

Supersized executive pay, especially in its typical

form, is also a costly burden that distorts the economy

away from the common good. It is a symptom of deeper

problems with the way corporations and the economy are

organized and regulated, argues AFL-CIO chief economist

Ron Blackwell.

 

The foul smell of excess

 

In theory, corporations pay CEOs the stock options and

other bonuses beyond their ample salaries to make sure

that they have incentives to maximize shareholder

value. But the system is rigged. Company managers

effectively control corporate boards and are in

collusion with the boards compensation advisers, says

Harvard Law professor Lucian Bebchuck.

 

Society pays a high price for high salaries.

 

High executive pay contributes to rising inequality.

The payouts for the top five executives at a typical

corporation consume about 10 percent of aggregate

corporate profits, according to Bebchuck. And at non-

union companies, where wages are depressed, the CEOs

make 20 percent more than at unionized companies,

according to a 2007 survey published in the Journal of

Labor Research.

 

Inequality takes its toll in many ways. It pushed most

Americans deeper into debt as they tried to maintain

living standards with stagnant incomes, thus weakening

consumer demand as a prop for the economy. And it

encouraged the rich to speculate. Consumer markets

diverged to extremes: Wal-Marts with low-priced imports

and luxury boutiques.

 

Growing inequality in a society increases illness and

mortality among the less well off. It creates stress

for individuals and tensions for society, thus

undermining the ability of the nation to tackle major

social issues-especially when inequality increases the

political power of the wealthy.

 

And within a company, inequality undermines teamwork.

As a result, argues New York University economics

professor Edward Wolff, productivity is depressed, and

firms invest less in human capital, or education and

skills. That's why the late management theorist Peter

Drucker persistently argued that CEO pay should be no

more than 25 times the average worker's salary.

 

High executive compensation, especially stock options

and bonuses, lead CEOs to take a short-term

perspective, concludes Bebchuck. It gives them an

incentive to quickly boost stock prices through tactics

such as outsourcing, layoffs, research cutbacks,

shortsighted sales or acquisitions of assets, and

financial manipulation. At financial firms, executives

sought riskier, higher-yield investments.

 

"The current economic crisis is a direct outcome of the

compensation system," Wolff says.

 

The compensation system encourages executives to focus

on extracting wealth from the rest of the economy, not

creating social wealth for the long haul. It distorts

the economy, diverting talent from productive to

unproductive work: the mathematicians and physicists

lured into investment banking could have been working

more usefully on research, such as helping build a

sustainable energy economy.

 

As the late economist David Gordon argued, American

corporations are less competitive and less productive

than their European and Japanese counterparts due to

the burden of an oversized corporate bureaucracy. That

bureaucracy reflects a corporate strategy of treating

workers as costs to be controlled, not essential

contributors to corporate success.

 

Josh Bivens, an economist at the progressive Economic

Policy Institute, argues in a new study that unions and

blue-collar wages are not hurting U.S. manufacturing,

but high corporate salaries are (along with an

overvalued currency and dysfunctional healthcare

system).

 

A new corporate contract

 

Giving shareholders more control of CEO pay would help,

but the public-not just shareholders-has a stake in

these decisions. Imposing pay caps-on all executives,

not only those at bailed-out firms-would be better.

Making the income tax much more progressive than Obama

would do with his modest, if welcome, tax reforms is

also necessary.

 

But as Blackwell argues, controlling salaries alone

will not fix the underlying problems with the corporate

system. We need, he says, to create a new legal and

regulatory system that aligns corporations with social

needs.

 

The new corporate accountability, Blackwell says,

should involve requiring boards of directors to include

major stakeholders - workers, government and

communities; instituting collective bargaining laws

that shift the balance of power between workers and

managers; and creating a public expectation of ethical

and socially responsible behavior.

 

The economic crisis, and the furor over executive pay

and behavior, provides us with an opportunity not just

to rein in ridiculous CEO compensation but also to re-

make the corporate system.

 

As Wolff says, beyond controlling pay, "a new kind of

corporation has to evolve."

 

[Editor's clarification: Thain's office notes that his

2007 income included $68 million in stock options,

which he was unable to exercise because the stock price

did not rise to levels designated in his compensation

agreement, but obviously fell instead.]